Review: Karl Polanyi’s “The Great Transformation”

by

Josh Alexakos

April 5, 2018

We live in an age of deep economic confusion. Despite the great material success achieved by
the neoliberal order, it has come at a cost: enormous inequality, social dislocation, and spiritual
poverty. Recent political and social movements have often dissented from this order, and the
anger encapsulated in these movements is seen all around the world.

From these events, a number of questions arise: What is the full extent of the damage? How has
our system caused this? Why does it cause this? And most importantly, what can be done?

If these questions are to be answered, a return to the past and the wisdom of our forebears is
necessary. And there may be no book more important in this “ressourcement” than Karl
Polanyi’s The Great Transformation. A towering work, written in the midst of the Second World
War, it attempts to explain how liberalism as a political economy lead to the horrific events of
the early 20th century.

The Great Transformation’s basic story is straightforward: economic liberalism proposed a

radically utopian—and impossible—vision of society. This vision imagined a market removed
from society and placed within a separate economic sphere, such that society and economics did
not interact. Whereas before, economies were parts of societies, economic liberalism proposed
society as existing independently and the economy doing so as well.

This idea began to develop over the course of the 17th through 19th centuries, simultaneously
producing previously unimaginable amounts of material wealth along with vicious social
dislocation and destruction. Proponents of economic liberalism arose to defend it due to an
increase in dissenters from it. As reaction to this system intensified, the state more and more
became the weapon used by both sides to institute their preferred order. After the Great
Depression, when the market system had collapsed, fascism arose as an attempt to use the state
to create society.

Polanyi sees the possibilities of modern political economy as a spectrum. On one end sits
economic liberalism, which prioritizes the individual above all and subjects society to whatever
ends that individual might prefer. On the other end lies fascism, a system that advocates a type of
holism where the individual must submit to the good of the society and the state.

Polanyi suggests looking to Robert Owen and his democratic socialism for a compromise
solution. A Welsh social reformer, Owen proposed a system that understands that the market is
embedded into society, but also respects the individual and their rights, and actually provides
more freedom by virtue of maintaining the society properly. Society is, after all, where we
exercise our freedom, and so it is intrinsic to the proper exercise of freedom.
While Polanyi is correct about much, his solution lacks a richness that one might expect of
someone attempting to solve the great dilemma of his age. If democratic socialism is simply a
very fine line that marks the midpoint between liberalism and fascism, then it will always find
itself susceptible to the temptation to move away from that middle. Misadventure is thus only a
slight misstep away.

Polanyi’s solution needs something to provide it with a robust understanding of both the
individual and society and the way that these two should interact with one another. Rather than
performing a tightrope walk, it needs firm grounding. Ironically, Polanyi rejects an answer out of
hand: Christianity. Christianity solves the dilemma of liberalism and fascism by solving the
conflict of society and the individual, restoring work to a truer understanding, and properly
ordering the ends of man (more on this below).

Intrinsic to solving the problem of liberalism, though, is understanding how it came to be. This is
why Polanyi devotes much of the book to the historical development of economic liberalism,
primarily in England but also in Europe more broadly. Due to this history, and despite the
shortcomings of its proposed solution, The Great Transformation is still a vital book for our
time. Polanyi divides it into three parts, all tackling different but interrelated issues.

Part one engages with the question that plagued some of the greatest minds of the moment: how
had one hundred years of peace in Europe lead to the two greatest wars in world history? The
lack of major conflict between great powers was historically anomalous. Polanyi argues that both
the peace and the war are attributable to the choice of world leaders to put the ends of the self-
regulating market above all else.

Part two deals with the underlying question: How did the idea of the self-regulating market rise
to such prominence? If such a system was so inherently fragile, what convinced so many people
of its strength and superiority?

Everything began, according to Polanyi, with the Industrial Revolution. The development of
advanced farming techniques and the creation of advanced machines made the potential material
possibilities inconceivable. However, it also had the perverse effect of dislocating a large number
of people, as the wealthy purchased land to expand their productive capabilities. Machinery also
subordinated the original ends of much production, mainly subsistence, to profit.

This shift seems minor to us, but Polanyi says that it was anything but minor. Economies prior to
the “market society”—a society subordinated to the ends of the market and thus deeply shaped
by it—were not controlled by the market, but rather controlled by the society in which they were
“embedded.” Polanyi means that economy was directed by society, not the other way around.
Material possessions were not the ends desired—social assets were. Creating and deepening
social relationships were of paramount importance, because the community in which one lived
was a collective whole. The community had a responsibility to care for all of its members, and so
individuals submitted their interests to the well-being of the common good.

