Tuesday, April 19, 2016

Robert Kuttner — Karl Polanyi Explains It All

Robert Kuttner provides an excellent summary of Karl Polanyi's The Great Transformation (download).
In the 1944 catalog of publisher Farrar & Rinehart, the entry for The Great Transformation appropriately compares it to Keynes’s succinct 1919 classic, The Economic Consequences of the Peace. But while Keynes’s book was a best-seller, turning its author into a celebrity, The Great Transformation sold just 1,701 copies in 1944 and 1945.
The New York Times reviewer, John Chamberlain, was savage: “This beautifully written essay in the revaluation of a hundred and fifty years of history adds up to a subtle appeal for a new feudalism, a new slavery, a new status of economy that will tie men to their places of abode and their jobs.” If that sounds just like Polanyi’s nemesis, Hayek, it was for good reason. Chamberlain had just written the foreword to Hayek’s The Road to Serfdom, also published in 1944. While Hayek’s book was adapted in Reader’s Digest and became a best-seller, Polanyi’s languished.
By 1946, however, Polanyi had been reviewed, mostly favorably, in major newspapers and social-science journals, and he was slowly attracting a following. At 61, Polanyi was offered his first real academic job in 1947 at Columbia, where he taught until 1953. But in the Cold War chill, the State Department refused to give a permanent visa to Ilona, and she relocated to Canada. After attempting to commute from Toronto, Polanyi spent his final years settled there, returning to an early scholarly interest in economic anthropology.
Comparison of The Great Transformation with The Road to Serfdom is in a sense the story of what would lead in Anglo-American economics to the conflict between Keynes and Friedman, mediated by Paul Samuelson. The first textbook of Keynesianism was Lorie Tarshis's The Elements of Economics (1947), which was pilloried as "pink" if not "red." Samuelson published his textbook that would become the standard in 1948. Eventually, even Samuelson's "bastard Keynesian," the purported synthesis of Keynes and neoclassical economics was over turned, which was largely attributed to the Chicago School and Milton Friedman. Karl Polanyi's The Great Transformation was relegated to a footnote whereas the economic liberalism of Hayek and Friedman became dominant. As result, few are familiar with Polanyi's work and fewer still read him.

Now, with economic liberalism in retreat and the moral economy and the good society reentering the debate forcefully, Polanyi's work is also experiencing a resurrection in social and political theory and political economy. Polanyi favored managed capitalism (social democracy) over laissez-faire capitalism based on free market fundamentalism (economic liberalism).

Karl Polanyi is not to be confused with his brother Michael, a chemist and libertarian social and political philosopher. Friedrich Hayek got the concept of spontaneous order from Michael Polanyi. In fairness to Michael, he was, like Hayek, no Murray Rothbard either. Michael made contributions to chemistry for which he is better known than as a political philosopher, and Michael's son John was awarded a Nobel in chemistry. Talented family.

Both Michael and Karl reacted the extremes of Marxism. But Karl rejected Michael's assumption that free market fundamentalism results in spontaneous order that is socially beneficial. Karl attempted to navigate between the free market fundamentalism that conflated economic liberalism with social and political liberalism, and the Marxism that had resulted in totalitarian communism. 

Like Marx, Karl Polanyi's approach was historical, but unlike Marx he did not postulate "iron laws," which he criticized liberal economist for doing also in seeking to model "the market" with purportedly universal laws of a natural system like 18th and 19th century classical physics. Being unnatural such attempts at universalization would naturally lead not only misunderstanding theoretically but also to economic crisis and social discord if applied rigidly. In fact, it led to domestic conflict and war historically.
Looking backward from 1944 to the 18th century, Polanyi saw the catastrophe of the interwar period, the Great Depression, fascism, and World War II as the logical culmination of laissez-faire taken to an extreme. “The origins of the cataclysm,” he wrote, “lay in the Utopian endeavor of economic liberalism to set up a self-regulating market system.”
Contrary to libertarian economists from Adam Smith to Hayek, Polanyi argued, there was nothing “natural” about the free market. Primitive economies were built on social obligations. Modern commercial society depended on “deliberate State action” by and for elites. “Laissez-faire” he writes, savoring the oxymoron, “was planned.”…
Libertarian economists, who treat the market as universal—disengaged from local cultures and historic time—are fanatics whose ideas end in tragedy. Their prescription means “no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system.”…
Longish but detailed and a good read. If you don't have time to get to it now, save it for the weekend. We are going to hearing a lot more about Polanyi, Keynes, Lerner, and Minsky, etc. as the debate shifts and people wake up to the facts that history rhymes and many of the issues of today have already been analyzed in the past to good effect. There are shoulders of giants to stand on.

