Reference: Rankin, Keith (1998) "Compulsory Freedom", New Zealand Political Review 7(4):12-15.

Editor's Introduction:

Karl Polanyi on the Utopia of the
"Self-Regulating Market"

Keith Rankin, 14 October 1998


"In 1944, Polanyi wrote The Great Transformation, which did more than any work of that generation to broaden and deepen the critique of market societies. Polanyi drew a distinction between a society that uses markets as one valuable tool, and a 'market society' that places everything on the auction block, even labor."

John Buell (1997), reviewing The Toll of Free Enterprise by Robert Kuttner.

"The mechanism of the market was asserting itself ... human labour had to be made a commodity. ... Out of the horrors of Speenhamland men rushed blindly" into "a utopian market economy."

from Karl Polanyi's The Great Transformation

In the later years of World War 2, a number of important works on social philosophy were published. A number of them might broadly be classed as "anti-socialist" - eg Hayek's Road to Serfdom, Popper's Open Society and its Enemies, Schumpeter's Capitalism, Socialism and Democracy. Others were clearly social democratic, such as Full Employment in a Free Society: a Report, by William H. Beveridge (the Beveridge Report which was a blueprint for the modern British welfare state), and John Maynard Keynes' proposals submitted to the 1944 economic conference at Bretton Woods.

Possibly the most significant of these works today is that by the social anthropologist and economic historian, Karl Polanyi: The Great Transformation. Polanyi's writing is attracting more attention in the 1990s than in earlier decades. Not easy to categorise, his best known work is both conservative and socialist in outlook. It is about the dichotomy of modern industrial capitalism: the clash between the politically imposed machinery of "the self-regulating market economy" and the spontaneous forces of "national and social protection". Polanyi's central insight is that governments have been pro-active in both initiating and seeking to perpetuate the pure market system.

For Polanyi, economic liberals (ie neoliberals in today's terminology), by definition, worship at the altar of the pure market economy. Economic liberals are not simply pro-market. They have a simple utopian vision that has no place for any organising principle other than competitive markets. Market society is the outcome of an economic machine that they liken to clockwork.

While Polanyi was himself far from being an economic liberal, he believed markets have a legitimate place within society. Humans are motivated primarily by a quest for social standing, he argued, and not material gain. Hence markets are a peripheral feature of normal society. The pursuit of material gain only takes place where wealth determines social status. Affluence is to be displayed rather than enjoyed. In nineteenth century Britain, nouveau riche capitalists did not seek to overthrow or outdo the landed gentry. Their aim was to buy their way into the upper classes; to purchase social standing.

The social anthropologist understood that humans are fundamentally cooperative beings, and that human societies naturally seek to form institutions that confer social and economic protection. Protection means supporting producers who are a part of one's own society. And protection means security, including social security.

Unlike protection which is a natural human impulse, the market system is an artificial construct of the human intellect. It eschews protection and emphasises discipline. Competition is about discipline and conformity, not freedom. The tyranny of the self-regulating market can only become the central organising mechanism if it is intentionally imposed on society by a government with dubious democratic credentials, and can only survive for any length of time if such a government resists the spontaneous human impulse towards protection.

Economic liberals, contrary to the way they portray themselves, are not believers in small government. They are not akin to anarchists, as Marx saw them. Rather they adopt a view of government that differs fundamentally from that of social democrats. Economic liberals believe, following Jeremy Bentham, that government means the "ministry of police" (read Treasury in today's parlance) and not the "ministry of welfare".

The following are some excerpts from the Great Transformation:

"Economic liberalism was the organising principle of a society engaged in creating a market system. Born as a mere penchant for non-bureaucratic methods, it evolved into a veritable faith in man's secular salvation through a self-regulating market.... Only by the 1820s did [economic liberalism] stand for the three classical tenets: that labour should find its price on the market; that the creation of money should be subject to an automatic mechanism; that goods should be free to flow from country to country without hindrance or preference."

"There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. ... Laissez-faire itself was enforced by the state. The [1830s and 1840s] saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrational bureaucracy able to fulfil the tasks set by the adherents of liberalism. ... Laissez-faire was not a method to achieve a thing, it was the thing to be achieved."

"This paradox [of the need for a strong central executive under laissez-faire] was topped by another. While laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not."


From F. Block and M. Somers in "Beyond the Economistic Fallacy: the Holistic Social Science of Karl Polanyi" in T. Skocpol (ed.) Vision and Method in Historical Sociology (Cambridge 1984); cited in a section on Polanyi by Scott Burchill, in Burchill and Linklater (eds.) Theories of International Relations, Macmillan 1996):

"The road to the free market was paved with continuous political manipulation, whether the state was involved in removing old restrictive regulations ... or building new political administrative bodies."


