Polanyi and Hayek on Freedom, the State, and Economics

Author(s): Birsen Filip

Source: International Journal of Political Economy , Winter 2012—13, Vol. 41, No. 4,
Critique of Current Neoliberalism from a Polanyian Perspective—Politics, Philosophy,
and Economics (Winter 2012—13), pp. 69-87
Published by: Taylor & Francis, Ltd.

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International Journal of Political Economy, vol. 41, no. 4, Winter 2012-13, pp. 69-87.
© 2013 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com
ISSN 0891-1916 (print)/1558-0970 (online)
DOI: 10.2753/IJP0891 -1916410405

Birsen Filip

Polanyi and Hayek on Freedom,

the State, and Economics

Abstract: This paper examines the relationship that prevails between the state,
economics, and freedom according to the works of Friedrich Hayek and Karl
Polanyi. Hayek, who was one of the most important contributors to the development
of the modern market economy and liberalism, formulated a concept of freedom
that includes economic and negative freedom as significant components; his
objective was to demonstrate the superiority of liberal capitalist societies over
all other forms of organizing a society in terms of achieving freedom. Meanwhile,
Polanyi, who confronted all forms of totalitarian regimes and argued that a "self
regulating market... was a Utopian project," formulated a concept of freedom that
rejected the self-regulating mechanism of the market economy as a component of
freedom; he supported regulated markets and included moral, ethical, and social
values among the key components required for the realization of freedom. This
paper shows that Hayek failed to foresee the destructive social consequences
and dehumanizing aspects of modern market capitalism, and promoted the
free market economy as a guardian of freedom primarily for its instrumental
value. Conversely, Polanyi was able to anticipate the modern market economy's
potential to engender disastrous consequences for the whole of humanity and
provided an honest and objective analysis of the modern market system that is
indispensable for understanding the dilemmas, issues, and contradictions of
economic globalization.

Key words: capitalism, economics, Friedrich Hayek, modern market economy,

negative freedom, open society, Karl Polanyi, positive freedom.

Birsen Filip has recently completed her Ph.D. dissertation in philosophy at the University
of Ottawa, Canada. She holds a bachelor's and a master's degree in economics from the
Université de Montréal and the University of Waterloo, Canada, respectively.

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70 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

The financial collapse that began in November 2008 and then spread rapidly fr
developed to developing countries eventually affected all key sectors of the glo
economy. It demonstrated that a crisis in the modern market economy has
potential to be far more destructive than any previous economic crises in wor
history, including the Great Depression, which most economists accept as the wor
economic catastrophe to have ever transpired. The 2008 financial crisis has dr
a great deal of attention to the discipline of economics, particularly neoclassic
economics, which has been the leading program of research shaping the glo
economy since the early part of the twentieth century. The intensive applica
of the neoclassical model to actual world economies began with the restructur
and implementation of policies based on its principles in the 1970s. This app
tion reached its zenith in the Reagan-Thatcher era in the 1980s, during which t
the principles of neoclassical economics gradually came to dominate all socia
political, and private spheres.1 Afterward, neoclassical economics continued to
prominence through the efforts of the United States and Great Britain; however,
official triumph of modern market economics occurred with the sudden colla
of the Soviet Union in 1991.

Despite this victory of neoclassical economics over its counterparts, its econo
mists have been unable to provide a solution for the 2008 financial crisis. This has
led the contradictions that have always existed within neoclassical economics to
become more apparent and have more attention drawn to them. In fact, there has
been a concerted effort to find a new set of rules, which has led to the publication
of a number of studies that not only emphasize the severity of the economic crisis,
but also accentuate the role that neoclassical economics played in producing it. As
a result, many have argued for the necessity of significant changes in and reforms
of the prevailing economic system or the emergence of a new paradigm.
Such efforts that focus on the defects of neoclassical economics are not a new
phenomenon, as there have always been some "orthodox dissenters" publishing
criticisms of their own field of research. Their works are typically based on disagree
ments regarding some ideas, views, or policies within the discipline of neoclassical
economics. In addition, an abundant amount of work criticizing many aspects of
the neoclassical program of research and proposing a re-appraisal of it has been
produced by heterodox economists comprising individuals from a number of dif
ferent unorthodox economic programs of research such as post-Keynesianism,
Marxism, and feminism, in addition to ecologists, socialists, and other similar
groups. Although they are important, it is not surprising these works did not receive
the respect and recognition that they warranted, because the history of neoclassical
economics in the twentieth and twenty-first centuries includes the outright rejection
of critical attitudes toward any of the fundamental assumptions or accepted truths
of this program of research.
Unlike the many efforts and studies that focused on the defects or failures
of mainstream economics, this paper does not attempt to propose an alternative
paradigm, a set of reforms, or immediate solutions to the "special anomalies" that

