The Great Transformation

Polanyi discusses the assumptions underlying market economies, namely that the economy “is directed by market prices and nothing but market prices” (45). Societies require economies, but no economy before had been controlled by gain/profit, despite academic arguments to the contrary. There were markets, but they were not the defining aspect of the economy. Polanyi suggests that economists like Adam Smith misread the past by equating the division of labor principle with barter and exchange. Polanyi discards Smith’s belief that humans are propelled by gain.

At face value, humans seem to be communistic, although Polanyi also argues that this is incorrect. Economic historians frequently seek to rationalize the development of the market system that was in place at the time, again misreading history by ignoring the allegedly uncivilized man in order to justify market liberalism. Polanyi argues that medieval society was not very different from the largely agrarian society of Rome and other ancient societies. Polanyi discusses Weber as one of the first economic historians to not discount earlier civilizations. Polanyi argues that man’s nature has not changed and man’s economy “is submerged in his social relationships” (48). Humans act to safeguard their social positionality, not their possessions. Polanyi gives the example of a tribal society struggling to ensure the survival of the community, which prefers generosity and reciprocity by focusing human passions towards noneconomic ends:“So-called economic motives spring from the context of social life” (49). Polanyi posits that order in production and distribution are ensured through two noneconomic principles of behavior: reciprocity and redistribution.

Polanyi believes the family to be at the nexus of reciprocity and redistribution to be motivated by purely noneconomic factors. Neither of these require institutions in order to assure their success. “Reciprocity is enormously facilitated by the institutional pattern of symmetry” (51), in which duality pairs individual relations. Villages on the Trobriand Islands, for example, are paired with one another to assure redistribution. There is also centricity in the sharing of the group output, in a hunt for example, so that goods are redistributed as well. When individuals have no economic motives, giving is made more important than gain. But Polanyi decries the idea that these noneconomic systems are primitive, citing western Melanesia’s elaborate nonmonetary trading transactions and ancient Egypt’s prolific redistribution as examples of complexity.

Polanyi writes that “[r]edistribution also has its long and variegated history which leads up almost to modern times” (53). He talks about gatherers coming back to redistribute their findings, usually through an intermediary, among the community and expecting reciprocity tomorrow for their actions. Polanyi believes all large-scale economies—some of which were feudal—were based on this principle of redistribution, usually with storage facilities for a variety of wares and products. Some redistributive economies had money, like the Incas, and these usually had elaborate divisions of labor as well, some of which may have been exploitative. Only in exceptional situations, like that of Western Europe, did the feudal system become political because vassals needed protection. In every situation, redistribution enmeshes the economy with social relationships. Polanyi discards the distinction between homogenous and stratified societies, believing all share these characteristics.

Polanyi discusses a third principle—householding, or production for one’s own familial use—as playing a major role in history that only arose with agricultural advancements. Polanyi distinguishes this principle from the idea of gain, using Aristotelian ideas:

Aristotle insists on production for use as against production for gain as the essence of householding proper; yet accessory production for the market need not, he argues, destroy the self-sufficiency of the household […] the sale of surpluses need not destroy the basis of householding (56).

However, Polanyi argues that Aristotle incorrectly ignored the importance of markets, despite the Greek economy depending upon trading. Polanyi also argues that more modern critiques of Aristotle are blinded in their emphasis on the market economy, as opposed to social relationships.

Polanyi concludes that all economic systems until the end of feudalism were organized by combinations of reciprocity, redistribution, or householding governed by principles of behavior. By the 16th century, markets became a concern of government but they did not control human society; rather, government intervention became the norm, and the self-regulating market did not exist. 

Polanyi writes that “[a] market is a meeting place for the purpose of barter or buying or selling. Unless such a pattern is present, at least in patches, the propensity to barter […] cannot produce prices” (59). However, the market may be subordinate to other principles but is not in exactly the same situation as the other three principles—symmetry, centricity, or autarchy—as it is more specific in the creation of an institution for singular purposes, namely the market itself. Therefore, the creation of a market economy forces society to run as an adjunct of the market.