The American Prospect
Karl Polanyi Explains It All
Robert Kuttner | co-founder and co-editor of The American Prospect, and Meyer and Ida Kirstein Visiting Professor in Social Planning and Administration at Brandeis University's Heller School for Social Policy and Management
ht Dan Lynch in the comments


Random said...


Need some help on reddit Tom :)

Trolling libertarians.

"No - that is not the way jobs work. Consumer demand creates the need for workers. The federal government can neither mandate nor regulate consumer demand and therefore cannot merely create productive self-sustaining jobs."

"It seems that NAIRU is a gray area, because it's not a policy prescription but rather a metric used to direct monetary policy. This is outside the scope of libertarianism.
Ideologically, libertarianism would be against a monetary monopoly, which would limit the efficacy of central bank policy. Any central bank would need to compete with alternatives."

yeah.... ;)

Tom Hickey said...

That's in their model, which they assume is congruent with reality. No arguing with that since the way they approach it is non-falsifiable, meaning that it is an ideology (dogmatic).

The simple answer is that government can create demand by injecting currency into markets either through expenditure or transfers, both of which credit bank accounts with non-government net financial assets, which the private sector cannot generate since all private sector transactions sum to zero as an accounting identity. Crediting bank accounts increases potential demand by increasing M1. The further down the income distribution the injection falls, the greater the possibility of consumption rather than saving. Increased spending in an economy running at less then optimal output will result in firms increasing quantity to meet increased demand, which implies that firms will add employees. This is a a result of the government contribution.

They will respond that this just increases the money supply and results in inflation without influencing employment. This assumes that Q is constant which is only the case at full employment. Additional demand will either increase domestic prices. (But this is only true if imports don't soak up the difference.)

Waste of time arguing with them.

Bob said...

We are going to hearing a lot more about Polanyi, Keynes, Lerner, and Minsky, etc. as the debate shifts and people wake up to the facts that history rhymes and many of the issues of today have already been analyzed in the past to good effect. There are shoulders of giants to stand on.

I'm afraid that "we" will not include the average Joe and Jane on the street.

Random said...

"many of the issues of today have already been analyzed in the past to good effect. There are shoulders of giants to stand on."

IMO this is bad framing.

It's not so much using old ways as building a new and exciting future.

Calgacus said...

Polanyi favored managed capitalism (social democracy) over laissez-faire capitalism based on free market fundamentalism (economic liberalism).

This kind of "framing" sets up the questions wrongly. There isn't any other kind of capitalism or monetary economy or market other than managed ones. There isn't any other kind of money than fiat/credit money. We have managed capitalism right now, managed for Bernie's billionaire class.

It's always managed, not because of any human frailty or vice - but because the concepts involved simply don't make any sense, are not definable, without presupposing "management". A completely spontaneous market order is as wrong as spontaneous generation in biology. Bad economics rests on bad accounting & bad philosophy that forbids asking such questions.

Tom Hickey said...

Right, Calgacus. In my haste I stated Polanyi's position wrongly. He did not see the issue as between managed capitalism and laissez-faire for the reasons you state.

The social, political and economic world are not divorced from each other in reality, only intellectually. The real world is cultural and institutional in contrast to the so-called natural world of economic liberalism in which spontaneous order arise from the interaction of economic agents. That's only a conceptual model and owing to humans being social and political animals in addition to economic ones, things just don't world as economic liberals fantasize. Homo economicus is a mythical beast, whereas him socialis is real.

So it is not a matter of which is superior, managed capitalism or free market fundamentalism. Between the two only managed capitalism is possible. The issue is the type and degree of planning and management involved. The notion of reducing supposed market imperfection to approximate a perfect market in order to arrive at a spontaneous order that his naturally beneficial for all is an assumption with no basis in fact. Socially, attempts to do so have been disastrous.