As the idea of a self-regulating market became more and more popular throughout the Industrial
Revolution though, the logical conclusions it entailed became more and more apparent. Three
elements that are fundamental to human society—land, labor, and money—had to become
commodities for the market system to work. This concept is self-evidently absurd, as Polanyi
notes: “the postulate that anything that is bought and sold must have been produced for sale is
emphatically untrue in regard to them.” But for a market society to truly be a market society, it
demands that all things be commodified and thus up for sale.

In the 19th century we see the first advocates for market society not as a necessary evil, but
actually an essentially unqualified good. New ideas, like utilitarianism and Social Darwinism,
were introduced in this era. Thus began the process of taking market logic into the moral and
ethical realms by claiming that the laws of nature should dictate not just the market, but also
society. Polanyi condenses it well: “economic society was founded on the grim realities of
Nature; if man disobeyed the laws which ruled that society, the fell executioner would strangle
the offspring of the improvident. The laws of competitive society were put under the sanction of
the jungle.”

One figure who stood against economic liberalism and critiqued it well was the aforementioned
Robert Owen. He correctly understood the nature and purpose of society, and how the market
society was a bastardization of this. Not only did it create social dislocation, but it also turned
virtue into vice, all while its proponents misunderstood why society was a uniquely human
phenomenon. Owen made powerful arguments and strove to provide alternatives to the market
society, but he was fighting an uphill battle. Economic liberalism as a body of thought was more
and more reflecting a religious faith, and its adherents becoming zealots.

This turn to a conviction in the market’s ability to solve all problems came as a reaction to
reality. Even in the 1830s, the flaws and failures of market mechanisms were becoming evident.
The greatest problems related to the three fictitious commodities of land, labor, and money.
Indeed, the greatest irony of this story is that market society, which exalted the material, faltered
on precisely this truth: that as material realities, humans, land, and productive activities have
limitations and needs, and the market accounted for none of these.

As political action became the most effective form of intervention, national identity became
more and more a source of focus. The market principles might be the same everywhere, but the
way the market’s problems manifested was radically different in Germany than in England. One
of the markers of national identity became currency, something that not only existed for an
economic function, but also became something distinctly national. These forces were used by the
two corresponding institutions, governments and central banks, to provide some form of
protection from those exposed to the market. The extent of the provisions depended on the extent
of enfranchisement, but the general direction of these interventions was the same: protectionism.

But the economists would not be so easily defeated. Remaining in the simplicity of their
economic models, they began to influence governments based on the fact that the market had
created unseen material wealth and that if there were bad side effects, they were a result of the
inhibition of the market. It had to be fully unleashed for it to be fully effective. No political
leader can remain resolute when they are tempted with utopia, and the Enlightenment
presupposition that reason could create heaven on earth worked in lock step with market logic.
We are all captives of our age to some extent, and they proved to be no exception.
The government and central bank were slowly weaponized for the ends of a market society, and
England was especially suited for this. As the leaders in both international trade and finance, and
the strongest military power in the world, Englishmen were used to enforce the market globally
through whatever means necessary.

But this was occurring right as the 1860s gave way to the 1870s, and Europe began to develop
cohesive nation-states that could match England in political efficacy. And so a tension began to
develop in the world: a world economy that dictated things soullessly, and a number of nation-
states often stirred to act quickly and sometimes rashly to protect their people. This tension could
persist, so long as the world economy kept growing and wealth continued to grow; but only so
long as those maintained. Eventually, the tension between nations exploded into World War I.
However, that was not the end of economic liberalism.

Part three of Polanyi’s book completes the tale of how economic liberalism fully collapsed after
World War One and led to World War Two. Polanyi begins by bringing attention to an
undercurrent throughout the book, that of democracy and popular government. At the same time
that market society was realized, efforts towards greater democratization were taking place. The
economic liberals were at best ambivalent about this development; a number of them felt that
“popular democracy was a danger to capitalism.” Specifically, the concern was that the people,
composed of many who would feel the effects of market shifts quite strongly, would attempt to
use intervention to shield themselves from the effects.

