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Karl Polanyi, The Great Transformation and a new political economy

Professor Matthew Watson, Assistant Professor Christopher Holmes and Professor Ben Clift, Politics and International Studies

The Great Transformation, by Karl Polanyi, celebrates its 70th anniversary this year. The economic historian’s great work holds a compelling and alternative understanding of the economic and financial crises affecting the economy today. Matthew Watson, Christopher Holmes and Ben Clift explain why The Great Transformation is a great alternative to the ideas of John Maynard Keynes, Karl Marx or Friedrich Hayek.
Words by Gareth Jenkins.

Canary WharfFor those leafing through books on political economy, studying the theory and history of economics, 1944 is a pivotal year. Friedrich Hayek published his book The Road to Serfdom and John Maynard Keynes was in the midst of helping to establish the Bretton Woods system. Between the two of them, their economic theories and books helped shape the political and economic policies of the post-war period. However, in the wake of the 2008 financial crisis, there has been a call to find an alternative approach as neither Keynesian nor Hayekian solutions feel suitable for the post-crisis situation we find ourselves in.

There is another political economist whose work might offer a solution, or at least a different perspective. His name is Karl Polanyi (pictured below right) and his most famous work, The Great Transformation, was also published in 1944. The University of Warwick’s Professor Ben Clift, Professor Matthew Watson and Dr Christopher Holmes make the case for why George Osborne, Ed Balls, the members of the European Commission and you might all want to add the book to your reading lists.

The Great Transformation is a remarkable book on a number of levels,” says Chris. “It’s a thrilling read. Karl Polanyi has an engaging, polemical style which draws you in and, over its relatively few pages, takes you on a journey through 400 years of economic history and 400 years of the economic ideas that surround that history.

Karl Polanyi

“We’re now at a really important juncture. Broadly speaking we experienced 30 years of Keynesian economic ideas in the post-war period before we moved to a much more free market, Hayekian approach, which recent financial crises have shown to be flawed in a number of ways. Since 2008, there’s been a search for a new set of economic ideas by which we might understand the world and implement change to resolve problems of financial crisis and other economic problems such as inequality.

The Great Transformation has an extraordinary diversity of style and the ability to draw so many different threads into one narrative. Rather than trying to present one, coherent set of ideas which can be applicable in any time or space, like Hayek did with The Road to Serfdom or indeed Karl Marx or John Maynard Keynes did in their own ways, Karl Polanyi instead chose to understand the economic problems of the period by looking back at the history of ideas that constituted them.

He said that to understand pivotal historical events, including the breakup of the Gold Standard and the breakdown of international relations during the first half of the twentieth century, we have to consider the role of economic thought accumulated over centuries which influenced how those events took place and were understood. It’s having that broad sweep of history and that wide intellectual canvas that makes his work really unique.”

Market or state

The Great Transformation examines the social and political changes that took place in England during the rise of the market economy. One of the primary conclusions Karl Polanyi makes, and something that differentiates him from Keynes and Hayek, is that the nation state and the newly formed market economy are not separate entities but are one object of human invention which he refers to as ‘the market society’. For Polanyi, this meant that any philosophy which sided with either market or state as the solution to our economic problems – for example, neo-liberalism on one hand or state socialism on the other – was likely to be simplistic.

Karl Polanyi narrates the historical development of the market society in The Great Transformation.

Commuters on the tubeSays Ben: “He unearths the formation and maturation of a set of market institutions which accompany the development and spread of market exchange and brought into being the regulative state activity over markets. These were necessary features of the entrenching of the market system as a mechanism for sustaining whole societies. That, in essence, is The Great Transformation he’s talking about.

“Karl Polanyi talks about the invention of ‘fictitious commodities’, in particular, land and labour. He discusses how there are damaging environmental and human consequences to the spread of market forces so, as labour gets transformed into a commodity, more and more members of society are subject to the dictates and vagaries of the labour market and there’s more and more social dislocation and misery and penury that results from the spread of market forces. That was the story of The Great Transformation in the advanced economies and today, if we look around the world, there are similar transformations going on within the emerging economies of the BRICs.”