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 WINTER 2012-13 71

have persisted in the discipline of economics for many decades. Rather, it exam
ines the relationship that prevails between the state, economics, and individual
freedom according to the works of Friedrich Hayek (1899-1992) and Karl Polanyi
(1886-1964). Hayek was one of the most important promoters of the modern mar
ket economy and is often regarded as "the father of neoliberalism" (Block 2001:
xx). He attempted to develop a theory against "socialist economic order," which
resulted in an extended analysis to demonstrate the superiority of liberal capitalist
societies. Meanwhile, Karl Polanyi, who confronted Nazism, fascism and all forms
of dictatorship, argued against the self-regulating market economy (capitalism).
Specifically, he argued that the self-regulating market was "a Utopian project"
and that it had the potential to engender disastrous consequences for the whole of
humanity (2001: 3, 266, 267).
Both Hayek and Polanyi served in the Austro-Hungarian army during World
War I and subsequently moved to England to escape German fascism (Randies
2007: 136). In addition to being great social scientists and philosophers, they were
also economists and both of them were influenced by Carl Menger's (1841-1921)
Grundsätze der Volkswirtschaftslehre (Principles of Economics) (1871), which
was accepted as the founding manuscript of the Austrian school of economics.2
In addition, Hayek and Polanyi were well known for publishing some of the most
significant books of the twentieth century; Hayek published The Road to Serfdom
in 1944, while Polanyi published The Great Transformation, also in 1944.
In The Road to Serfdom, Hayek warned readers that "the forces" that ruined
"freedom in Germany," Italy, and Russia were not unique attributes of those coun
tries; they could exist anywhere. He explained that those forces could be avoided
or "prevented," so long as society and the people that comprised it were able to
recognize these movements and forces "in time" and understand where they "may
lead" (Hayek 1994: 6, 11-12). In essence, Hayek used this book, as well as The
Constitution of Liberty ( 1960), as a platform to defend free market capitalism against
the socialist forces and movements that existed in democratic welfare states and
had the potential to eventually lead to an environment in which totalitarian regimes
could thrive (i.e., fascism, Nazism, or communism).
Meanwhile, Polanyi's The Great Transformation has been described as "the
most powerful critique yet produced of market liberalism."3 In it he explained that
"nineteenth-century civilization was... destroyed" by free market capitalism, which
is based on a "Utopian vision of the market" (Block 2001: xviii; Polanyi 2001:
257). Polanyi further argued that the modern market economy gives the illusion
that individuals shape society based on their own wills (Polanyi 2001: 266). As a
result, serious problems and sometimes even warning signs of impending crises
are ignored or denied. The Great Transformation "celebrated the New Deal in the
United States... because it placed limits on the influence of market forces," whereas
The Road to Serfdom was critical of "the New Deal reforms" and warned that they
would engender "economic ruin and a totalitarian regime" (Block 2001: xx).
Polanyi developed a theory against centralized state socialism, although he did

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72 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

not share Hayek's opinion that all forms of socialism required a centrally planned
economy. Despite differences in their views pertaining to socialism, Hayek and
Polanyi were both concerned about the problems and conditions associated with
freedom in the modern market economy (or "open societies" or capitalism). In the
end, however, differences in their respective views about the self-regulating4 aspect
of the modern market led them to conceptions of freedom that were fundamentally
distinct from one another.
Polanyi recognized the contradictory nature of the modern market economy,
meaning that he had a realistic view of the consequences associated with it; as such,
he was able to foresee its often-disastrous consequences. Hayek, to the contrary,
had a Utopian view of the modern market economy, causing him to associate free
dom with capitalism. As a result, he used the concept of freedom to promote free
market economies by advocating that they not only generate economic prosperity,
efficiency, and growth, but also that they guarantee a higher level of individual
freedom. This line of rhetoric was frequently employed during the cold war, espe
cially in the Reagan-Thatcher era of the 1980s.5

Hayek's Negative Concept of Freedom

Hayek's idea of freedom had two main components: negative freedom (or "freedom
from")6 and economic freedom. Based on the former, freedom is "the absence of
coercion" on the part of other people, organizations, or agents (Hayek 1960: 133).
Hayek believed that coercion occurred whenever the decisions or choices that in
dividuals made within their private spheres were not determined by their own will,
but through the imposition of the will of an external authority (i.e., the coercer).
Even though he explained that it was possible for a person, group of people, or an
organization7 to act as a coercer and deprive others of their freedom, he focused
his efforts mainly on the coercive power of the state. He held the belief that any
attempt to realize common goals and ends through state intervention was a form
of coercion that would eventually jeopardize freedom.8
In addition to rejecting coercion because he believed that it constituted a threat
to the achievement of freedom, Hayek also rejected any definition of freedom that
"guided" the actions of individuals according to common moral or ethical values.
He argued that any requirement of conformity in terms of moral values actually
represented a form of coercion and "a denial of freedom" (ibid., 79). He insisted
that freedom had nothing to do with imposing or possessing common moral or
ethical values. In fact, he believed that, in order for freedom to prevail, society
had to accept the reality that each individual possessed his or her own moral and
ethical values.

In addition to rejecting subjective freedom, which basically refers to the notion

of associating freedom with common moral or ethical values, as well as the idea of
following one's desires, emotions, impulses, and compulsions, Hayek also made a
point of specifying that his concept of freedom contrasts with positive freedom in

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 WINTER 2012-13 73

the sense of "self-mastery," "self-direction," and "self-realization." His opposition

is not surprising, given that the positive concept of freedom allowed for rulers t
justify the use of coercion or manipulation for the purpose of achieving the com
mon good (Berlin 1969: 132).9 More precisely, Hayek was of the opinion that,
based on the notion of attaining the common good or distributive justice, the ruler
is permitted to use coercive power in order to establish institutions and control the
actions of individuals.
Hayek believed that individuals could not experience anything worse than having
the coercive power of the ruler treat them as though they were mere tools for the
achievement of the common good, which, in turn, meant they were unable to utiliz
their individual wills for the purpose of determining their own goals and ends. H
claimed that each time individuals are coerced into assisting in the achievement
of fairness, welfare, and justice, the coercer prevents them from fully developin
their intellects and capacities in making independent choices, or using their wil
knowledge, and abilities to achieve individual freedom.
Hayek also argued that interference on the part of the ruler would not only
prevent individuals from fully and spontaneously developing their intellects an
capacities, but it also has the potential to facilitate despotism, paternalism, an
authoritarianism, each of which represents an enemy of freedom because they
would implement obstacles to its achievement. Therefore, Hayek regarded positiv
freedom as the "most dangerous" concept to the achievement of freedom, because it
can eventually engender totalitarian regimes (fascism, socialism, and communism
(Hoy 1984: 13).
Even though he was adamantly opposed to totalitarian regimes, Hayek did not
view them as the only legitimate threats to freedom. He was also highly critical o
the paternalism of the "social democratic welfare state" and argued vehemently
against extending the role of the state within the social and economic arenas fo
the purpose of ensuring distributive justice and greater equality. He explained th
defenders of distributive justice supported various types of social and economic
programs and services because they viewed them as an "efficient method of pro
viding for the specially needy" (Hayek 1960: 289). However, he argued that such
forms of state intervention represent a danger to the self-regulating aspect of th
modern market economy because they prevent access to equal opportunity and
represent obstacles to the transmission of accurate information. He also emphasize
the point that a welfare state's social and economic programs create dependenc
on government assistance for certain types of people, causing them to become i
responsible and lose their freedom.
Hayek's opposition to the "social democratic welfare state" demonstrates that h
did not regard the existence of individuals that are unable to achieve their particula
goals and ends on account of a lack of capacity as threats to the achievement of
freedom. For instance, he rejected any state authority that may resort to imposing
positive rules of conduct or laws that require the redistribution of wealth and i
come in order to maximize the common good or welfare of society as a whole. By