There is a specific step involved that turns isolated markets into a market economy, one that is not natural as previous economists have supposed:

The presence or absence of markets or money does not necessarily affect the economic system of a primitive society [refuting] the nineteenth-century myth that money was an invention the appearance of which transformed a society by creating markets, forcing the pace of division of labor, and releasing man’s natural propensity to barter, truck, and exchange (61).

Markets exist outside of economies as meeting places for long-distance trade. Polanyi argues that long-distance trade creates markets that involve money and therefore bartering; his argument represents essentially the opposite of orthodox economists. Polanyi views trade as an external feature of the internal organization of the economy, which arose through distance requisitioning, like hunting or gathering. External trade becomes organized on reciprocity, not on bartering:“The transition to peaceful barter can be traced in two directions, namely, in that of barter and in that of peace” (62).

External markets are different from local markets in that they are created out of an absence of goods, whereas local trade is limited to regional and often un-transportable goods. Both forms of trade therefore are related to geographic distance and complement one another without competition. Internal or national trade, however, can involve competition. External markets might arise in ports, but the local markets will be separate from this, and bartering was seen as a subordinate trait of redistribution or reciprocity. Polanyi argues that the nascence of local markets is unclear, yet:

the most significant result of markets—the birth of towns and urban civilizations—was, in effect, the outcome of a paradoxical development. Towns, insofar as they sprung from markets, were not only the protectors of those markets, but also the means of preventing them from expanding into the countryside and thus encroaching on the prevailing economic organization of society (65).

Rules concerning the local market were very strict and specific; they are therefore not the cause of internal or national trade.

In Western Europe, internal trade was created by state intervention. Alleged nations were loose political units of self-sufficient households and insignificant local village markets. Long-distance trade was purposefully kept out of the countryside, distinguishing it from local trade and thereby eliminating the possibility that either could have resulted in internal trade:

An increasingly strict separation of local trade from export trade was the reaction of urban life to the threat of mobile capital to disintegrate the institutions of the town. The typical medieval town […] met the peril squarely by enforcing with the utmost rigor that policy of exclusion and protection which was the rationale of existence […] (68).

In the 15th and 16th centuries, state action forced mercantilism on protectionist towns, breaking down the barriers between local and long-distance trade and paving the way for a national market that ignored town or trade distinction. The mercantile system was a response to many challenges, including internal and external politics, economics, and administration that unified large tracts of land and centralized state power. People knew competition would lead to monopoly, and to prevent this, the state regulated the economy at a national scale:

Although the new national markets were, inevitably, to some degree competitive, it was the traditional feature of regulation, not the new element of competition, which prevailed […] This national market now took its place alongside, and partly overlapping, the local and foreign markets […] entirely compatible with the principle of householding still dominant in the countryside (70).

The economic system existed as part of the social system and regulation and markets formed together. Market economies, including production, distribution, and income, are controlled by market prices based on the expectation that humans attempt to achieve maximum monetary gain and assume that money exists and that supply equals demand. Essentially, everything has a price and must be saleable on the market, including land, labor, and money. Incomes cannot be formed outside of sales and the formation of markets and prices cannot be inhibited.

Under feudalism and the guild system, land and labor was part of social organization, along with societal rules and institutional regulations:

Mercantilism, with all its tendency toward commercialization, never attacked the safeguards which protected these two basic elements of production—labor and land—from becoming the objects of commerce [regardless of nationalization attempts] (73).

The only disagreement between mercantilism and feudalism lay in the methods of regulation, as they both refused to commercialize either labor or land.

Polanyi likens the shift from despotism to democracy to the shift from regulated to self-regulated economy, as both illustrate a fundamental transformation in social structure. The self-regulating market essentially breaks society into dichotomous economic and political spheres, which is unusual, as the economy, historically, has represented a facet of social order. The market economy accomplishes the subordination of society to the market system through commodification in which all various markets coalesce to form One Big Market.

