The year 1944 has seen the publication of two major books developing opposing accounts of the social and political events that marked the three first decades of the 20th century: Friedrich Hayek’s Road to Serfdom and Karl Polanyi’s The Great Transformation. They offer radically different views about the rise of totalitarianism, in particular with respect to the role played by the extension of market-based economic relationships in Western societies. If Road to Serfdom has made Hayek a major intellectual figure of the second half of the 20th century, Polanyi’s The Great Transformation has had a lasting influence, especially among those opposing the kind of free market liberalism promoted by Hayek but nonetheless reticent to fully endorse Marxism and communism.
Polanyi’s thesis is relatively well-known but is worth briefly recalling. The “great transformation” the book alludes to in its title refers to a period that essentially took place in the 19th century during which through active state interventionism, “fictitious commodities” have been created. Polanyi identifies three such commodities: human labor, money, and land. Until the 19th century, labor, money, and land had in common to have been largely immune from the transformations induced by market-based exchanges. They were mostly regulated by relations of reciprocity and redistribution organized by non-economic institutions, e.g., the state, the family, the tribe… There is a good reason for that according to Polanyi. They are intrinsically attached to the substance of the human condition in such a way that they cannot be economically traded without destroying this substance.
The great transformation towards what Polanyi calls the “market society” reorganized society and its institutions exclusively around two motives: the search for profits and the fear of hunger. The transformation of labor, money, and land into commodities has been the decisive step of this reorganization. The nature of society changed fundamentally. Before, the economy (a system of institutions aiming at providing the material means for the satisfaction of human needs) was “embedded” into society in the sense that it was organized to serve ends determined in other spheres (political, cultural, familial, religious). The commodification of labor, money, and land resulted in the “disembeddedness” of the economy and, ultimately, embedded society into the economy. Polanyi argues that this led to destructive consequences and created new needs for the population to be protected from them. Here are the roots of totalitarianism according to Polanyi. To protect itself against the damages caused by the unlimited extension of market exchanges, society has had to design new social and political institutions leading to authoritarianism and despotism.
The long-lasting influence of Polanyi’s book is undoubtedly at least partly due to the effectiveness of this narrative. Economists and historians tend to agree that Polanyi had many of the facts wrong or at least that his emphasis on some specific political or social events (such as the abrogation of the Speenhamland law) is prone to misrepresentation. The narrative survives these factual problems however and continues to strike a chord. It underlies for instance contemporary accounts of populism that put most of the emphasis on economic causes. This is sometimes made explicit, as in this conference given by Dani Rodrik four years ago:
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By the way, this post has been triggered by an op-ed I read this morning in the French newspaper Le Monde. Addressing the still ongoing conflict about the reform of the French pension system and the unwillingness of President Macron to give up the reform despite the large popular opposition to it, the author recalls Polanyi’s thesis and writes (I translate from French and I emphasize):
“The urgency [to reform the pension system] the President is invoking is related to… financial markets. It is said that if no signal has been sent to them, the risk would have been the significant rise in interest rates at which France is borrowing. True or not, this argument makes things clear: it is the legitimacy of the market against the legitimacy of the members of parliament. The market against democracy.”
And the author to continue with a Polanyian prophecy that, if Macron persists:
“everyone can understand who will win, indeed. Polanyi teaches us about this very explicitly: the smashing of the social movement leads us toward a far-right authoritarian regime.”
There would be many things to say about Macron’s reform of the French pension system and his claim that it cannot be delayed because that would trigger a sanction from financial markets. The former is very imperfect, especially because of its unfair implications. Better reforms were probably feasible (without mentioning the fact that members of the government misrepresented some of the implications). The latter is surely exaggerated, though it is obviously difficult to assess the counterfactual. What is interesting here is the Polanyian message that “the market” and democracy are in opposition.
