From Asad Zaman Professor, Economist and currently Vice Chancellor of the Pakistan Institute of Development Economics, Islamabad:

Ever since the spectacular failure of modern economic theory became obvious to all in the Global Financial Crisis, the search for alternative ways of organizing our economic affairs has intensified. The vast majority of alternatives under consideration offer minor tweaks and patches, remaining within the methodological framework of neoclassical economics. In contrast, Polanyi offers a radical alternative, with unique insights based on a deep study of the history of the emergence of capitalism. A major obstacle to understanding Polanyi is the fact that living in a market society shapes our mindsets and behaviors, making it difficult to imagine radical alternatives. Understanding Polanyi requires standing outside the streams of history which have shaped modern societies, to see how our economic, political and social theories about the world have been shaped by external forces, and have evolved in time. Studying this archaeology of knowledge offers us insights into the historical processes which have shaped our thoughts, and gives us the tools necessary to liberate us from the narrow boundaries created by our own past experiences.

The central theme of Polanyi’s book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. Today, the victory of the market economy is so complete that it has become difficult for us to imagine societies where the market does not play a central role. Polanyi argues that contrary to popular belief, markets have been of marginal importance in traditional societies throughout history. The market economy emerged after a prolonged battle against these traditions. As Polanyi clarifies, this is not a good development. The commodification of human beings and land required by the dominance of the market has done tremendous damage to society and environment. The value of human life has been degraded to their earning power. This enables the grim calculations made by Ambassador Albright that sacrificing half a million Iraqi children is worth the control of oil. Similarly, precious rainforests, coral reefs, plants, fish, and animal species which took millions of years in the making, and cannot be replaced at any price, are reduced to the value of timber, food or chemicals. This is the root cause of the social and environmental catastrophes we currently face. The analysis of Polanyi can be summarized in the six points listed below.

1: All societies face the economic task of producing and providing for all members of society. Modern market societies are unique in assigning this responsibility to the marketplace, thereby creating entitlements to production for those with wealth, and depriving the poor of entitlement to food. All traditional societies have used non-market mechanisms based on cooperation and social responsibility to provide for members who cannot take care of their own needs. It is only in a market society that education, health, housing, and social welfare services are only available to those who can pay for it.

2: Market mechanisms for providing goods to members conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms which govern social relations, with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Market societies convert these into commodities causing tremendous damage. This involves (A) changing a nurturing and symbiotic relationship with Mother Earth into a commercial one of exploiting nature, (B) Changing relationships based on trust, intimacy and lifetime commitments into short term impersonal commercial transactions, and (C) Turning human lives into saleable commodities in order to create a labor market.

3:  Unregulated markets are so deadly to human society and environment that creation of markets automatically sets into play movements to protect society and envirnoment from the harm that they cause. Paradoxically, it is this counter-movement, this opposition to markets, that allows markets to survive. If this was not present, markets would destroy the society and the planet. For example, the Great Depression caused the collapse of many free market institutions, and the government stepped in to prop them up and substitute for them. Similarly, only massive government intervention save the world from a major economic crisis following the Global Financial Crisis of 2007. This protective, anti-market, move allowed capitalism to survive. This is called the “Double Movement” by Polanyi, who says that the history of capitalism cannot be understand without looking at both sides — the forces trying to liberate markets from all regulations, and the forces fighting to protect society from the harmful effects of unregulated markets.

4: Certain ideologies, which relate to land, labour and money, and the profit motive are required for efficient functioning of markets. In particular, both poverty, and a certain amount of callousness and indifference to poverty are required for efficient functioning of markets. Capitalist economics require sales, purchase, and exploitation of labor, which cannot be done without creating poverty, and using it to motivate workers. The sanctification of property rights is another essential feature of markets. Thus, the existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.

5: Markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by GFC 2007. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, the Second World War, had finally killed the market system and a new method for organising economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about 30 years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism.

6: Market economies require imposition by violence — either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. There are a number of strategies commonly used to portray an economic disaster as progress and development. Without this propaganda, markets could not survive, as the forces of resistance to markets would be too strong. For example, a fundamental message of modern economics textbooks is that capitalism has created tremendous wealth and unprecedented progress. In fact, notwithstanding capitalist propaganda to the contrary, this growth has been extremely costly. We have sold planet Earth and the future of our children, and are celebrating the proceeds without taking into reckoning the costs. Accounting for the costs of destruction of environment, animal species, and human society, shows that that costs of growth have been far higher than the benefits.

See “Evaluating the Costs of Growth” (September 21, 2014). Real World Economics Review, issue 67, 9 May 2014, page 41-51.. Available at SSRN: https://ssrn.com/abstract=2499115.

We conclude by briefly considering the consequences of this analysis. The organization of production in a capitalist economy rests essentially on the exploitation of laborers, and requires using poverty as the goad to moltivate laborers to work. This means that if we provide universal basic incomes, we will remove the incentives for production which lie at the heart of capitalist systems of production. Instead, Polanyi suggests that we focus on ensuring that all people have the right to earn a decent livelihood. This can be accommodated within the present systems of production without radical change. Long run solutions require more radical changes in mindsets which would reverse the great transformation by prioriotizing social relationships and subordinating the market to the society.

I recently recorded a half-hour talk discussing the material summarized in the above post. The video is linked below:

Supplementary Readings and Videos:

For a more complete list of papers/videos/posts on Polnayi, see: Resources for Study of Poplanyi’s Great Transformation

Polanyi’s analysis cannot be understood by modern economists because it is based on methodological principles radically different from those currently in use.  The Methodology of Polanyi’s Great Transformation explains these principles, which demonstrate the necessity of considering historical and cultural context of economic theories. Polanyi’s analysis provides the basis for a radically different approach to economics, which considers politics, society, environment, and economics as inter-related subjects which cannot be understood in isolation.

The relationship between the Great Transformation and the looming environmental catastrophe which threatens the future of humanity on planet Earth is discussed in Zaman, A. “Unregulated Markets and the Transformation of Society” Chapter 18, Routledge Handbook of Ecological Economics: Nature and Society. Editor Clive Spash. 2016. A brief summary of this paper, and a video-talk on the topic is available from another post on this blog: “Markets & Society”

A 30 page article, which provides further details of this brief sketch,  can be downloaded from the link below:   “The Rise and Fall of the Market Economy,” Review of Islamic Economics, Vol. 14, No. 2, 2010, pp. 123–155. This post, and the connections to Islamic Economics, are explained in my blog: “An Islamic WorldView“.