However, Polanyi argues that labor, land, and money cannot be said to be produced, especially not with the goal of profit and therefore cannot be defined as commodities. Despite this fact, the market economy creates them and their respective markets as such, believing that the rules that define markets also apply to these fictitious commodities and preclude any intervention therein. Polanyi believes that if the market mechanism had absolute authority over the fate of humans and nature, society would be demolished: “Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as victims of acute social dislocation through vice, perversion, crime, and starvation” (76). Further, nature would be similarly demolished by greed. The artifice of the market economy stems from the organization of production via buying and selling.

Polanyi argues that the advent of the machine did not change the organization of production; rather, the increasing complications of industrial production required more numerous safeguards in terms of supply. The commodification of acreage, work, and currency resulted from the factory system entering commercial society:

As the development of the factory system had been organized as part of a process of buying and selling, therefore land, labor, and money had to be transformed into commodities in order to keep production going [….] The fiction of their being produced became the organizing principle of society (78-79).

Specifically, the commodification of human labor allowed society to be subordinated to the economy. Polanyi reflects on the social dislocation brought about by the enclosures, arguing that the Industrial Revolution wrought horrific effects on the community in the pursuit of progress which would have annihilated society if not for protective institutional measures. 

Polanyi writes that “[n]o market economy was conceivable that did not include a market for labor; but to establish such a market, especially in England’s rural civilization, implied no less that the wholesale destruction of the traditional fabric of society” (81). Speenhamland Law (SL)—enacted to lessen rural poverty in England and Wales—prevented this creation of the labor market from 1795-1834 via informal regulations.

Money and land had been mobilized, but Speenhamland Law assured that the poor received a minimum income—dependent on county bread prices—through wage subsidies. In 1832, the middle class ascended to power and sought to withdraw SL in order to create a competitive labor market. Speenhamland Law’s paternalism allowed workers to be compensated even if they were employed, which was a reversal of Elizabethan Law and meant that workers had no incentive to satisfy their employers, decreasing labor productivity. SL was exceedingly popular because parents did not have to worry about their children starving when employers reduced wages, seemingly at random. The poor began to prefer subsidies to wages but had no control over the rates, and “little by little the people of the countryside were pauperized” (84).

Under Speenhamland Law, society was torn by two opposing factors: the paternalist protection of labor and the market system’s organization of production. Poor people sold their labor while it was deprived of market value. New enclosures produced a rural proletariat that could not subsist off their labor. SL was considered futile, and the only options were to destroy the machines in Luddite fashion or create a regular labor market. Polanyi discusses conditions under which SL might have worked, as the majority of workers preferred wages to pauperism. SL was abolished only after workers prevented the progress of machine civilization yet no one could foresee the potential problems associated with the market system.

Polanyi breaks the Industrial Revolution into three periods: Speenhamland Law (1795-1834); “second, the hardships caused by the Poor Law Reform in the decade following 1834; third, the deleterious effects of a competitive labor market after 1834, until in the 1870s the recognition of the trade unions offered sufficient protection” (86). SL slowed down the proletarianization of the poor; the Poor Law Reform abolished the right to live, impoverishing many and leaving them to starve in a radical transformation that quickly ruined many lives. Polanyi suggests that the Poor Law Reform in many ways was the exact opposite of SL, in that it degraded the poor by leaving them starving, isolated, and homeless.

Industrial capitalism was created through the competitive labor market in 1834 and immediately caused a reactionary set of social protections, such as factory regulations and social laws, creating conflict between protective action and market self-regulation. The pauper became a prominent figure of discussion and shifted the gaze to the idea of a collective being through the lens of political economy. Hope became synonymous with progress, although it was birthed out of a social nightmare, and life seemed like a contradiction: man could stop procreating or suffer the ills of overpopulation; food limitations and overpopulation fought against wealth’s alleged boundlessness; and economic harmony meant individual destruction. Polanyi writes that:

Pauperism, political economy, and the discovery of society were closely interwoven. Pauperism fixed attention on the incomprehensible fact that poverty seemed to go with plenty […] [leading people] to explore the meaning of life in a complex society (89).