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74 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

imposing such laws or positive rales of conduct, the ruler will likely feel as thoug
he has made his subjects feel free, because he has chosen to do what is best
them or, to put it another way, he has prevented them from doing what is wron
Hayek argued that this type of state interference, under the auspices of achiev
distributive justice, represents a real threat to freedom, as individuals are made i
mere tools for the government. Therefore, contrary to the defenders of distribu
justice, Hayek did not accept the unequal distribution or lack of economic resou
as an obstacle to the achievement of freedom, arguing instead that defenders
the "social democratic welfare state" confused the lack of freedom with a lack of
economic resources, equality, opportunities, fairness, welfare, justice, and so
In fact, Hayek often argued that distributive justice is meaningless and unj
in the context of free market capitalism, as it requires the state to treat its citiz
unequally (Hoy 1984: 49). To be more specific, he explained that the achieveme
of distributive justice meant that "people who differ greatly in strength, intellige
skill, knowledge and perseverance" had to be treated accordingly by the sta
(Hayek 1976: 82). Furthermore, he was of the opinion that freedom had nothi
to do with achieving equality in people's skills, capacities, incomes, and weal
stating that "not only has liberty nothing to do with any other sort of equality,
it is even bound to produce inequality in many respects" (Hayek 1960: 85). In
other words, he held the view that even if a human being is not able to fully uti
freedom on account of inadequate social, economic, and health conditions, th
value of freedom remains the same for all members of society, from the poo
and least educated segment of the population all the way up to the richest and m
educated citizens. Therefore, contrary to the defenders of the positive concept
freedom, Hayek regarded any state laws requiring the redistribution of wealth
income for the purpose of achieving fairness, welfare, and justice as real threats
the achievement of individual freedom.
According to Hayek, freedom requires "some assured private sphere" in which
individuals are not manipulated, coerced, or prevented from using their own beliefs,
reasoning, and knowledge for the purpose of freely developing their intellects, skills,
and capacities (ibid., 13). That essentially means individuals should be capable
of making choices or decisions within their private spheres, based on their own
faculties and without being "subject to coercion by the arbitrary will of another or
others," which endangers freedom (ibid., 11). In order to prevent the coercion of
one individual by another in a free society, Hayek argued that the state should be
the only entity to have the power to coerce. However, this power to coerce has to
be used to the minimal extent possible and its implementation needs to be based on
predictable, "known rules" and laws, which limit the state's power to coerce (ibid.,
21). Therefore, even though the state can intervene to establish legal order within
a society for the purpose of securing individual rights and freedom, it is necessary
to place limitations on this power by means of a legal system (or predetermined,
foreseeable, and known rules), so that the state is prevented from transforming itself
into a dictatorship. In other words, the state should be able to secure freedom while

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 WINTER 2012-13 75

simultaneously respecting the rule of law. If, however, the state did expand its
to the point that the rule of law was no longer respected, then the existenc
state "monopoly of coercion" would not be compatible with freedom.
Hayek's objection to the excessive role of governments in socialism and so
democratic welfare states did not mean that he strictly subscribed to the laissez
approach and did not believe that governments should exist; he maintained
a government should always remain a "servant" of the people and never bec
their "master." In fact, he was opposed to the "laissez-faire" approach10 an
an alternative, proposed "the proper functions of the state" and "limits of
actions" (Gamble 2006: 128). He believed that the state had a role in maintain
social order by preventing coercive acts on the part of its citizens and establ
"a stable and fair context for individuals to act and pursue their own ends" (O
2006: 139).
Hayek also accepted that governments had significant roles in defending the
country against enemies in the event of war, protecting property rights, and es
tablishing order and the rule of law to protect citizens from coercive powers and
to secure individual rights and freedoms. Furthermore, he supported "a program
for rational improvement of existing institutions11 and also various measures of a
broadly welfarist character" for the purpose of providing a social safety net (Shear
mur 2006:149). For example, he supported a guaranteed minimum level of income
for people in extreme misfortune or severe deprivation, as opposed to a system
where the state secures greater social and economic equality for all. According to
Hayek, a guaranteed minimum income does not "lead to a restriction of freedom,
or conflict with the Rule of Law"; instead, it provides people with their basic needs
and an opportunity to participate in the marketplace (Hayek 1976: 87).

