Karl Polanyi and Neoliberalism

Barış Kaan Basdil

Abstract

This article intends to offer a discussion on the growth-led development approach upheld by the neoliberal school, by referencing some critical approaches, and focuses on Karl Polanyi’s criticism based on his book, The Great Transformation and Pat Devine’s article, Karl Polanyi.

It was the best of times…

Why do we do economic modeling? Why bother with complicated mathematical models, saddle paths and differential equations? “… we use math not because we are smart, but because we are not smart enough.” argues Dani Rodrik. We use maths because we cannot understand the mechanisms through which people interact, with the naked eye. As a consequence, we try to build models in order to represent the world as faithfully and as efficiently as possible. In fact, we have been able to do so, with neoclassical models such as the Ramsey-Cass-Koopmanns model. Using such models, and with the help of data, we can infer relationships between variables.

Figure 1 shows the relationship between log GDP per capita and life expectancy. Although it would be indisputable that there is a positive correlation, there is not enough evidence to infer direct causation between the two.

Natural Logarithm of GDP and Life Expectancy. Courtesy of Kamil Yılmaz.

Furthermore, we know that growth is a measure of central tendency, meaning it conveys no information about the distribution of that growth among different segments of society. In fact, when we take a closer look we see that global income growth has been very much unequal in the post-80s era, as seen in Figure 2.

Global Income Growth Between 1988 and 2008. Courtesy of Kamil Yılmaz.

Lucas, in his famous article commonly known as the “Lucas Critique”, argues that these numerical relationships are only probabilities, and no way are deterministic relationships (Kamil Yılmaz). In fact, it is in the second page of his article that he states:

“I shall argue that the features which lead to success in short-term forecasting are unrelated to quantitative policy evaluation, that the major econometric models are (well) designed to perform the former task only, and that simulations using these models can, in principle, provide no useful information as to the actual consequences of alternative economic policies.” (Robert Lucas)

So already we have some doubts regarding the sufficiency of growth for nationwide development. In addition, the holders of this paradigm de facto turned the classicals on their heads and acted as if capital was the only input of production (and therefore value). The convergence debate illustrates this clearly. Absolute convergence theory posits that countries with lower per capita capital levels will grow faster than those with less, resulting in a global convergence. Barro was the first to famously discredit this view in his 1991 article:

“Thus, poor countries tend to catch up with rich countries if the poor countries have high human capital per person (in relation to their level of per capita GDP), but not otherwise.” (Robert Barro)

The “geist” before this approach can be found in neoliberalism, an approach to capitalism that leaves all economic processes to the market and market alone. David Harvey defines neoliberalism as “in short, the financialization of everything” (David Harvey). The government only provides the physical and intangible infrastructure needed in order for the market to function efficiently.

Karl Marx rightly and avant-la-lettre criticised this approach with a term called “commodity fetishism”. He believed that capitalism rips economies and markets from the sphere of the people, and that market processes are between money and goods, not among people.


Karl Polanyi and Neoliberalism

A similar criticism came from Karl Polanyi, who argued that economic processes were not entirely independent from, but rather embedded in social processes. Furthermore, parallel to Harvey, he argued that what neoliberalism is founded on, the free trade of land, labor and capital, is inhumane.

Karl Polanyi was a Hungarian social scientist, who taught at Columbia University. He attended worker protests that took place in Oxford and London in the thirties. He is primarily known for his work on pre-capitalist societies and economies of societies in the Antiquity (Karl Polanyi).

He argued that capital, land and labor could not be seen as inputs of production, because they were not inputs of production. Capital was another name for money, which is a store of value and unit of accounting. Land was another name for nature and labor for men, and by removing them from what they are, and acting as they were steel, we would cause their deterioration. For example, it is easy to store steel, but it would be rather hard to store labor as one would steel. Similarly, acting as if land is replaceable would eventually lead to its deterioration.

Pat Devine quotes Polanyi:

“These inputs are labour, land (non human nature) and money, but although they are treated as commodities and bought and sold, they are either not produced at all (e.g. non human nature), or if they are, they are not produced for sale in markets (e.g. labour and money. This is why Polanyi calls them “fictitious commodities.” (original emphasis, Pat Devine).