For Polanyi, economic liberalisation is a process of making human society subservient to the economic mechanism. An idea - and a faith in mechanism - becomes sovereign. People without property could be valued only in accord with their role as a cog within the mechanism. They worked efficiently, or they died, or they faced a living death in the workhouse.

Polanyi found the Marxist class-based critique to be unsatisfactory, in that it misunderstood the essential social role of protectionism:

"Upholding the viewpoint of opposing classes, liberals and Marxists stood for identical propositions. They established a watertight case for the assertion that nineteenth century protectionism was the result of class action, and that such action must have primarily served the economic interests of the members of the classes concerned. Between them, they all but obstructed an over-all view of market society, and of the function of protectionism in such a society."


While, for Polanyi, the emergence of socialism was a natural reaction to the rise of the economically liberal bourgeoisie, his analysis was quite different to that of Marx. Where for Marx the state was a key part of the solution, for Polanyi the liberal state was the problem. Yet, both saw liberalisation as an economic revolution that was necessary to give us twentieth century living standards. They stood in awe of what they saw as the transforming power of an economic society based on, in particular, the commodification of labour. Neither writer can be construed, however, as giving any support for a recommodification of labour in the late 20th century.


Speenhamland and the New Poor Law

The prototype of the self-regulating market economy lasted for a single generation in one country, Great Britain, in the middle third of the nineteenth century. Its central defining institution was, for Polanyi, the New Poor Law of 1834. Prerequisites were the enclosures (ie commoditisation) of land, and the Speenhamland welfare system. A 'postrequisite' was the formal adoption of free trade in 1846, with the abolition of the Corn Laws that provided agricultural protection.

The removal of protection created for the first time an unfettered labour market. Both alternatives to dependence on wage labour - communal land holdings and social welfare ("outdoor relief") - had been essentially eliminated. Starvation, emigration or imprisonment (including the "indoor relief" that was the workhouse) were the only alternatives to wage work for the vast majority who had no access to income from property or collective support. Factories, in many cases, were no less than privately-owned workhouses.

In setting the scene for the hegemony of British industrial capitalism, Polanyi placed great emphasis on the Speenhamland system that marked the transition from the community-oriented Old Poor Law to the exploitative and punitive New Poor Law. Speenhamland was a set of locally administered Guaranteed Minimum Income schemes that lasted from 1795 to 1834. They were introduced by rural conservatives to protect England from the revolutionary economic and political turmoil that was hitting America and France in the 20 years from 1775.

The Speenhamland system was, in essence, a decentralised version of the Guaranteed Minimum Family Income scheme that was a key part of Roger Douglas' December 1987 tax-benefit package.

The system, while well-intended, created a poverty trap on account of its 100% effective tax rate on additional income. Employers had no incentive to pay higher wages, and employees had no incentive to be productive in their work. More importantly, given that fiscal constraints both real and imagined dominated government policy, the whole system was underfunded. In effect, the Speenhamland system set a maximum as well as a minimum standard of living. That maximum standard of living was progressively eroded, especially in the post-war years (post-1815) in which unnecessary fiscal constraint proved far more severe than the real constraints of the war years.

The low supply and productivity of labour in the Speenhamland period played a major role in ushering in the Industrial Revolution. Manufacturers adopted labour-saving machine technology. With the British economy growing as a result of a huge post-Waterloo competitive advantage reaped from industrialisation and economies of scale, the shortfall of disciplined labour became a severe constraint on further growth. The replacement of the Speenhamland system with the New Poor Law in 1834 (following the enactment of the Reform Bill which gave immense political power to the emerging employer class), while further degrading an already degraded workforce, created a market society close to the liberal ideal. Speenhamland had created the conditions which enabled the constituency for laissez-faire to become politically dominant.

Polanyi noted that the Speenhamland system need not have failed England's poor. He said:

"If labourers had been free to combine for the furtherance of their interests, the allowance system might, of course, have had the contrary effect on standard wages. ... The unjust Anti-Combination Laws of 1799-1800 ... were not revoked for another quarter century."


Speenhamland allowances had the potential to liberate landless workers by giving them an alternative source of income and thereby raising their bargaining power. Workers would have preferred wages that exceeded the poverty line that was defined by the allowance system, but were legally prevented from using their bargaining power to achieve that end.