Hayek's Concept of Economic Freedom

The second component of Hayek's idea of freedom is economic freedom, which

emphasizes the importance of individuals voluntarily organizing their activities for
the purpose of achieving better outcomes within the marketplace. More precisely,
it is the freedom that allows individuals to voluntarily choose how to earn, spend,
save, and invest their incomes based on their own values, skills, will, intelligence,
and knowledge, without interference from any external forces in the marketplace
(Hayek 1994: 42). Furthermore, he explained that economic freedom also neces
sitates that individuals are able to freely enter into all forms of occupation and can
willingly engage in any business enterprise.
Hayek believed that when people used their skills, will, intelligence, and
knowledge, they would not only contribute to the achievement of their particular
goals and ends within the free marketplace, but they would also unconsciously
contribute to the achievement of common goals and ends that are in the best in
terests of society as a whole, without the need for a centralized, rational planning
authority. More specifically, by attempting to achieve their individual plans and

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76 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

particular goals and ends within the marketplace, all actors would realize mutu
beneficial outcomes without having to follow the commands or dictates of oth
Hayek argued that this was the way in which the activities of millions of peo
were organized within the free marketplace, where individuals do not need to
low the commands and dictates of a social engineer in order to realize the comm
goals and ends of society.
According to Hayek, economic freedom requires the existence of a competit
free market, where voluntary cooperation and free choices on the part of individ
are necessary. He stressed that prices and wages represented important means
communication within the marketplace that assist in co-coordinating the activi
of millions of people without resorting to central planning. More precisely, he
plained variations in prices and wages transfer information price- and wage-trans
information between individuals (Hoy 1984: 41).
Hayek highlighted the importance of the self-regulating aspect of the mode
market economy. This basically means that the market order is dynamic and
stantly changing, and individuals frequently alter their choices of action as n
situations and circumstances materialize. According to Hayek, it is this emergenc
new situations and circumstances in the marketplace (also in social life) that ca
economic indicators to change constantly. The prevalence of constant changes wit
the marketplace, in addition to the complexity of social life, led Hayek to claim t
it is not possible to centrally and deliberately plan and control the outcomes of
marketplace, as was attempted within socialist systems.12 He was of the opin
that state control over the economy would require constant intervention in or
to ensure that adjustments were made in accordance with changes that occurr
within society, the environment, and in the nature of knowledge in general. T
sort of intervention, even if done diligently, would eliminate the self-regula
aspect of the market system. Thus, Hayek believed that state intervention in
economic arena represented a threat to the achievement of both economic free
and freedom in general (i.e., freedom of speech, freedom of expression, freed
of press, freedom of religion).

Polanyi on Freedom, State, and the Modern Market Economy

Contrary to Hayek, Karl Polanyi was fully aware of the contradictory charac
of the modern market economy and its tendency to engender crises. He was
cerned mainly with the disruptive and destructive aspects of the modern ma
economy. More specifically, he believed that societies had been destabilized
"disrupted" by the introduction of free market capitalism (Polanyi 2001: 16
As an example, Polanyi pointed out that some of the devastating famines that
world has experienced were outcomes of "the new market organization of la
and land which broke up the old village without actually resolving its problem
(ibid.. 167-168).
Polanyi strongly opposed the modern market economy's support for mater

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 WINTER 2012-13 77

acquisition as the primary purpose of a human being's existence. More precisely

he was concerned that the worship of material gain, as advocated by the moder
market economy, had come to dominate all aspects of social, cultural, and politi
life. However, he believed that "the defect of the market economy is not the me
existence of selfishness and the motive to gain, but rather the elevation of this mot
to a central and predominant place in the social order" (Stanfield 1986: 127).
Polanyi worried that the constant preoccupation with material gain stimulate
unnatural, unethical, and immoral practices, and represented a threat to the achiev
ment of freedom. In fact, he was of the opinion that the concept of freedom defend
by Hayek represented "illusory freedom," because it focused on material and
economic prosperity instead of moral and ethical values, justice, self-realization
or self-development. He believed that the fact that neoclassical economists plac
such a high value on the pursuit of self-interest while not attributing any role for
moral and ethical values, justice, and equality led to the modern market econom
representing an obstacle to the achievement of freedom. In other words, Polan
was of the view that many of the measures taken to achieve freedom under the gui
of modern market capitalism actually ended up destroying freedom.
Polanyi associated moral perfection with virtuous behaviors, which are roote
in the spontaneous actions of individuals. Unlike Hayek, he did not regard state
intervention designed to impose specific moral values on its citizens as a dange
for the free development of individuals. Instead, he argued that actors within t
marketplace (i.e., producers, consumers, governments) should take social, moral
and ethical values into consideration when conducting their transactions becaus
of the fact that their decisions and actions impact the social and political life o
society as a whole.
Polanyi often cited the importance of the welfare of the entire community in hi
criticisms of the modern market economy; as a result, contrary to Hayek's view
as well as those of many liberals, Polanyi did not reduce freedom to an individu
matter, because he regarded it (freedom) as a social matter that involves bearin
responsibility for one's choices. In fact, he was highly critical of liberals defending
"free enterprise," because he believed that it engendered "irresponsible actions.
In The Great Transformation, Polanyi often underlined the importance of taki
responsibility for one's actions in social life. Thus, he attributed importance
sympathy, shared values, commitment, and cooperation in social life, believing tha
such elements were needed to create responsible individuals who were capable o
holding a society together.
Responsibility is, in fact, an important component of Polanyi's conception
of freedom and strongly relates to the roles of social, moral, and ethical valu
in the marketplace. He tried to demonstrate that the liberal state's13 reliance o
the self-regulating mechanism of the modern market economy indoctrinated
people into worshipping individual material gain without having to assume an
responsibility in the event that their actions result in negative outcomes for t
lives of others. He argued that such "irresponsibility is destructive of communit

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78 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