Polanyi puts forward the argument that economic activity is embedded within a social and economic context. This allows a reader of The Great Transformation to start thinking about how markets evolve, develop and change in terms of processes of what Karl Polanyi calls the embedding and dis-embedding of market forces.

“This is one of Polanyi’s central concepts,” explains Ben. “The idea of the double movement that characterises the market society. On the one hand you’ve got the forces of economic liberalism seeking to spread and expand the role and the remit of market forces - freeing up labour markets for example - but on the other hand you have a sort of backlash from society, as society is subjected to ever more dislocation; there’s a call for social protection and the setting up of welfare state institutions for example to protect vulnerable citizens.”

Modern capitalism

There is, for Karl Polanyi, an ongoing political struggle between the ‘dis-embedding’ force of the free market and the ‘re-embedding’ efforts of social protection. It is one very useful way of understanding the politics of modern capitalism.

Polanyi also argues that the market society is not a naturally occurring phenomenon but is a political and social construct. Such an approach puts Karl Polanyi outside the mainstream of political economic debates between a Keynesian approach to economic policy and a Hayekian approach. Ben explains:

“He has a sense that this notion of a self-made market, this kind of natural market order that gets posited in economics, is in some respects, a myth. This is why we teach Karl Polanyi to our students; he brings home to them this very important point that markets are not self-sustaining and they’re not inevitable. Actually, it’s really quite unhelpful to think about political economy in terms of a dichotomising opposition between the state on the one hand and the market on the other. The notion that these two are involved in some sort of tug of war where one wins and the other loses or one gains at the other's expense does not makes sense in a Polanyian framework.”

Budget cuts protestMatthew agrees: “Take the modern condition of austerity. When we ask our political classes about austerity they tell us there’s no choice, but there’s no such thing as ‘no choice’ within a Polanyian world view. Everything is a political choice; every decision that’s made, whether individually or collectively to either reaffirm or challenge the core premises of the market society, is a political choice. So, however much we’re told that those choices are constrained or that those choices are reduced to a single alternative, we can use Karl Polanyi and the tradition that he’s developed to blow a big raspberry at those suggestions.

“Polanyi’s book was a game changer. It provides us with a series of reflections on the nature of the market society. Before Karl Polanyi, it was usual to try to think of markets in isolation, just as a simple economic form, and they could be spoken about in equally simple economic terms. Much of the discussion about markets before The Great Transformation was simply about efficiency criteria: was the market the most efficient way of organising an economy; would it lead to higher levels of growth; would it lead to more trade between different countries?

Good for the environment

Karl Polanyi changes the whole concept of the market, in my reading in any case, by talking about the market society. Polanyi reset the terms of the argument. It wasn’t just about whether markets were more efficient economically, it was about the human and environmental costs of allowing people and nature to be included as parts of the production process within the market economy. Karl Polanyi gave us a set of philosophical issues that we’re still wrestling with today. Are we content to allow people to become ever more incorporated into the market society if we can show that it’s not necessarily good for them? Are we comfortable in allowing more of the environment to be incorporated into a market society if we can show that it’s not good for the environment?

“Polanyi talked in really compelling terms about fictitious commodification. He was worried that things were being put up for sale when they had an essence before their marketised form. Think of labour markets. We all exist within labour markets of one form or another, we’ve become more and more familiar with using the language of labour markets, but there is a non-commodified essence to the human form before it becomes labour. We’re just people and we have needs as people. Those needs as people might very well clash with the needs that we have to demonstrate as labour.

“The BMJ [British Medical Journal] has, for example, documented a whole catalogue of new psychological illnesses over the last 10 or 20 years that come with new forms of work. So as the labour market makes more and more demands of us, the less and less able we are to function as human beings; we lose some of that essential human essence.