Society became doubly bifurcated into progress/perfectibility versus determinism/damnation and harmony/self-regulation versus competition/conflict, leading a new set of ideas to enter social consciousness. 

Under the mercantile system, there existed a Code of Labor consisting of two primary laws regarding labor organization: the Poor Law (1536-1601), which applied to the unemployed and unemployable; and the Statute of Artificers of 1563, which dealt with the employed and rested on the enforcement of labor, seven years’ apprenticeship, and public officials’ assessment of yearly wage.

Informally, the first to go for the Statute of Artificers was the apprenticeship clauses, followed by the yearly wage assessments, although they were formally repealed in 1813 and 1814, respectively; Polanyi writes that “[t]he enforcement of labor in the countryside was discontinued little by little” (91). In terms of English society, the “poor” referred to those without land (i.e., commoners), and included paupers, whose beggary and repeated vagrancy were severely punished. The locally-administered Poor Law of 1601 required able-bodied poor to be put to work to earn the subsidies of the parish, which used the taxes and rates levied on rich householders and non-rich tenants. Often, the institution of the Poor Law was not effective, although it maintained social cohesion.

Polanyi writes that “[a]fter the Restoration the Act of Settlement and Removal was passed to protect the ‘better’ parishes from the influx of paupers” (92). Commoners were therefore restricted in occupation and mobility and forced to work. In 1795, during the Industrial Revolution, the Act was partially repealed to restore laborer mobility and abolish parish serfdom; Speenhamland was enacted, amounting for bare subsistence, while contradicting the requirements of the national supply of laborers by the owners of the Industrial Revolution’s machines, who were bent on a global economy.

However, Speenhamland’s magistrates did not understand the wider economic developments and therefore did not see this apparent contradiction. They did not link the rise in rural pauperism to the increase in world trade, instead attributing it to the Poor Law administration:“Up to 1785 the English public was unaware of any major change in economic life, except for a fitful increase of trade and the growth of pauperism” (94). Much literature on the growth of pauperism emerged, citing a variety of causes, including grain scarcity, irregular urban employment, drug habits, new work animals, and tea, among others.

Polanyi attributes the growth of pauperism to an increase in invisible unemployment, as early excessive trade fluctuations resulted in rapid increases in unemployment and underemployment, which was more apparent than the general increase in trade. However, most people did not see the connection between the urban manufactories and rural pauperism. Polanyi hypothesizes that people migrated to urban manufacturing sites for a short period of time before returning to their rural roots, as no decrease in rural population was noted. Trade’s dislocating effects—such as enclosures and the war on cottages—caused much of England’s social damage in the countryside, while the urban centers witnessed great uncertainty of labor conditions. In the decade following the Seven Years’ War (1763), both unemployment and trade increased as overpopulation became a growing concern. Rioting and rumors therein were rampant. Something had to be done.

People thought to reduce the seemingly-contradictory rise in both wages and pauperism by lowering wages to employ more people; however, Polanyi argues that these two are only contradictory within a market system, which England did not have. Speenhamland Law sought to protect rural areas “from social dislocation, reinforce traditional authority, prevent the draining off of rural labor, and raise agricultural wages without overburdening the farmer” (99). The local nature of SL was its downfall, as it destroyed the Elizabethan Poor Law system, fusing the workhouse with the poorhouse. In SL, the rural middle-class bore most of the taxes and created a growth in indentured labor, negatively affecting the productivity of labor and depressing standard wages. By the 1830s, rates were falling despite an increase in national income, “yet the criticism of Speenhamland became more and more violent owing to the fact, so it appears, that the dehumanization of the masses began to parlay[z]e national life, and notably to constrain the energies of industry itself” (102).