(Standfield 1986: 127). Furthermore, he claimed that the destructive consequences

of the modern market economy included many different externalities, asserting
that "it [the self-regulating market] would have physically destroyed man and
transformed his surrounding into a wilderness" (Polanyi 2001: 3). According to
Polanyi, externalities would be at a minimum in a community-oriented society,
as "people are aware of their impacts on each other, responsive to each other"
(Standfield 1986: 127).
Polanyi was very concerned with the negative outcomes associated with the
modern market economy, including poverty as well as social and economic in
equality, which prevent many individuals from exercising their freedom. More
specifically, he thought that the options available to an individual could be severely
restricted, or that individuals could end up with no choices whatsoever, when they
are deprived of their basic needs, health, education, or wealth for whatever reason.
This would create a significant obstacle to the achievement of self-realization. As
a result, Polanyi aimed to restore a moral and ethical relationship between human
beings by establishing an institutional framework that regulates the activities of
individuals. In other words, he supported the redistribution of wealth and income
and believed that "the question of distribution ... was a question of social justice
and could not be solved in the marketplace" (Mendell 1990: 69). He also defended
the state provision of public education and training to "develop the intellectual and
cultural equipment of the working class" (Mendell 2007: 85).
Therefore, contrary to Hayek, Polanyi advocated state interference to support
the development of virtuous citizens and to achieve the common good so as to
ensure that everybody integrated into the social order. He essentially believed that
state interference aimed at cultivating social, moral, and ethical values (or virtu
ous citizenship), and providing education and training would be compatible with
freedom. More specifically, Polanyi defended the positive concept of freedom and
believed that the concept of freedom that was derived from the principles of the
modern market economy fails to provide autonomy, self-development, and rational
self-determination (or self-realization).

Hayek and Polanyi on Tribal Society

Polanyi's support for the positive concept of freedom, as well as welfare and so
cialist states, seems to have been derived from his analysis of the nature of tribal
societies. A tribal society was simple and small, and individuals knew each other
intimately and were bound to one another through kinship. As a result, members
of the tribe supported each another in times of need. For example, they helped
each other prevent the onset of starvation and actively participated in communal
activities (Polanyi 2001: 48). Since members of the tribe directly observed the
consequences of their actions, there was a moral obligation to help each other.
Furthermore, the nature of relationships and the size of the community meant that
individuals knew the origins of everything they consumed and were conscious of

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 WINTER 2012-13 79

the destructive nature of production. Therefore, members of a tribe did not

destructive behavior related to the nature of production (ibid.).
Furthermore, it was possible to plan common goals and ends for the entire
munity in a tribal society, because all of its members would typically submit t
authority of a commander or another form of figurehead. People respected and o
the commands and dictates of the authority figure, as they had complete confi
that their decisions would achieve the best possible outcomes for everyone.
Polanyi thought that the practices of the modern market economy and the na
of modern societies had led to the disappearance of the social bonds that exis
the tribal society, as individuals had come to focus solely on their material inte
and gains. Based on his analysis of the importance of reciprocity in tribal soc
to "safeguard both production and family sustenance"14 and the fact that this
of reciprocity does not exist in the modern market economy, Polanyi formu
his support for the redistribution of goods and income within society through
interference (ibid., 50).
Hayek, to the contrary, believed that the principles and achievements of
Great Open Society" are threatened whenever supporters of collectivism attemp
return to lifestyles that are commonly associated with a tribal society. He expl
that the departure from tribal societies led to the disappearance of a feeling
sponsibility for one's community as a whole. Furthermore, it was also the depa
from tribal societies that resulted in close relationships within the community
replaced by "limited, impersonal, and temporary" relationships. Hayek emph
that, contrary to a tribal society, individuals living in "the Great Open Societ
not have complete knowledge of the needs, welfare, and interests of their
citizens. He explained that those people that desired a return to tribalism forge
they live in a modern and complex society (or "open society"), consisting of a
number of people who possess various and conflicting goals and ends.

Polanyi and Hayek on Socialism

Even though Karl Polanyi supported the notion that "socialism was superi
capitalism," it is important to point out that he opposed "centralized state socia
(Congdon 1990: 79). He did not share Hayek's belief that socialism was alwa
the result of a centrally planned state authority. Instead, he was of the opinion
collectivist movements were the result of "the vital social interest affected b
expanding market mechanism" (Polanyi 2001: 151). That means that he did
believe that such movements were the outcomes of "any preference for soc
or nationalism on the part of concerted interests" (ibid.). In fact, he believed
socialism was "the solution natural to industrial workers who see no reason
production should not be regulated directly and why markets should be mor
a useful but subordinate trait in a free society" (ibid., 242).
Polanyi actually defended cases of socialism that sought to achieve social ju
in terms of establishing an equal distribution of wealth and income and rea

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80 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

freedom; he claimed, "Neither freedom nor peace could be institutionalized under

that [free market] economy, since its purpose was to create profits and welfare,
not peace and freedom" (ibid., 263). He also maintained that the modern market
economy lacks "the sense organ in order to perceive social needs and evaluation"
(Cangiani 2007: 36). He believed that "[freedom] will exist to the degree in which
we will deliberately create new safeguards for its maintenance and, indeed, exten
sion" (Polanyi 2001:263). In other words, he defended creation of "new safeguards"
through "regulation and control."
Contrary to Hayek's belief that regulations engendered the emergence of totali
tarian regimes, a view also held by a number of prominent liberals, Polanyi thought
that "regulation and control can achieve freedom not only for the few, but for all"
(ibid., 265). His concept of freedom not only includes the achievement of social
and economic justice, it also involves "an expansion of civil liberties" through
state regulation and control (Block 2001: xxxvi-xxxvii). He explained that, "to
turn against regulation [and control] means to turn against reform" (Polanyi 2001:
265).15 In other words, Polanyi did not associate freedom with the absence of state
regulations or control in the market place, which is often defended and promoted
by the liberal tradition. In fact, he did not associate any instances of increased state
interference within society with restrictions being placed on the achievement of
freedom. According to him, liberals possessed a narrow and simplistic view of
freedom, because they associated state "planning and control" with the "denial
of freedom" (ibid.). As a result, they often claimed: "Free enterprise and private
ownership are .. . essentials of freedom. No society built on other foundations is
said to deserve to be called free" (ibid.).
Hayek did not concur with Polanyi's decision to defend the use of state regula
tions and control for the purpose of achieving freedom. According to Hayek, this
would require the centralized provision of social services, which would require a
social planner or engineer to rationally and consciously conduct a teleological evalu
ation of common goals and ends. He further argued that the achievement of teleo
logically evaluated common goals and ends would necessitate that a social engineer
impose certain moral obligations and values.16 In the end, the involvement of a social
engineer in the achievement of common goals and ends would essentially eliminate
an individual's ability to operate as a free being that makes decisions according to
his or her own thoughts, convictions, beliefs, interests, will, and so on.
In his arguments against collectivism, Hayek permitted a limited state role in
securing freedom and the private spheres of individuals through the rule of law
and "methodological individualism" (or an "individualist-subjectivist approach to
social facts"),17 which basically emphasizes that "all statements about collectives
are logically deductible from statements about individuals," rather than "statements
about group minds" (Barry 1984: 36). He was also convinced that collectivism
produced totalitarianism, as he claimed that "the prevalence of socialist views"
was the common element between Germany, Italy, and Russia.
Instead of collectivist systems, which were based on central and deliberate plan