So already we can see that Polanyi would object to the foundations of national accounting, let alone growth being a proxy of development.

Another objection of his to neoliberalism would be to its market fundamentalism. He argued that there were four forms of integration, namely reciprocity, householding, exchange and redistribution. Reciprocity would refer to the kind of integration where our actions stem not form our self interests, but rather a feeling of kinship and acquaintance. Householding would refer to the activities that occur within the household, as mainly emphasized by the feminist school of thought. Exchange would refer to activities we call quid pro quo. Finally, redistribution refers to allocations determined by a central authority. Neoliberalism, in only holding up exchange, neglects all other spheres of societal integration, and fails to faithfully reproduce humanly activities on the economic whiteboard.

Quoting Devine:

“Polanyi argued that prior to the establishment of the capitalist self-regulating market system, economic activity was organically embedded in society and nature. (…) The development of capitalism ruptured this organic integrated unity.” (Pat Devine)

So in addition to the philosophy of neoliberalism, Polanyi would also object to its methodology as well.

A related perspective to what we have discussed before is the environmental one. Polanyi, who objected to the commodification of land in order to prevent its deterioration would wholeheartedly object to the current environmental pollution and the consequent environmental crisis. Adhering to the environmental Kuznets curve literature, we see that in order for countries to develop, they initially consume high amounts of carbon, and their carbon consumption decreases significantly after development. This alone raises so many questions. Polanyi would condemn this type of growth, and would probably ground his objections on the separation of the economic and social spheres.

Nevertheless, I believe it is important to highlight that Polanyi was not altogether against the institution of markets. As discussed, he believed that markets provided one of the societal forms of integration.

“[The self-adjusting market] would have physically destroyed man and transformed his surroundings into a wilderness.” (Pat Devine)

He emphasized that it is not merely markets, but self-regulating markets that would bring about the destruction of man and his surroundings. He argues that:

“…the need for trade and markets is not greater than the need for reciprocity and redistribution” (Karl Polanyi), which can also be read in the opposite direction. Fernand Braudel also highlights the distinction between capitalism and markets. He dates the development of the market sturcture as we know it to the beginning of the fifteenth century. (Fernand Braudel)

In fact, Ayşe Buğra argues that Polanyi broke away from scientific socialism in an early age, despite his shared opinions with Karl Marx, in the introduction of The Great Transformation. (Karl Polanyi)

Conclusion

In this paper I intended to highlight some objections to growth-led development, referencing Lucas, Harvey, Barro, Marx and Braudel, with special emphasis on Karl Polanyi. By breaking down a complex phenomenon such as development to growth rates, neoliberal economists seem to disregard its social and environmental consequences. What makes Polanyi such an important figure is that he does not shy away from making his analysis long-term, and that he correctly identifies mechanisms with which our society functions. For example, he argued that for each move to further markets among other integration mechanisms, societies would engage in counter-movements to balance that. An example of this phenomenon would be the nineteenth century unrests in Europe, and the twentieth century experiment of the Soviet Union. This article is in a way in line with this counter-movement, in exposing some drawbacks of the self-regulating market.

Epilogue

This was a final assignment for a course titled World Economic History, given by Professor Fikret Adaman of Boğaziçi University. He introduced me to Polanyi a semester ago as I was taking History of Economic Thought, also taught by him. I believe Polanyi is an important figure to studybecuase he offers a broader perspective of “societal integration” beyond markets. Apart from this, The Great Transformation is really a one-of-a-kind book with very interesting and relevant perspectives on society and economics. It is a must-read for those who wish to drift away from neoliberal thinking, and want to explore a lesser-known but still as much striking alternative.

References

Karl Polanyi, The Great Transformation.

Robert E. Lucas, Econometric Policy Evaluation, A Critique.

Robert J. Barro, Economic Growth in a Cross Section of Countries.

David Harvey, A Brief History of Neoliberalism.

Pat Devine, Karl Polanyi.

Fernand Braudel, A Brief History of Capitalism.

Dani Rodrik, Dani Rodrik’s Weblog.

Kamil Yılmaz, Presentation in Bilim Akademisi Social Sciences Summer School in Economics, 2020.

Barış is a co-founder and the editor-in-chief of Tablet. He is available through kaanbasdil@gmail.com.