Authors and philanthropists descried the albeit unavoidable social catastrophe that Speenhamland precipitated while economists stayed largely silent. New industrial towns lacked occupants other than laborers and quickly turned to slums of immigrant peasants. The only social relations that the laborer had were economic in nature; he could either be defined by his work or he was a pauper, thereby defined by his lack of work. Polanyi believes that this impossible definition and its subsequent popular demoralization were the worst possible outcomes of Speenhamland:“Once a man was in the poorhouse (he would usually land there if he and his family had been for some time on the rates) he was morally and psychologically trapped” (104). Polanyi claims that the greater one’s vices, the more s/he was paid under Speenhamland, leading to an increasing cycle of vice and poverty. He speaks of the struggling middle class’s desire for a new class of independent laborers.

Speenhamland’s abolishment allowed for the nascence of the modern working class, whose distrust of public relief and state action and insistence on respectability and self-reliance continued for generations. This new class transformed England into a market economy, as much of English society became vehemently opposed to workhouses and Speenhamland’s right-to-live philosophy, and new laws, such as the Parliamentary Reform Bill of 1832, reiterated these convictions. Polanyi writes that “[t]he traditional unity of Christian society was giving place to a denial of responsibility on the part of the well-to-do for the condition of their fellows” (106), creating two inseparable nations of unimaginable wealth and poverty.

Prior to Speenhamland, no one knew where poverty came from, although philosophers believed that it was inseparable from progress and wealth. Economists believed that trade, which had hit a recent swell, would soon fall. The vagrant poor had arisen in England in the first part of the semi-feudal 16th century, becoming a rebellious danger in the latter part of the century before they were mostly forgotten in the proceeding, semi-colonial, 17th century: “From this time onward, opinions about pauperism began to reflect philosophical outlook [mirroring] views of existence as a whole” (110).

Quakers first realized that involuntary unemployment reflected defective labor organization. John Bellers suggested the College of Industry to make use of the poor’s leisure time, structuring later socialist thought and, eventually, to be used by capitalists for profit. A century later, Jeremy Bentham planned to use first convicts then paupers to run his brother’s new machinery via the panopticon’s constant observation of exploitative labor. Bentham classified the poor, grouping them into categories of unemployment. In 1819, Robert Owen republished his own much-larger approach to Bellers’ Colleges of Industry that reflected the growth in human misery, applying it in the National Equitable Labor Exchange (1832) that eventually failed but resulted in the Trades-Union, which shaped social policy on poverty for the next 100 years.

Some criticized these policies, such as Defoe, whose pamphlet “insisted that if the poor were relieved, they would not work for wages; and that if they were put to manufacturing goods in public institutions, they would merely create more unemployment in private manufactures” (114). Mandeville shallowly reflected this, but his writing gained more popularity, as it related to the Puritanical thought that mobile wealth, not poverty, was an issue of morality.

However, all writers seemed to agree that human suffering would provide solutions to labor. People believed that the largest populations were necessary for cheap labor, which would allow manufacturing, trade, and wars to flourish, refusing to see that pauperism was an evil, with the labor of the poor being exploited for economic profit. However, people did not really understand either the new wealth or new poverty but “were convinced that an appropriate organization of the labor of the unemployed must produce a surplus” (115). Bellers wanted to use it for other sufferers, Bentham for shareholders, and Owen for the unemployed themselves, all of whom radically misunderstood the nature of vastly-increasing pauperism in the developing market economy. 

Polanyi uses Adam Smith to bookend the close of the invented state’s age, made famous by More and Machiavelli, and believes that Townsend marks the new age of Ricardo and Hegel, in which society subjected the state to its own laws. Polanyi discusses Smith’s founding of economics and Smith’s belief that national wealth, a function of their national life, was subordinate to the community: “in his view nothing indicates the presence of an economic sphere in society that might become the source of moral law and political obligation. Self-interest merely prompts us to do what, intrinsically, will also benefit others” (117). Smith excluded natural factors, except human labor, from his discussion of wealth.