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 WINTER 2012-13 81

ning (or "artificial order," taxis), Hayek promoted the idea of using "the spontan
ous forces of society" (or voluntary, "self-generating order," kosmos). He describe
spontaneous order as a natural and "self-correcting" process that is basically the
result of unplanned, un-designed, unpredicted and uncalculated human actions, a
opposed to an outcome that is artificial, designed, and imposed. Furthermore, he was
of the view that deliberately planned and designed goals and ends would disturb the
self-regulating and self-organizing mechanisms of liberal society. This is due to the
fact that Hayek held the view that "human progress" and historical developments
were not outcomes of deliberate calculations; rather, he thought they were the result
of spontaneous change, the complex and subjective activities of individuals, an
unknown accidental events. Hayek did, however, support a state role in ensuring "the
conditions for the preservation of a spontaneous order" (Hayek 1976: 2).
Polanyi shared Hayek's view that the civilizations' institutions were outcomes of
the spontaneous forces of society. Like Hayek, he also opposed central and deliber
ate planning on the part of the state authority. However, their views diverged in that
Polanyi believed that the free market system was not a product of the spontaneous
forces of society. Instead, he was of the opinion that the free market system wa
the result of conscious and deliberate planning. In fact, Polanyi went so far as t
assert that a self-regulating market system has never really existed; to the contrary,
he often stated that the modern market economy was actually "enforced by the
state" (2001: 145).
In fact, Polanyi argued, "There was nothing natural about laissez-faire; free
markets could never have come into being merely by allowing things to take thei
course" (ibid.). He claimed that a belief in a self-regulating-market mechanism was
based on "Utopian expectations" (ibid., 266). He further added that "the leading free
trade industry" was "created by the help of protective tariffs, export bounties, and
indirect wage subsidies" (ibid., 145). He wrote, "The road to the free market was
opened and kept open by an enormous increase in continuous, centrally organize
and controlled interventionism" (ibid., 146). Essentially, that means he was argu
ing that the free market was the outcome of an expansion of state intervention and
reforms. Government administration had to be "constantly on the watch to ensur
free working of the system" (ibid., 147). Therefore, Polanyi strongly believed tha
a "laissez-faire economy was the product of deliberate State action. . . . Laissez
faire was planned" (ibid.).
According to Polanyi, "if the needs of a self-regulating market proved incompatible
with the demands of laissez-faire, the economic liberal turned against laissez-fair
and preferred... collectivist methods of regulation and restriction"; examples include
"trade union law" and "anti-trust legislation" (ibid., 155). He argued that, as long a
the free market system has not been "established, economic liberals must and wil
unhesitatingly call for the intervention of the state in order to establish it, and once
established, in order to maintain it" (ibid.). In order to establish and maintain the fre
market, "[t]he economic liberal can... call upon the state to use the force of law; h
can even appeal to the violent forces of civil war" (ibid.).

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82 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

Polanyi went so far as to argue that the free market system is "the outcome of a
conscious and often violent intervention on the part of government which imposed
the market organization on society for noneconomic ends" (ibid., 258).18 In other
words, he believed that modern market economies require "political action" that
has been consciously and rationally designed (Standfield 1986: 103). He claimed,
"Whether protection was justified or not, a debility of the world market system
was brought to light by the effects of interventions" (Polanyi 2001: 226). Thus, he
reached the conclusion that "[i]t was an illusion to assume a society [was] shaped
by man's will and wish alone" (ibid.).
Polanyi explained that in the modern market economy, "| n jeither price, nor sup
ply, nor demand must be fixed or regulated; only such policies and measures are in
order which help to ensure the self-regulation of the market by creating conditions
which make the market the only organizing power in the economic sphere" (ibid.,
72). For example, he pointed out that all Western countries had implemented protec
tive tariffs in the past.19 Simply put, the modern market economy requires interven
tion on the part of the state (Standfield 1986: 103). Not only that, but Polanyi went
further by claiming that it needs to be controlled and regulated. Thus, he essentially
argued: "Regulation and markets .. . grew up together" (Polanyi 2001: 71).
Hayek argued that these institutions and the legal framework, which protect the
private spheres of individuals,20 are products of a spontaneous order; they are not
the results of a central rational design that attempted to predict and calculate all the
benefits associated with those institutions. However, Polanyi considered movements
against modern market economies to be outcomes of the spontaneous forces of
society. Despite his opposition to "artificial order" {taxis) and his support for resis
tance against modern market economies, Polanyi conceived a system where some
"elements of the planned economy" were combined with "the market economy"
(Nagy 1990: 128). He accepted that the market has always existed; however, he
rejected the notion of a self-regulating mechanism of the market.
Polanyi sought "the abolition of labour, land and money markets, and not neces
sarily products market" (Adaman, Devine, and Ozkaynak 2007: 96).21 He believed
that it was impossible to obtain the real opportunity costs of goods without markets,
because market prices value products according to their scarcity (Rosner 1990:
56-57). Furthermore, Polanyi held the view that state coercive power and planning
could play an instrumental role in achieving the conditions of freedom. Meanwhile,
the economic prosperity of "the market economy" could assist with the achievement
of individual freedom and the fullest development of individuality.