Mining“We can tell the same story about the environment and the commodification of nature. Polanyi now allows us to have a conceptual language of the economy to take these things seriously and to challenge some of the certainties with which politicians present the case for more and more market.”

Red Vienna

By all accounts Karl Polanyi was quiet, thoughtful, reflective – probably a fairly typical man of his intellectual station in 1920s ‘Red Vienna’ where he matured, having moved from Hungary after the First World War.

“Karl Polanyi was a radical,” says Matthew. “But what shade of red he was is an interesting question. He was certainly no lover of the Soviet takeover of Hungary in 1919 and this was one of the reasons that he ended up in Vienna. He made at least one or two flirtations with Marxism, at least according to his biographers. The ‘moral Marx’ of the Paris Manuscripts seemed to influence him and his notions of how workers become alienated within the market economy.”

Karl Polanyi described himself as having lived the ‘world life’ of a serial émigré. Following his move from Budapest to Vienna in 1919, he then, in 1934, and again under political pressure, emigrated from Vienna to England before finally ending up in the United States.

Chris says: “It was his wife, Ilona Duczyńska, who was the real revolutionary. She was the deeper shade of red within their relationship. It’s often the case with us academics. We’re fairly staid, we’re fairly boring; we think too deeply to be too interesting, but we often have much more interesting partners and I think this was certainly the case for Karl Polanyi.”

Ilona Duczyńska and Karl Polanyi married in 1920.

“The high point of Ilona’s revolutionary zeal was her purported attempt/plan to assassinate the Hungarian Prime Minister, István Tisza, during the interwar period. She apparently got around to purchasing the gun and she had it in her handbag and was ready to do the deed but, on the day, and by some accounts on the hour, she overheard from a paperboy that the Prime Minister was due to resign. This rendered the assassination attempt redundant.”

“There’s another story,” adds Matthew, “where she apparently travelled all the way by train from Moscow to Vienna with a toothpaste tube of stolen diamonds that she was using to bankroll the Austrian communists in their fight against fascism.”

Old toothpaste


However, Karl Polanyi was less radical; indeed for him the road to the free market only remained open because of state interventionism. To understand capitalism, one needs to understand the political acts that go into market making.

“That might seem almost self-evident,” says Ben. “But it’s a very different way of understanding the world from what you will find within the social sciences derived from economics and, in particular, neo-classical economics.

“One very fruitful area for Polanyi-inspired research today is a re-examination of concerns such as the global financial crisis and the Eurozone crisis. There’s quite a compelling Polanyian reading of why and how the financial crisis happened in terms of the sub-prime crisis, the slicing up of bad mortgage liabilities and then selling them on as assets to unsuspecting investors. This looks to me like a concrete example of the dis-embedding of market relations from their social context, which underpins everything Karl Polanyi says is wrong with free market capitalism.

We can think about the sub-prime crisis, and the mortgage backed securities that were at its core, as some of the fictitious commodities that Karl Polanyi was talking about. And we’ve only got to look at what’s happened since the crisis to see that that it can have damaging societal consequences and adverse social effects.

“And if we turn to the Eurozone crisis, I think there’s an even closer connection between what Polanyi had to say about the nineteenth century Gold Standard and how this spread of dis-embedded market forces had the effect of, as he put it, annihilating the human and natural substance of society. He saw how the Gold Standard spread across Europe, causing acute social dislocation and revealed what he called the congenital weakness of market society. Now if we look to the Eurozone area and substitute the Euro for the Gold Standard, and look to the southern periphery in countries like Greece, we can see very similar processes going on.”

The Great Transformation might be a book out of time; relevant to today, but was deemed less so when it was published in 1944.

“It was enough to bag him a chair at the University of Columbia,” explains Ben. “But it wasn’t actually received that well at the time. I suspect that’s because it took the historical approach to understanding the present and so, for some, it could have been written off as a work of economic history and for others it was seen as an outcrop of Polanyi’s anthropological thoughts. But we can regard him as forward thinking as many of the economic facts which characterise our age – the marketisation of public services, globalisation in its various guises, the coming back of capital mobility in a big way – they’re really the kind of things Karl Polanyi was talking about.”

