Dynamic Markets versus Cohesive Community

A clever turn in Karl Polanyi’s argument in The Great Transformation is that implementation of the market system resulted from intentional government design while reaction to the self-regulating market system arose spontaneously. I don’t know how seriously Polanyi means his readers to take the argument. He advanced the argument mainly as rhetorical counterpoise to Adam Smith’s claim that markets reflect natural, non-political human behavior with which governments only artificially intervene. Polanyi argues, “The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.”

He marshals his evidence selectively, however. The ending of the Speenhamland system in England, necessary to the creation of a nation-wide labor market which was, in turn, necessary for the commodification of labor in the country, was manifestly a governmental act. In a passing concession, albeit one that distinguishes his argument from the Marxists’, Polanyi notes, “In the end the free labor market, in spite of the inhuman methods employed in creating it, proved financially beneficial to all concerned.” The critical limitation in the sentence, however, is that the benefits of the free labor market were only “financial.” The human costs necessary to realize these financial benefits for Polanyi — the loss of human community in the subordination of society to the “unregulated market,” and the transition costs to the unregulated market — were greater than the financial benefits of that transition.

Yet in contrast to the forced commodification of English workers, in continental Europe, and in the United States, workers voluntarily integrated themselves into the market system. Polanyi himself notes,

[In continental Europe] the working class had not been forced off the land by an enclosure movement; rather, the allurements of higher wages and urban life made the semiservile agricultural laborer desert the manor and migrate to the town . . . Far from feeling debased, he felt elevated by his new environment. Yet there was no comparison between the moral and cultural catastrophe of the English cottager or copyholder of decent ancestry . . . and the Slovakian or, for that matter, Pomeranian agricultural laborer changing almost overnight from a stable-dwelling peon into an industrial worker in a modern metropolis.

But in America, too, workers chose integration into the market. As John Lauritz Larson writes in The Market Revolution in America,

[A]ntebellum Americans who traded cash wages for rural self-sufficiency enjoyed efficiencies at the expense of independence. It took not a generation for the skills of self-sufficiency to begin to atrophy, and, frankly, few antebellum Americans indulged nostalgic dreams of a return to simpler times. Progress promised ease and prosperity, and most Americans were all too familiar with the “charms” of pre-industrial material life to see it as a virtue alongside modern ways.

Without anybody wishing it so, the increasing scope of commercial transactions, the specialized divisions of labor, the growing distance between buyers and sellers, the institutionalization of relations, and the proliferation of intermediaries disembedded individual transactions from contexts in which the common welfare or “commonwealth” of whole communities once had seemed self-evident.  . . .  The result, overall, was a decline of what we might call “diseconomies’ or wasteful transaction costs, but this rationalization came at a price in terms of community welfare and social relations.

The thing about Polanyi’s and Larson’s arguments, at least as applied to continental Europe and the US, is recognition of the individual rationality of actions taken by workers: Given the incentive structure workers faced, they pursued higher wages despite what Polanyi and Larson argue is a loss of community.

To be sure, we know that individually rational behavior can lead to either socially optimal, or socially suboptimal, outcomes. The “invisible hand” describes cases in which individually rational behavior can lead to socially optimal outcomes; the prisoners’ dilemma describes cases in which individually rational behavior can lead to socially suboptimal outcomes. The trick is figuring out which situation one faces.

Polanyi, Larson, and others, basically identify negative externalities to the expansion of the market. The difference in their argument with usual discussion of negative externalities is that, for them, it is the market itself that generates the negative externality rather than a specific subset of transactions within the market that generates the externality. Nonetheless, their argument is essentially that the process of market creation does not fully price the cost of that creation. They argue that the human cost created by the loss of solidarity and community is greater that the financial value that the market system creates. This argument only makes sense, however, only if workers themselves do not bear the full cost of the loss of solidarity; their entry into the market imposes costs on others as well, costs that aggregate as more and more people enter the market system.

Polanyi is at his most dramatic on these costs:

Robbed of the protective covering of cultural institutions [by the self-regulating market], human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, and the power to produce food and raw materials destroyed.

All of these are negative externalities produced by the unregulated market, according to Polanyi. That said, I’m unsure about Polanyi’s argument about the last bit, on the production of food and raw materials. Neither is an externality, and the market system would seem to result in production of more of each, not less. He does, after all, grant that the market system increases production.

Today’s discussion of the problems facing the American working class often seem to pick up on these claims, quite literally. The commentary surrounding Anne Case and Angus Deaton’s report of increasing mortality rates among middle-aged white Americans often at least implicitly draws the link between increased globalization, meaning increased market integration, and the “deaths of despair” stemming from drug overdose, suicide, alcohol and more.

Still, there are some difficulties with simply picking up on Polanyi’s and Larson’s (and others’) argument. To wit, Larson’s “market revolution” occurred almost 200 years ago. The market extremism of Polanyi’s “great transformation,” according to him, had been put to a definitive end by the end of the first half of the 20th Century. Additionally, it would presumably be in the areas of the world in which the market is advancing, the new regions being integrated into the market system, that Polanyi and Larson would predict we should see the pathologies associated with marketization, not in the regions in which marketization already occurred. As with just about every externality, the dispute revolves around the cost of the externality relative to the value generated, and the extent to which the market fails fully to reflect those costs.