Conclusion

Hayek and Polanyi defended two fundamentally conflicting systems for organizing
a society. Hayek advocated free market capitalism, or economic liberalism, which is
based on methodological individualism, self-interest maximization, self-regulating
markets, free trade, and so forth. He was highly confident that the self-regulating

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 WINTER 2012-13 83

aspects of the free market system possessed the ability to ensure freedom in genera
He regarded the modern market economy as the only system capable of resisting
unfreedom, oppression, and coercion on account of its capacity to coordinate th
voluntary activities of individuals without the need for interference on the part of
external authorities.
Polanyi, however, rejected methodological individualism and regarded humans
as social beings, not as isolated, atomistic, self-interest maximizers. Although h
claimed that self-regulating markets are unachievable and that state intervention
is necessary to attain the modern market economy and offset its weaknesses an
failures, he was opposed to centrally planned systems because he thought they elim
nated individuality. Nonetheless, Polanyi still defended socialist systems over th
modern market economy. Given that he often spoke of the importance of including
individual moral responsibility in economics, it is not surprising that his defense of
socialism was primarily based on its "moral superiority" over any other method o
organizing a society (Stanfield 1986: 5). In fact, he believed that socialism coul
defeat "the demoralized atmosphere" of the modern market economy and assist i
achieving freedom. However, it is important to point out that Polanyi's defense o
socialism did not mean he rejected markets outright; in reality, he supported market
that could be shaped according to social, moral, and ethical values.
Hayek rejected socialist and welfare states on account of his view that they ha
the potential to engender totalitarian regimes. He argued that people are not free in
such states because they are not permitted to make their own decisions or choos
their own courses of action; instead, they are interfered with or coerced into achie
ing common or collective goals. Hayek objected to this form of state interferenc
arguing that following one's own goals and ends is far more important than adherin
to those that have been established teleologically by the state.22 In other words, h
regarded state interference and coercive power as the greatest threats to "huma
freedom," which led him to advocate the dismantling of welfare states and systems
that were based on social engineering. As a result of his strong opposition to sta
interference, Hayek neglected to recognize the importance of state intervention i
terms of offsetting the detrimental features of free market capitalism.
Contrary to Hayek, Polanyi was of the opinion that the modern market economy
creates an environment where freedom "degenerates into a mere advocacy of fre
enterprise" and material gain without taking any consideration of the consequenc
that one's actions might have on society as a whole (Polanyi 2001: 265). Polany
believed that freedom was a collective matter that required agents to take mora
ethical, and social responsibility for the impact of their actions on their fellow men
and the nature that surrounds them.
Polanyi also argued that people are excluded from practicing freedom when they
suffer extreme inequality in terms of their social and economic conditions. In other
words, freedom is of little use to people that lack their basic needs and opportunities fo
self-realization. People that live in such dire circumstances rarely possess the means
by which to achieve self-determination or self-realization. Thus, according to Polany

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84 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

the fact that a wide variety of options might exist for society in general means little
to an individual who does not possess the means to choose among them; freedom
does not have any meaning for an individual in this situation. In this event, active
state intervention and reforms may be required to provide the conditions of positive
freedom. Basically, he believed that while state intervention and reforms might limit
the freedom of some people, it would simultaneously enhance that of others.
Hayek, much like other neoclassical economists, advocated the superiority of
the modern market economy for many years without being critical of its defects.
He glorified its optimal outcomes while disregarding those that are not favorable.
He essentially conducted himself as though the principles and policies of modern
market capitalism were infallible. Thus, unlike Polanyi, Hayek appears to have been
out of touch in terms of the realities of the modern exchange economy. Instead of
conducting an objective and comprehensive examination to locate potential defects
that could lead to disastrous outcomes, Hayek focused his efforts on proving the
superiority of "open societies" over central deliberate planning in terms of achieving
economic prosperity, greater opportunities for individuals, and the efficient alloca
tion of resources. Similarly, a majority of mainstream economists have not properly
examined the defects of neoclassical economics in an objective and critical manner
that might allow them to identify and correct for weaknesses and thereby provide
an opportunity to avoid making the same mistakes in the event of future crises.
Polanyi did not consider the modern market economy to be a promoter or
defender of freedom without question. He was able to recognize that the modern
market economy had the potential to generate disastrous consequences, such as pov
erty and misery, meaning that it represented a threat to the achievement of freedom
and moral values, both of which are required to hold civil society together. Hayek,
however, was not particularly concerned with the issues of ethical values, misery,
increasing inequality, or excessive poverty, all of which affected individual freedom,
because he was convinced that the self-regulating aspects of "open societies" would
ensure freedom in general. However, the destructive social consequences and dehu
manizing aspects associated with modern market capitalism demonstrate that there
will always be efforts to search for a new paradigm, as was the case with Polanyi's
The Great Transformation. The arguments he put forth against the fundamental
tenets of neoclassical economics in this book not only provide a strong theoretical
foundation against the tragic consequences of economic globalization, they also
represent a source of inspiration for opponents of this program of research, which
include heterodox economists and "orthodox dissenters."