The Reaction to Economic Liberalism

"The critical stage was reached with the establishment of a labour market in England, in which workers were put under the threat of starvation if they failed to comply with the rules of wage labour. As soon as this drastic step was taken, the mechanism of the self-regulating market sprang into gear. Its impact on society was so violent that almost instantly, and without any prior change in opinion, powerful protective reactions set in."

from The Great Transformation

The social response to economic liberalism is reflected in the lives of John Stuart Mill (the spiritual father of social democracy ) and his father James (a Benthamite utilitarian and a friend and patron of David Ricardo who was the central theorist of classical economics). (The social reaction also began with one of J.S. Mill's mentors, E.G. Wakefield; but that's another story. It may suffice to note that Wakefield's major work, England and America, appeared in 1834; and that Wakefield's subsequent work, a heavily annotated edition of Adam Smith's Wealth of Nation's, also represented an early moment in the anti-Ricardian backlash.) Social democracy can be thought of as the synthesis through which the market, while remaining an important institution, re-acquired its social context.

While the backlash was one inevitable consequence of a system as unnatural as laissez-faire, another inevitable consequence was the deceleration of British productivity growth in the second half of the nineteenth century. By making labour into a cheap commodity, incentives to innovate as a means of saving on labour diminished. Cheap labour can only take a nation's economy so far.

The torch of economic creativity moved away from Britain in the middle part of the century, to the European continent and to North America. When science gave the Industrial Revolution its second wind, Britain fell behind. Tertiary education in Britain was grossly sub-standard compared to Europe. As Adam Smith had foreseen, the great transformation had been a social transformation, the creation of a people subservient to the machine.


New Zealand Parallels

"The New Zealand experiment is in fact reminiscent of the forceps birth of British capitalism, analysed by Karl Polanyi in La Grande Transformation."

Serge Halimi, "New Zealand, from Welfare State to Market Society; Test Tube Miracle of Total Capitalism", Le Monde Diplomatique - April 1997.

"Bentham believed [that] the influence of legislation 'is as nothing' in comparison with the unconscious contribution of the 'minister of the police' ... the task of the executive. ... Benthamite liberalism meant the replacing of Parliamentary action by action through administrative organs."

from The Great Transformation

"The eclipse of political thinking was the intellectual deficiency of the age. It originated in the economic sphere, yet eventually it destroyed any objective approach to the economy itself."

Karl Polanyi, "The Economistic Fallacy" in Livelihood of Man (1977) ed. Harry W. Pearson.

The parallels between the economic regime of mid-nineteenth century Britain and post-1984 New Zealand are striking. The Government deliberately imposed, upon a mute populace, the legislative and administrative apparatus required to create the market utopia of abstract theory. Once again, ideology upstaged reality. Proactiveness on the part of government has perpetuated the neoliberal regime, in the face of consistent electoral opposition. The introduction of the MMP electoral system can be understood as a part of the spontaneous popular reaction to neoliberal reform. And the desperate measures being undertaken by members of the Shipley government to persevere with laissez-faire reflect the real political tensions that arise when a system in place cannot by its very nature survive democracy.

The New Zealand welfare system has yet to embark upon the modern version of the New Poor Law. Rather, the changes to social welfare in the 1980s and 1990s were reminiscent of the transitional Speenhamland system, with its ever-tighter welfare ceilings. The new forms of income support, such as the Independent Family Tax Credit (what Polanyi calls the "aid-in-wages" feature of Speenhamland) and the Accommodation Supplement (what Polanyi calls "aid-in-rent") closely resemble Speenhamland top-ups.

The lesson we should draw is that the present targeted welfare system is a temporary phenomenon, and was always intended to be a temporary phenomenon. The Kafkaesque outcomes that arise from underfunded targeting serve the real purpose of creating dissatisfaction with the welfare state. A constituency emerges which opposes any kind of social welfare beyond the workhouse and private charity.

The present Community Wage scheme embodies the tension between the socially-inclusive if class-ridden principles that underpinned the Old Poor Law of the pre-Speenhamland era, and the altogether different subservience to the labour market that characterised the post-Speenhamland era.

The Community Wage is likely to be a short-lived transition. If the democratic opposition to the neoliberal state continues to gather momentum, the Community Wage can quickly evolve into something new that falls within the long-standing traditions of social protection. But, if we succumb to the increasingly urgent new right programme to subvert democracy - ie if we buy the argument that out main problem today is what Gareth Morgan calls "policy paralysis" - then we may end up with Act's policy of workfare, which is no less than a return to the New Poor Law.

If we look at New Zealand's neoliberal economic reforms through Karl Polanyi's lens, we can attribute much social change to those reforms. The good news is that market rationalism cannot survive democracy. The social impulse for communities to protect themselves through mutual support rather than individual self-reliance will outlive the attempt to create an economic machine that forces us to yield to the discipline of Mammon.


© 1998 New Zealand Political Review

Keith Rankin:  NZPR | Rankin File