Matthew adds: “The more that I read it, the more I find new things in it. Increasingly, I find at least three different analytical voices that appear within The Great Transformation. There’s Karl Polanyi the anthropologist, who makes some very interesting observations about the nature of modern economic life to show that self-regulating markets are far from being the only form of economic life that’s possible. There’s also the historical Karl Polanyi, where he shows the decisions that were made on a calculated basis across a number of years to produce an international settlement that seemed to prefer market self-regulation over all other forms or potential alternatives of economic life.

“And then there’s Karl Polanyi the political activist. He never loses that sense of suggesting through his work that things could be different. I think that it’s the political activist voice that holds together the rest of the text of The Great Transformation. There’s a really strong line of argument that the world takes its current shape through reasons of political choice and that other political choices could be made to deliver for us a rather more progressive experience of the market world.

“I think that everyone should read The Great Transformation – and when I say everyone, I really do mean everyone. It can be read in many different ways. For us academics, I think we love finding some of the hidden subtleties and nuances within it. But it doesn’t mean you have to be an academic or trained as a political economist to find lots and lots of things of real interest within this book. So, if you’re interested in the nature of the world, how the world came to be how it is and what the arguments might be for trying to rethink some of the ‘certainties’ about modern economic life, then you can do a whole lot worse than reading Karl Polanyi’s The Great Transformation.”

Ben CliftBen Clift is a Professor of Political Economy at Warwick Univeristy. His research interests lie in comparative and international political economy, and he has published widely on French and comparative capitalisms, the politics of economic ideas, capital mobility and economic policy autonomy, the political economy of social democracy, and French and British. He is co-editor (with Cornelia Woll) of a special issue of The Journal of European Public Policy entitled 'Economic Patriotism: Political Intervention in Open Markets'. His new book, Comparative Political Economy: States, Markets and Global Capitalism is published with Palgrave (2014). You can follow Ben's work on

Chris Holmes

Chris Holmes is an Assistant Professor in International Political Economy at the University of Warwick. He has been awarded a one year Leverhulme Research Fellowship which will commence in September 2014 allowing him to complete a research monograph on a Polanyian reading of the economic reasoning in both historical and post-2008 financial crisis contexts. The title of the Fellowship is 'Visions of perfectibility: state, market and alternatives in the formation of economic ideas'. He has edited a special issue on the 70th anniversary of The Great Transformation which will appear in the journal Economy and Society in November 2014. It deals in particular with the complexity of today’s world in contrast to the world Polanyi lived in; and his tendency to simplify the issues he wrote about. The journal will feature the work of Nancy Fraser, Chris Hann, Gareth Dale and Warwick’s Matthew Watson.

Matthew WatsonMatthew Watson is Professor of Political Economy at Warwick and currently holds a three-year ESRC Professorial Fellowship. His research interests lie with political economy, ‘the market’ and understanding what it means to live life as a market-bound economic agent. His research is designed to understand the multiple ways in which the market economy becomes embedded in everyday experience: as a set of institutions designed to naturalise behaviour, as an ideological blueprint for the common sense of society, as formal practices manifesting routinely reproduced exchange relations, as evolving ideas incorporated into the history of economic thought, as reflections in popular culture, and as something to organise political resistance against.


Polanyi photographs: Karl Polanyi, 1917 l Photo: © Kari Polanyi Levitt reproduced with kind permission from the Karl Polanyi Institute of Political Economy at Concordia University.
Other images: Clocks, Canary Wharf, Isle of Dogs #1 by Veronica Agullar (via Flickr)
Work by Chris Brown (via Flickr)
Passenger by James Guppy (via Flickr)
Excavator by Rene Schwietzke (via Flickr)
Dr. Belding Tooth Powder by rosefirerising (via Flickr)