Notes

1. Over time, neoclassical economics has gradually evolved into neoliberal economics,
which is supported by the Washington consensus.
2. Hayek was well-known for his contributions to the Austrian school of economics,
as well as for being a very influential figure in the discipline of economics on account of
the significant role he played in developing some of the fundamental ideas of free market

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 WINTER 2012-13

capitalism in the twentieth century. He is also recognized for his contributions to the Mont
Pèlerin Society, which could be described as a collection of "the opponents of socialism in
the intellectual, political, and business worlds" (Boettke 2006: 51). Its members endorsed
"free markets, limited governments, and personal liberty" (Mirowski and Plehwe 2009: 2).
Hayek actually served as president at the Mont Pèlerin Society from its founding in 1947
until 1960 (honorary president thereafter).
3. Market liberalism has also been called the "modern market economy," "Thatcherism,
Reaganism, neoliberalism," and the "Washington consensus" (Block 2001: xviii).
4. According to Stiglitz, "the self-regulating economy" was related to laissez-faire in
the past; in the modern world, it is associated with the Washington consensus (2001 : xvi).
5. Hayek was accepted as "the person who had inspired both Margaret Thatcher and
Ronald Reagan to pursue policies of deregulation, liberalization, and privatization" (Block
2001: xx).
6. During the twentieth century, both positive and negative freedom became associated
with the writings of Sir Isaiah Berlin (1909—1997), who was of the opinion that positive and
negative liberty were "two major conceptions of liberty in the history of ideas" (Gray 1984:
325). According to Berlin's philosophy, the difference between positive and negative liberty
is related to the distinction between nonintervention and self-governance. Although Hayek
did not specifically refer to the "negative concept of freedom" by name, this is precisely
what he so strongly advocated and defended in The Constitution of Liberty (1960).
7. Unsurprisingly, Hayek opposed granting coercive powers to monopolistic organiza
tions and associations. His opposition to coercion should not be interpreted as an outright
rejection of "organization" (Miller 2010: 62). In fact, he believed that organizations could
be "beneficial and effective," provided that they are voluntary; he was primarily opposed to
coercive, "monopolistic organizations" that could be categorized as "exclusive, privileged"
(Hayek 1960: 37).
8. However, despite his rejection of state coercive powers, he did defend the monopoly
of coercion by the state for the purpose of preventing the coercion of citizens by other in
dividuals. Specifically, he argued that state coercive power was justified in the event that it
was used to prevent and protect individual rights and freedoms. However, aside from those
few exceptions, Hayek believed that "we should accept only the prevention of more severe
coercion as the justification for the use of coercion by government" (1960: 144).
9. Berlin says, "coercion implies the deliberate interference of other human beings
within the area in which I could otherwise act" (1969: 122).
10. Hayek was opposed to the "laissez-faire" approach on account of his belief that
"individual intentional acts of exchange can be coercive and produce injustice" (Plant
1994: 165). However, he did not think that the outcomes of individual actions in the free
marketplace engendered "injustice," as they (the outcomes) are essentially the "unintended
consequence of millions of individual economic exchanges" (ibid., 169).
11. According to Hayek, the improvement of existing institutions means working step
by step, rather than totally reconstructing or redesigning the whole system.
12. However, Hayek's objection to rational planning should not be confused with an
outright rejection of this practice under all circumstances. In fact, he was very conscious
of the fact that individual agents deliberatively plan their actions in order to achieve their
particular goals and ends. According to him, this manner of planning one's goals and objec
tives constitutes an important aspect of freedom.
13. Polanyi was of the opinion that "the liberal state was itself a creation of the self
regulating market" (2001: 3).
14. Polanyi argued: "Reciprocity and redistribution are able to ensure the working of an eco
nomic system without the help of written records and elaborate administration" (2001: 51).
15. Polanyi claimed that "the victory of fascism was made practically unavoidable by the
liberal's obstruction of any reform involving planning, regulation, or control" (2001: 265).

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 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

16. Hayek explained that, in many cases, the achievement of "collective interests of c
groups" is not in "the general interests of the society" (1976: 6). At the same time, ho
he recognized that "a collective interest" can become a common interest or "general inte
if all members of the society are convinced that the achievement of the "collective inte
of particular groups on the basis of some principle of reciprocity will mean for them
in excess of the burden they will have to bear" (ibid.).
17. Hayek made it clear that individualism did not entail being egoistical or se
even though individuals' selfish or altruistic goals and ends motivated them to excha
barter the fruits of their labor in the marketplace. In fact, Hayek was opposed to mains
economic views of individualism. More precisely, he rejected the idea that:

Agents are assumed to be rational, in the sense that they exhibit consistency in c
over well-ordered preference functions, and they are assumed to have full inform
Tastes and preferences can be virtually of any form, but, whatever they are, they ar
sumed to be unchanging [A]gents are motivated only by their own narrowly def
self-interest, with the result that their utility functions are independent of those of
agents. (Caldwell 2004: 281)

18. Polanyi underscored the importance of the contractual relationship in the free
ket economy, which basically destroys "noncontractual relations between individual
prevents spontaneous interactions within society (2001: 171). In other words, "tradi
institutions" were "destroyed" and "prevented from reforming" because of the introd
of the contractual relationship (ibid.).
19. To be more precise, "[b]y the end of the Depression, Germany had surrounded her
with higher protective tariffs. . . . The United States had even higher tariffs than the R
and was just as "collectivistic" in its own way" (Polanyi 2001: 226). In his foreword t
Great Transformation, Stiglitz explained; "In their transformations, the governmen
today's industrialized countries took an active role, not only in protecting their indu
through tariffs, but also in promoting new technologies" (2001: xii).
20. The private spheres of individuals include private property, individual rights
individual freedom.
21. Polanyi distinguished "real commodities" from "fictitious commodities." The former
includes goods that are "produced for sale on a market," whereas the latter includes "land,
labour, and money" (Block 2001: xxv).
22. Hayek recognized the fact that, under certain circumstances, it was entirely possible
for "individual ends" to correspond to common ends (1994: 67); however, this correspon
dence is not the result of a unified effort on the part of all individuals.

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