Because the Polanyian narrative is so seductive, it is worth recalling some basic insights about the relationship between markets and democracy in contemporary societies. Polanyi’s thesis is an instance of what is sometimes called the “parasitic liberalism thesis”.[1] In essence, this thesis holds that market-based liberal institutions are self-defeating. Their proper functioning depends on “traditional” institutions (family-based, religious) but the development of market relationships endangers the latter. The so-called “crowding out effect” of intrinsic motivations by extrinsic motivations, where the introduction of economic incentives destroys ethical or civic commitments is sometimes given as an empirical illustration of this thesis. It is true that this effect has been observed from time to time but, contrary to a widespread belief, it remains relatively exceptional.[2] More fundamentally, there is a rich theoretical, empirical, and experimental literature that suggests that the parasitic liberalism thesis is false in general.[3]
Of course, this does not imply that Polanyi’s thesis regarding the rise of totalitarianism in the 1920s and 1930s is false, nor that the extension of market relations cannot lead to disastrous social and political consequences. I’m fully ready for instance to accept that contemporary populism is largely due to economic causes. The claim is rather that there is not in principle an opposition between the market-based economic system and other institutions. The opposition between markets and democracy (or any other political regime for that matter) is not automatic and unavoidable.
As I have started this post mentioning Polanyi and Hayek, I shall end with a Hayekian point. Since Kenneth Arrow’s seminal work,[4] it is usual to characterize the market system and democracy as two different social choice mechanisms, i.e., procedures aggregating preferences and dispersed information to make collective decisions that affect everyone. There is in general a division of labor between these two mechanisms, as the former “chooses” (figuratively) allocations of resources while the latter chooses (more concretely) allocations of political power and ultimately policies. Because of that, they function very differently and are more complements than substitutes – bad news for libertarians on the one hand, and for collectivist planners on the other. More than complementary, they can be interdependent, a very important insight for those who think that markets tend to cannibalize democracy.
Irrespective of a society’s economic system, the effects of political collective decisions also bear on the allocation of resources. The collective choice of a pension system has effects with respect to the allocation of resources, both intra- and intertemporal. This does not determine what is the “best” pension system – this depends on citizens’ preferences. But this entails that there are underlying tradeoffs that must be made. For instance, if you choose a pension system that is not financially balanced, that implies that you have to borrow money at some cost. More generally, in the case of repartition-based pension systems such as the French one, the tradeoffs are determined by two factors: economic growth and demographic growth. The more you have both, the less each person has to work to maintain the pension at some (real) level.
These tradeoffs have nothing to do with the existence of a market system or the fact that we have created “fictitious commodities”. They exist as a matter of fact. The virtue of the market system – Hayek’s point – is to make them explicit through the information collected and disseminated by market prices. But this has nothing to do with the embeddedness of society in the economy or that markets are disputing the political legitimacy of democracy (and thus of the People). Making enlightened democratic choices requires information and the market system contributes to producing this information. There is no “market despotism” here because ultimately the choice remains a collective one made through democratic mechanisms.[5] But this is a choice under constraints, as any other choice.
[1] See in particular Samuel Bowles, “Is Liberal Society a Parasite on Tradition?,” Philosophy & Public Affairs 39, no. 1 (January 1, 2011): 46–81.
[2] More precisely, there may be a crowding out effect but most of the time it is not observable at the behavioral level. Economic incentives more than compensate the decline of intrinsic motivations.
[3] See, for instance, Bowles, “Is Liberal Society a Parasite on Tradition?”; Samuel Bowles, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens (New Haven ; London: Yale University Press, 2016).; Herbert Gintis and Samuel Bowles, “Social Capital, Moral Sentiments, and Community Governance,” in Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life (MIT Press, 2005), 379–94.
[4] Kenneth Joseph Arrow, Social Choice & Individual Values (Yale University Press, 1963).
[5] In the case of the reform of the French pension system, it might be argued that the choice is ultimately not democratic – constitutional but not democratic. That may well be the case. This is only a problem however if we consider that every legitimate political collective choice must be democratic in this specific sense.