Karl PolanyiThe C reatTransformationThe Political andEconomic Originsof Our TimeF O R E W O R D BYJoseph E.StiglitzINTRODUCTIONBYFred BlockBEACON PRESSBOSTON

To my beloved wifeIlona DuczynskaI dedicate this bookwhich owes all to her help and criticismBeacon Press25 Beacon StreetBoston, Massachusetts 02108-2892Beacon Press booksare published under the auspices ofthe Unitarian Universalist Association of Congregations. 1944) 1957) by Karl PolanyiFirst Beacon Paperback edition published in 1957Second Beacon Paperback edition published in All rights reservedPrinted in the United States of America05 04 03 02 01 0087654321This book is printed on acid-free paper that meets the uncoated paper ANSI/NISOspecifications for permanence as revised in 1992.Text design by Dan OchsnerComposition by Wilsted & Taylor Publishing ServicesLibrary of Congress Cataloging-in-Publication DataPolanyi, Karl, 1886-1964.The great transformation: the political and economic origins of our time / KarlPolanyi; foreword by Joseph E. Stiglitz; with a new introd. by Fred Block.—2ndBeacon Paperback ed.p. cm.Originally published: New York: Farrar & Rinehart, 1944 and reprinted in 1957by Beacon in Boston.Includes bibliographical references and index.ISBN 0-8070-5643-x (pa: alk. paper)1. Economic history. 2. Social history. 3. Economics—History. I. Title.HC53 .P6 330.9—dc2i00-064156

ContentsFOREWORD BY JOSEPH E. STIGLITZINTRODUCTION BY FRED BLOCKNOTE ON THE 2 0 0 1 EDITIONVllXviiiXXxixAUTHOR'S ACKNOWLEDGMENTSxlPart One: The International Systemi. The Hundred Years' Peace2. Conservative Twenties, Revolutionary Thirties321Part Two: Rise and Fall of Market EconomyI. Satanic Mill3. "Habitation versus Improvement"354. Societies and Economic Systems455. EvolutionoftheMarketPattern596. The Self-Regulating Market and the FictitiousCommodities: Labor, Land, and Money717. Speenhamland, 1795818. Antecedents and Consequences909. Pauperism and Utopia10810. Political Economy and the Discovery of Society 116II. Self-Protection of Society11. Man, Nature, and Productive Organization12. BirthoftheLiberalCreed13. Birth of the Liberal Creed (Continued):Class Interest and Social Change14. Market and Man15. Market and Nature136141158171187

Contents[vi]16. Market and Productive Organization17. Self-Regulation Impaired18. Disruptive Strains201210218Part Three: Transformation in Progress19. Popular Government and Market Economy23120. History in the Gear of Social Change 24521. Freedom in a Complex Society257NOTES ON SOURCES1. Balance of Power as Policy, Historical Law,Principle, and System2. Hundred Years' Peace3. The Snapping of the Golden Thread4. Swings of the Pendulum after World War I5. Finance and Peace6. Selected References to "Societies andEconomic Systems"7. Selected References to "Evolution of theMarket Pattern"8. TheLiteratureofSpeenhamland9. Poor Law and the Organization of Labor10. Speenhamland and Vienna11. Why Not Whitbread's Bill?12. Disraeli's "Two Nations" and the 285288298299300

[ Joseph E. Stiglitz ]Foreword( it is a pleasure to write this foreword to Karl Polanyi's classic bookA. describing the great transformation of European civilization fromthe preindustrial world to the era of industrialization, and the shifts inideas, ideologies, and social and economic policies accompanying it.Because the transformation of European civilization is analogous tothe transformation confronting developing countries around theworld today, it often seems as if Polanyi is speaking directly to presentday issues. His arguments—and his concerns—are consonant withthe issues raised by the rioters and marchers who took to the streets inSeattle and Prague in 1999 and to oppose the international financial institutions. In his introduction to the 1944 first edition, written when the IMF, the World Bank, and the United Nations existedonly on paper, R. M. Maclver displayed a similar prescience, noting,"Of primary importance today is the lesson it carries for the makers ofthe coming international organization." How much better the policiesthey advocated might have been had they read, and taken seriously, thelessons of this book!It is hard, and probably wrong even to attempt to summarize abook of such complexity and subtlety in a few lines. While there are aspects of the language and economics of a book written a half centuryago that may make it less accessible today, the issues and perspectivesPolanyi raises have not lost their salience. Among his central theses arethe ideas that self-regulating markets never work; their deficiencies,not only in their internal workings but also in their consequences(e.g., for the poor), are so great that government intervention becomesnecessary; and that the pace of change is of central importance in determining these consequences. Polanyi's analysis makes it clear thatpopular doctrines of trickle-down economics—that all, including thepoor, benefit from growth—have little historical support. He also[ Yii ]

[ viii ]Forewordclarifies the interplay between ideologies and particular interests: howfree market ideology was the handmaiden for new industrial interests,and how those interests used that ideology selectively, calling upongovernment intervention when needed to pursue their own interests.Polanyi wrote The Great Transformation before modern economists clarified the limitations of self-regulating markets. Today, thereis no respectable intellectual support for the proposition that markets,by themselves, lead to efficient, let alone equitable outcomes. Whenever information is imperfect or markets are incomplete—that is, essentially always—interventions exist that in principle could improvethe efficiency of resource allocation. We have moved, by and large, to amore balanced position, one that recognizes both the power and thelimitations of markets, and the necessity that government play a largerole in the economy, though the bounds of that role remain in dispute.There is general consensus about the importance, for instance, of government regulation of financial markets, but not about the best waythis should be done.There is also plenty of evidence from the modern era supportinghistorical experience: growth may lead to an increase in poverty. Butwe also know that growth can bring enormous benefits to most segments in society, as it has in some of the more enlightened advancedindustrial countries.Polanyi stresses the interrelatedness of the doctrines of free labormarkets, free trade, and the self-regulating monetary mechanism ofthe gold standard. His work was thus a precursor to today's dominantsystemic approach (and in turn was foreshadowed by the work of general equilibrium economists at the turn of the century). There are stilla few economists who adhere to the doctrines of the gold standard,and who see the modern economy's problems as having arisen from adeparture from that system, but this presents advocates of the selfregulating market mechanism with an even greater challenge. Flexibleexchange rates are the order of the day, and one might argue that thiswould strengthen the position of those who believe in self-regulation.After all, why should foreign exchange markets be governed by principles that differ from those that determine any other market? But itis also here that the weak underbelly of the doctrines of the selfregulating markets are exposed (at least to those who pay no attentionto the social consequences of the doctrines)! For there is ample evidence that such markets (like many other asset markets) exhibit excess

