Karl Polanyi’s 1944 book, The Great Transformation: The Political and Economic Origins of Our Time, casts an outsized shadow over policy debates today despite being published almost eighty years ago. Right-wing postliberals regularly cite the book (for example, Patrick Deneen and Milbank and Pabst), as do left-wing opponents of “neoliberalism” (for example, Wendy Brown and Eugene McCarraher). And classical liberals (a.k.a. neoliberals) think it remains important enough to modern policy discussions to continue to engage it, both negatively and positively (for example, Santhi Hejeebu and Diedre McCloskey’s discussions here and here).

Just this summer, UC-Berkeley economic historian J. Bradford Delong thought enough of Polanyi’s argument that he used it, along with Hayek, to organize the broad argument of his new book, Slouching Towards Utopia: An Economic History of the Twentieth Century.

The main attraction of Polanyi to right-wing postliberals and left-wing anti-liberals is his argument that, during the nineteenth century, the market system attained an autonomous status that ran roughshod over humans and human social relationships. Modern post- and anti-liberals cite Polanyi to invoke and apply his analysis to events today. Markets again ride roughshod over humans and human flourishing, the citations to Polanyi suggest.

Yet there are problems with today’s invocation of Polanyi’s argument. First, a central feature of Polanyi’s historical argument is that the autonomous market had been destroyed by the time he wrote the book in 1944. On Polanyi’s own terms, the “market system” that he studied cannot have returned today unless the Polanyian “mixed economy” and welfare state have disappeared today as well.

Contrary to the implication of many citations to Polanyi, he was not anti-market. He thought the market was incredibly productive. His concern circled around the speed of transformation wrought by the market system, which is a term of art for Polanyi. As he notes, “the end of market society means in no way the absence of markets.”

Secondly, the sine qua non of the market system Polanyi identifies is no government intervention at all in labor markets or land markets, and a gold standard. If even one of these three conditions fails to exist, then the autonomous market cannot exist, according to Polanyi.

This does not mean that nothing remains to learn from Polanyi today. I suggest that liberals—and even “postliberals,” if carefully defined—can still learn important lessons from Polanyi. Polanyi’s broad argument stands for the proposition that the economic realm and the social realm do not exist in isolation from each other. The trick is not to discount the significance of one or the other entirely.

The Rate of Change of the Great Transformation

Polanyi recognizes the “almost miraculous improvement” in economic production during the nineteenth century. The cloud that surrounds the silver lining, however, is that this great transformation “was accompanied by a catastrophic dislocation of the lives of the common people.” It is the latter that receives Polanyi’s focused attention.

It is not the change itself, however, that caused extensive social damage, but rather the pace of economic change relative to the pace of social adaptation to that change. Polanyi all but specifies a mathematical model. Drawing on an implicit model of relative rates of change (the bane of first-semester calculus students everywhere), Polanyi identifies the condition for good versus bad economic change: “The time-rate of [economic] change compared with the time-rate of [social] adjustment will decide what is to be regarded as the net effect of the change [on society].”

Polanyi is clear that the “welfare of the community” can be “safeguarded” when the pace of economic change “which is deemed too fast” is slowed down to a human level. Polanyi himself provides examples of economic “progress” (his word) in the early modern period that occurred at non-destructive rates of change. Discussing the English Enclosure movement Polanyi writes:

The rate of that progress might have been ruinous, and have turned the process itself into a degenerative instead of a constructive event. For upon this rate, mainly, depended whether the dispossessed could adjust themselves to changed conditions without fatally damaging their substance, human and economic, physical and moral . . . (emphasis added)

In his book, Polanyi unapologetically recognizes the economic “improvement” brought about by the market. Elsewhere he refers to the impact of the market system creating an “automatic increase of material welfare,” albeit at a cost of social disruption. He does not oppose the increased material prosperity that markets can provide. He merely wants societies to recognize the interaction between the economic and the social, and for societies to provide time for the social fabric to adapt to economic transformation without tearing. This response had already occurred by the time he wrote, according to Polanyi.

The Autonomous Market Has Not Been Re-Created

Polanyi is entirely clear in his book that the problem he identified had been resolved by the time that he wrote: “The end of [the self-regulating market] has come in our time; it closes a distinct stage in the history of industrial civilization.” Polanyi repeats this again and again. Indeed, he builds a “double movement into the very fabric of his analysis: The rise of the autonomous market system prompted a “simultaneous countermovement” that resulted in the re-embedding of the economy in society.

In fact, the ultimate explanatory point of Polanyi’s book is not to argue that the autonomous market continued to be a problem. It had been dealt with. Rather, the point of his historical analysis is to account for the rise of fascism—and, hence, World War II—as a continuing consequence of the “countermovement” that ended the self-regulating market of the nineteenth century.

Further, readers often misconstrue Polanyi’s references to the “market system,” or the “autonomous market.” These are specific terms of art for Polanyi, and do not indict markets generally. In fact, he expressly observes that “the end of market society means in no way the absence of markets.” Rather

[Markets] continue, in various fashions, to ensure the freedom of the consumer, to indicate the shifting of demand, to influence producers’ income, and to serve as an instrument of accountancy, while ceasing altogether to be an organ of economic self-regulation.

Polanyi even observes that “There is a sense, of course, in which markets are always self-regulating, since they tend to produce a price which clears the market . . .”

For Polanyi, “[A] self-regulating market system implies something very different [than the ordinary self-regulation market-clearing prices], namely, markets for the elements of production – labor, land, money” (emphasis in original).

The recognition that there is no bright-line division between the economy and society continues to be an important, if still underrecognized point.