Townsend uses a Robinson Crusoe-esque story of goats and dogs to demonstrate that food quantity regulates population; although the tale has not been corroborated, Polanyi argues it is the basis for Darwinian natural selection and Malthusian population laws. Townsend applied this theorem to the poor, introducing the laws of Nature to human affairs. Previous philosophers, such as Hobbes, had looked at human laws and government, but Townsend maintained that balance existed in Nature without government interference, minimizing the necessary amount of governance. Townsend bifurcated society into property-owners (the dogs) and laborers (the goats), arguing that hunger would act as governance. Townsend’s argument reflected the market system’s emerging society, including the nationalization of grain prices, market price and income stability, and social hierarchy sans legal privileges or disabilities:

The biological nature of man appeared as the given foundation of a society that was not of a political order [….] economists presently relinquished Adam Smith’s humanistic foundations, and incorporated those of Townsend [….] Economic society had emerged as distinct from the political state (120).

Burke equated the danger for white masters of large slave populations in the West Indies with the increase in English unemployment, arguing for the farming-out of paupers via the roundsman system. Employers took over the authority and administration that had previously been the responsibility of the church or government, and Elizabethan legislation was abolished as labor became a commodity: “The laws of commerce were the laws of nature and consequently the laws of God [….] Let the market be given charge of the poor, and things will look after themselves” (122).

Bentham agreed that no punishment besides hunger, which was natural, was necessary to maintain balance and that poverty was the price to be paid for surplus and prosperity. Townsend argued for the abolition of poor relief, believing philanthropist charity to be nobler than required aid. In a different vein, Burke advised that the suffering of the poor was the natural condition of mankind, and therefore should be exalted. Bentham rejected the preeminence of economics over politics, believing that the Industrial Revolution’s great gift was social—rather than technical—innovation, as the discovery of economics transformed society by establishing the market system, whereas the machinery was developed by uneducated artisans. Bentham believed he had discovered a new social science based on utility concerning morals and legislation. In 18th-century England, statistics were not available, so science concerning population or trade was mostly speculative.

Around the time of Bentham’s death in 1832, there was a similar end to exploration of society, as businessmen became the new engineers of society, deciding for themselves how their activities should operate: “Once the market organization of industrial life had become dominant, all other institutional fields were subordinated to this pattern” (126). Bentham’s Panopticon sponsored a variety of proposals, many of which necessitated legislative support.

Polanyi discusses the times of censorship and repression surrounding Malthus’s response to Godwin. Any ideas of democracy were political, not economic, in nature, and therefore had no bearing on the poor’s discontent:“The so-called ‘poor rate’ meant an economy for the employers, and a loss for the industrious workman who expected nothing from public charity. Thus the pitiless interplay of interests had turned a charitable law into a bond of iron” (127-28). New laws of population and wages rested on this bond. Malthus, Burke, and Bentham falsely believed that Speenhamland would force laborer wages up and vehemently opposed it. People looked to Townsend’s naturalism for justification for lowering laborer wages, leading in part to the naturalism evident in orthodox economics’ foundations. Neither Ricardo nor Malthus understood how capitalist systems worked.

Polanyi believes that Smith did not understand elements of price, although Smith correctly ascertained that a society cannot flourish if its majority is starving. However, Smith believed in the falsity of trickle-down wealth. Ricardo believed that food shortages were to blame for the falsity of Smith’s supposition.

Polanyi discusses three consequences for the emergence of economic theory during Speenhamland: 1) the confusion of classical economists, 2) the inevitability of the result, and 3) the consequences of the solution that involved the naturalization of economic laws. He writes that “[t]he true significance of the tormenting problem of poverty now stood revealed: economic society was subject to laws which were not human laws [….] From this time onward naturalism haunted the science of man” (131).

Classical economists like Ricardo and Malthus attempted to save the poor from the wretched fate their theories proposed. Ricardo attempted to humanize labor by investing it with the unique aspect of value. Polanyi believes that only Owen understood the importance of society, as his socialism “was based on a reform of human consciousness to be reached through the recognition of the reality of society” (133). Owen cautioned against the inevitable evils of leaving manufacturers to progress on their own, such as the decrease in individual and social happiness, advising these be rectified through legislation because poverty was a social problem, not an economic one.