Foreword[ ix ]volatility, that is, greater volatility than can be explained by changes inthe underlying fundamentals. There is also ample evidence that seemingly excessive changes in these prices, and investor expectations morebroadly, can wreak havoc on an economy. The most recent global financial crisis reminded the current generation of the lessons that theirgrandparents had learned in the Great Depression: the self-regulatingeconomy does not always work as well as its proponents would like usto believe. Not even the U.S. Treasury (under Republican or Democratic administrations) or the IMF, those institutional bastions of belief in the free market system, believe that governments should notintervene in the exchange rate, though they have never presented acoherent and compelling explanation of why this market should betreated differently from other markets.The IMF's inconsistencies—while professing belief in the freemarket system, it is a public organization that regularly intervenes inexchange rate markets, providing funds to bail out foreign creditorswhile pushing for usurious interest rates that bankrupt domesticfirms—were foreshadowed in the ideological debates of the nineteenth century. Truly free markets for labor or goods have never existed. The irony is that today few even advocate the free flow of labor,and while the advanced industrial countries lecture the less developedcountries on the vices of protectionism and government subsidies,they have been more adamant in opening up markets in developingcountries than in opening their own markets to the goods and servicesthat represent the developing world's comparative advantage.Today, however, the battle lines are drawn at a far different placethan when Polanyi was writing. As I observed earlier, only diehardswould argue for the self-regulating economy, at the one extreme, orfor a government run economy, at the other. Everyone is aware of thepower of markets, all pay obeisance to its limitations. But with thatsaid, there are important differences among economists' views. Someare easy to dispense with: ideology and special interests masqueradingas economic science and good policy. The recent push for financial andcapital market liberalization in developing countries (spearheaded bythe IMF and the U.S. Treasury) is a case in point. Again, there was littledisagreement that many countries had regulations that neitherstrengthened their financial system nor promoted economic growth,and it was clear that these should be stripped away. But the "free marketeers" went further, with disastrous consequences for countries that

[ x]Forewordfollowed their advice, as evidenced in the recent global financial crisis.But even before these most recent episodes there was ample evidencethat such liberalization could impose enormous risks on a country,and that those risks were borne disproportionately by the poor, whilethe evidence that such liberalization promoted growth was scanty atbest. But there are other issues where the conclusions are far fromclear. Free international trade allows a country to take advantage of itscomparative advantage, increasing incomes on average, though it maycost some individuals their jobs. But in developing countries withhigh levels of unemployment, the job destruction that results fromtrade liberalization may be more evident than the job creation, andthis is especially the case in IMF "reform" packages that combine tradeliberalization with high interest rates, making job and enterprise creation virtually impossible. No one should have claimed that movingworkers from low-productivity jobs to unemployment would either reduce poverty or increase national incomes. Believers in selfregulating markets implicitly believed in a kind of Say's law, that thesupply of labor would create its own demand. For capitalists whothrive off of low wages, the high unemployment may even be a benefit, as it puts downward pressure on workers' wage demands. But foreconomists, the unemployed workers demonstrate a malfunctioningeconomy, and in all too many countries we see overwhelming evidence of this and other malfunctions. Some advocates of the selfregulating economy put part of the blame for these malfunctions ongovernment itself; but whether this is true or not, the point is that themyth of the self-regulating economy is, today, virtually dead.But Polanyi stresses a particular defect in the self-regulating economy that only recently has been brought back into discussions. It involves the relationship between the economy and society, with howeconomic systems, or reforms, can affect how individuals relate to oneanother. Again, as the importance of social relations has increasinglybecome recognized, the vocabulary has changed. We now talk, for instance, about social capital. We recognize that the extended periods ofunemployment, the persistent high levels of inequality, and the pervasive poverty and squalor in much of Latin America has had a disastrous effect on social cohesion, and been a contributing force to thehigh and rising levels of violence there. We recognize that the mannerin which and the speed with which reforms were put into place in Russia eroded social relations, destroyed social capital, and led to the ere-

Foreword[ xi ]ation and perhaps the dominance of the Russian Mafia. We recognizethat the IMF's elimination of food subsidies in Indonesia, just as wageswere plummeting and unemployment rates were soaring, led to predictable (and predicted) political and social turmoil, a possibility thatshould have been especially apparent given the country's history. Ineach of these cases, not only did economic policies contribute to abreakdown in long-standing (albeit in some cases, fragile) social relations: the breakdown in social relations itself had very adverse economic effects. Investors were wary about putting their money intocountries where social tensions seemed so high, and many withinthose countries took their money out, thereby creating a negativedynamic.Most societies have evolved ways of caring for their poor, for theirdisadvantaged. The industrial age made it increasingly difficult for individuals to take full responsibility for themselves. To be sure, a farmermight lose his crop, and a subsistence farmer has a hard time puttingaside money for a rainy day (or more accu