This is the very center of Polanyi’s analysis: the sine qua non for the autonomous market is that the market, and the market alone, sets equilibrium prices for labor and land, and that monetary policy is immunized from political and social influence by a gold standard. All three need to exist at the same time for the establishment of the autonomous market. (Polanyi later treats “international free trade” as an expression of the autonomous market. But this can negatively affect society via the market for labor and the gold standard.)

Polanyi held that the autonomous market system he identified had been destroyed by the time he wrote because the gold standard had been eliminated, and because government policies regulated wages, labor, and land, thereby removing them from the vagaries of singular market control.

We consider each element in turn.

The elimination of the gold standard is of course clear. The first leg of the tripod is gone. And, what’s more, it has not been resurrected today.

What about labor? Polanyi argued that even at his time, in 1944,

[T]he labor market was allowed to retain its main function only on condition that wages and conditions of work, standards and regulations should be such as would safeguard the human character of . . . labor. Social legislation, factory laws, unemployment insurance, and, above all, trade unions . . . interfer[e] with the laws of supply and demand in respect to human labor, and remov[e] it from the orbit of the market (emphasis added).

Needless to say, social welfare and anti-poverty policies that existed at the time that Polanyi wrote have only subsequently expanded. Health and safety regulations, public provision of basic education and more have also likewise increased since Polanyi wrote.

Further, Polanyi argued that feudal economic forms provided a rough and ready social welfare system. The community would support individuals and households faced with need. Polanyi argues that the creation of an autonomous labor market in the eighteenth and nineteenth centuries required the destruction of this safety net so that workers faced the choice of working or quite literally starving to death. This was the stripping of nested social commitments to serve—to create—the autonomous market.

The second leg of the autonomous-market tripod was cut away and is not remotely close to being re-established. Polanyi thought the policies adopted in the 1930s and 1940s sufficient to end the unregulated labor market. Regulations and social welfare policies adopted in the 1950s and 1960s in Europe and the U.S. dwarfed those earlier policies.

Finally, regarding the market for land. Again, Polanyi concluded that land was no longer subject wholly to the vagaries of the market. And, today, crop insurance, conservation programs, commodity programs, zoning, and nutrition programs remove land from the domain of the self-regulating market.

The third leg of the autonomous-market tripod was eliminated almost 90 years ago. And, again, there is no threat of its recreation today.

In sum, Polanyi argued in 1944 that the “autonomous market” had already been destroyed. The programs and policies that removed land and labor from control of the autonomous market, and the elimination of the gold standard, all continue today.

The Polanyian “mixed economy” of the modern era continues unabated. The policy arguments today circle around where to draw the policy lines, not over the existence of these policies that ended the self-regulating market.

What Lessons from Polanyi for Today?

So what lessons, if any, remain from Polanyi for us today? At the broadest level of his argument, the recognition that there is no bright-line division between the economy and society continues to be an important, if still underrecognized point. Recognizing it explicitly would improve policy discussions all around.

A fair bit of both right and left postliberalism reflects a concern with the manifest materialism of American society. This, of course, is not new; Tocqueville recognized this unhealthy dimension of American life as far back as the 1820s. More subtly, as Santhi Hejeebu and Deidre McCloskey argue, the academic division of labor today between economics and sociology too often separates the study of “economics” from “society” rather than studying them together.

This division is not simply a problem for economistic reductionism: Postliberals often ignore the economic costs of their social policy recommendations. Slowing down economic change to achieve social goods requires tradeoffs. That doesn’t mean the tradeoff shouldn’t be made in favor of social goods over economic goods. But there’s no reason to pretend that social goods can be sustained or increased with zero economic costs.

That said, there is a natural way of putting together economic and social life. As I pointed out above, Polanyi all but posits a formal model that puts together the rate of economic change relative to the rate of social adaptation to that change.

Polanyi’s argument can be conceived as commending the inclusion of social externalities in socioeconomic analysis. There’s no principled reason that social costs cannot be explicitly brought into economic policy analysis. Harold Demsetz, for example, observed in his famous article on property rights,

Externality is an ambiguous concept. For the purposes of this paper, the concept includes external costs, external benefits, and pecuniary as well as non-pecuniary externalities. No harmful or beneficial effect is external to the world (emphasis added).

Demsetz provides a distinctly Humean take on property rights; one that could easily accommodate Polanyian social externalities (even though Polanyi might snark at the “property rights” language):

If the main allocative function of property rights is the internalization of beneficial and harmful effects, then the emergence of property rights can be understood best by their association with the emergence of new or different beneficial and harmful effects. Changes in knowledge result in changes in production functions, market values, and aspirations. New techniques, new ways of doing the same things, and doing new things-all invoke harmful and beneficial effects to which society has not been accustomed. It is my thesis in this part of the paper that the emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities.

While most postliberals will no doubt resist the nomenclature of “property rights,” it would be myopic to overlook the Humean flexibility of “property rights” in Demsetz’s argument. He’s talking about things that people value in general, including social relations.

The point is not that the social must always be preferred to the economic, any more than the economic must always be preferred to the social. The point is that there are tradeoffs across the two dimensions that people and policymakers want to take into account when making policy. That social externalities may be difficult to define and measure does not mean that they do not exist and therefore can be ignored.

Contrary to the many citations to Polanyi among left and right postliberals, the specifics of Polanyi’s analysis of the “great transformation” is irrelevant to analyzing the social effects of economic changes today. The autonomous market does not exist today, and it’s not even close. Polanyi said it didn’t even exist when he wrote in 1944. His book nonetheless remains relevant today at its broadest level, as an eloquent, if often misunderstood and unheeded, plea to recognize the interdependence of the social and the economic when considering the conditions of human flourishing.