This kind of intervention could not be tolerated. Because adherence to the market was necessary
everywhere for it to work, nations were forced to stay on the gold standard. If they did not, they
could not participate in the world economy, which could cause entire national industries to
collapse. Ironically, while attacking interventionism, the economic liberals actually used it to
maintain the international gold standard everywhere. So, in the 1920s as in the 1870s, the world
economy was maintained everywhere.

However, the frailty of the world system was this time too great. The stock market collapse in
1929 led to the Great Depression, and the necessary tools for authoritarianism could be found in
the hands of the economic liberals, who had used the governments and the central banks to
maintain the increasingly faltering order. Democracy, which might have been capable of
preventing authoritarianism, had been so thoroughly battered by the economic liberals that it had
little power to stop fascism.

Fascism was, according to Polanyi, “rooted in a market society that refused to function.” This
made it a universal force, capable of transcending any barriers, be they cultural, religious, ethnic,
or other. All it needed was a market society that had reached the point of no return. Globally, this
was the case, as “the political and economic system of the planet disintegrated jointly.” Polanyi
aptly calls fascism a “political religion” because it functions not only politically but also socially.
The forgotten realm of man, society, came back to haunt the economic liberals.

Polanyi ends the book with a chapter that both both evaluates the preceding history and ponders
the future based on what he hopes it holds. In many ways this is simultaneously his strongest and
his weakest chapter. He summarizes his work profoundly: “The true criticism of market society
is not that it was based on economics… but that its economy was based on self-interest. Such an
organization of economic life is entirely unnatural, in the strictly empirical sense of exceptional.”
He then posits that the future will be one of the abandonment of market economy, something he
sees already occurring, and what will come after it is dependent on whether we grasp the “true
significance of freedom in a complex society.” By defining freedom as solely from institutions
and power solely as institutions, economic liberalism sets up a false dichotomy between market
society and fascism. In that decision, Polanyi argues, no one wins.

For a society to flourish, it must recognize its own existence. Intrinsic to that recognition is the
realization that people in a society need one another—that they are responsible to and for their
neighbor. This means that society will have to exercise power, but it can do so rightly. If a
society denies its own reality, it is forced into liberalism on the one hand, or fascism on the other.
If it cannot come to grasp the true nature of power, which actually can be used properly, then it
will be forever oscillating between the two points.

Christianity contains the resources to solve Polanyi’s predicament, and they are found most
explicitly in Christ’s own teachings. The tension in which Christ holds both society and the
individual gives real substance to Polanyi’s solution, allowing it to exist not as a fragile
balancing act but as a galaxy of orbiting priorities which work together harmoniously in their
proper place. Christ’s challenge that we love our neighbors as ourselves is the fundamental moral
command that gives weight to Owen’s theory that a society flourishes most when its members
are responsible for one another.

Christianity also provides a needed correction to both economic liberalism and fascism in its
understanding of the purpose of vocation. Liberalism sees work as little more than a means to an
end, that end being personal wealth and individual satisfaction. Fascism, on the other hand,
believes work to be something done by individuals for the furtherance of society and the state.
Christianity rejects both, contending that work has intrinsic value as it is intimately tied up with
our identity as image-bearers. We “image” God in our efforts to cultivate and care for his
creation. Vocation is thus an end in and of itself. Polanyi’s society needs this vision of work if it
intends to offer an alternative to liberalism and fascism.

Christianity is most important to Polanyi’s system, though, precisely because it does not
prioritize either the society or the individual above all else. As the Westminster Shorter
Catechism states, the “chief end of man is to glorify God and enjoy him forever.” Subordinated
to God, humanity can flourish and thus develop the proper relationship between the individual
and society. Individuals have freedom as beings created in God’s image, but they are also
implicitly called to pursue the common good when Christ compels them to love their neighbor as
themselves. To love someone is to want what is best for that person, and thus the common good
is the most logical end to pursue when loving our neighbors. When the individual and society are
not the ultimate end of existence, they do not have to exist in opposition to one another, and the
two are able to do precisely what they were created for.

Thus, if Polanyi’s account is accurate, then Christianity is that much more important to it. We
need a political economy that properly orders all of its component parts, and to do that we need
something—or someone—to help us understand how and why things should be ordered as
Polanyi describes. If Christianity were incorporated in Polanyi’s vision, it would solve its
weaknesses and provide a robust vision of a rightly ordered society and economy.

[This article appears in Fare Forward Issue 8 (Dec. 2017), order here.]