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Karl Polanyi’s Great Transformation and the Countermovement to Capitalism

Media pundits hail the economist Karl Polanyi as a brilliant theorist of capitalism and a thinker for our time. In order to understand Polanyi’s ideas, however, we need to see him in the context of his own time: Europe’s "age of catastrophe" in the early twentieth century.

Karl Polanyi was born in Vienna, Austria in the last decades of the nineteenth century. Pictured here is the destruction of the Schönbrunn Palace in Vienna during World War II, during which his book The Great Transformation was published. (Photo by ullstein bild via Getty Images)

Financial Times columnist Martin Wolf recently noted the enduring political influence of two books published during the Second World War by men who were born in Vienna in the late nineteenth century: Friedrich Hayek’s The Road to Serfdom and Karl Polanyi’s The Great Transformation.

Hayek was, of course, one of the progenitors of neoliberalism, the dominant economic philosophy of our time. Yet for Wolf, despite his own long-standing neoliberal inclinations, Polanyi seemed “much the better guide” to understanding the present. His Financial Times colleague Jonathan Derbyshire nominated Polanyi as a fantasy dinner guest to accompany the philosophers Michel de Montaigne and David Hume. Meanwhile, the New York Times published a comic inspired by The Great Transformation.

Polanyi is more than a fashionable reference point for liberal pundits, however. His name has been linked to a variety of socialist projects. Most recently, and with good reason, media commentary has identified him as a “democratic socialist” precursor of Jeremy Corbyn and Bernie Sanders. Long before that, The Great Transformation had become a touchstone for left critics of neoliberalism.

There seems to be a broad consensus that Polanyi is a thinker for our times. But if we want to fully appreciate the strengths and shortcomings of his ideas, we need to look at Polanyi in the context of his own time, the period in European history that Eric Hobsbawm dubbed “the age of catastrophe.”

A Utopian Endeavor

In The Great Transformation, Polanyi argued that the events through which his generation was living — two world wars, fascism, and the Great Depression — formed an interconnected “cataclysm,” the origins of which could be traced to “the utopian endeavor of economic liberalism to set up a self-regulating market system.”

What was it about the market system that had brought the world to ruin? At bottom, Polanyi insisted, it was the fact that the self-regulating market treats land, labor, and money as commodities. In subsuming these vital elements of human life, the market subjects society to its anarchic and perverse laws.

However, the very extremism of the self-regulating market ensures that it can never reign unchallenged. This was Polanyi’s second thesis, positing that the subordination of life and nature to a calculus of purchase and sale will give rise to such severe consequences that a clamor for “social protection” becomes inevitable.

“Countermovement” was the term he coined to describe this pressure. In the nineteenth century, the countermovement had acted in support of market expansion, by reining in its destructive tendencies; in the following century, however, the compatibility of market expansion with the countermovement broke down.

A major section of The Great Transformation charted the “disruptive strains” that brought the market system to its knees in the early twentieth century. Protectionist measures and organizations, such as tariff policies and trade unions, were needed to prevent the destruction of society by the “blind action” of the market. Yet these same measures led to deepening economic slumps.

Polanyi subscribed to the pre-Keynesian beliefs that state interference with markets causes them to malfunction, that higher wages lead to lower investment, and that strong labor movements diminish the recuperative powers of capitalism. Regulated capitalism with its inelastic markets would be inherently unstable, he argued.

Revolutionary Decade

As the global liberal order broke down, Polanyi believed, the split between politics and economics would be sutured. States were developing into what he called “more complete and coherent” national units, whether in a fascist or progressive form — the latter being exemplified for Polanyi by the regimes that Roosevelt and Stalin presided over in the United States and the Soviet Union.

This was the subject of a section of The Great Transformation entitled “Conservative Twenties, Revolutionary Thirties.” To many readers, the heading seems like an editorial blunder. Surely he meant to refer to the revolutionary twenties instead?

Did that decade not commence with a series of upheavals that overturned old regimes, from Russia to the Rhineland, followed by risings in Italy, Spain, and Cuba, and radical student struggles across China and Latin America? Did the 1930s not see the extinguishing of those movements in the torture chambers of Moscow and Berlin, and on the streets of Vienna, Barcelona, Beijing, and beyond?

But this was no slip. Polanyi’s dichotomy between conservation and revolution referred not to collective action or labor movements but to liberal institutions: Were they being restored, as in the 1920s, or giving way to statist alternatives? In his reading, Stalin’s regime was a forerunner of the “great transformation,” while Hitler’s “hitchhiked” upon it.

Crisis Theory

The Great Transformation became influential among critics of neoliberalism from the 1980s onward. They could repurpose its withering critique of Victorian market fundamentalism and deploy it against the Ronald Reagan/Margaret Thatcher revival of such ideas.

Today, however, the unfolding of neoliberalism has passed beyond its vanguard phase (1970s–1980s) and its years of consolidation (1990s–2000s). In the wake of the 2008 Great Recession, and now again during the COVID-19 crisis, economic nationalism, industrial policy, and Keynesianism have all made partial comebacks.

Neoliberalism has taken a zombie turn: it lacks coherence but still does not have to face viable alternatives — although when we hear Joe Biden’s national security advisor Jake Sullivan calling for the United States to “move beyond neoliberalism,” we may wonder if this is a straw in the wind.

The fallout from the 2008 crisis brought opportunities for left-wing politicians like Bernie Sanders, but also for Donald Trump and similar ghouls elsewhere in the world. As the times change, Polanyi is increasingly being read as a theorist of the politics of capitalist crisis, and in particular the rise of the far right.

Fascism, for Polanyi, was not a distant or abstract enemy. He was unable to return to Hungary when its protofascist ruler Admiral Miklós Horthy unleashed a White Terror following the short-lived Soviet republic of 1919. After clericofascists came to power in Austria, he had to flee to Britain.

During the Second World War, the pounding of British cities by Nazi bombers supplied one reason for Polanyi’s flight to the United States, although the truly horrific blows were landing on his family and friends who had remained in central Europe. His younger sister, her husband, and his nephew-in-law were all arrested and killed by the Nazis.

After Polanyi’s arrival in America, the US authorities permanently barred his wife, Ilona Duczyńska, from joining him. The background, once again, was the impact of fascism — this time US-style.

It was pressure from the Klan and its political allies in 1924 that had pushed Congress to enforce strict annual quotas limiting immigration from eastern Europe. The more immediate causes of her exclusion, however, were anti-communist decrees and US government officials with fascist sympathies, such as Roosevelt’s ambassador to Britain, Joseph Kennedy, and the assistant secretary of state Breckinridge Long.

From Ricardo to Hitler

Even as he suffered from the ravages of fascism, Polanyi was trying to make sense of it. The Great Transformation should be read not only as a critique of “market fundamentalism,” but as a theorization of Europe’s interwar fascist irruption.

In Polanyi’s analysis, fascism was a furious last stand by embattled capitalist elites as they confronted working-class revolt and a series of crises that had culminated in the Great Depression. He saw that slump as the outcome of disruptive strains — in particular, the tensions that arose from the effort of capitalist economies to maintain the gold standard. For Polanyi, the gold standard was the institutional expression at the global level of the free-market utopia.

Karl Polanyi. Max Planck Institute

He traced the origins of the free-market utopia in turn back to the writings of Thomas Robert Malthus and David Ricardo. For Ricardo in particular, the essential tenet of economic liberalism was that land, labor, and money should be treated as commodities. Hence Polanyi’s famous dictum: “In order to comprehend German fascism, we must revert to Ricardian England” — the subject of the main chapters of The Great Transformation.

At this point we should note an ambiguity in Polanyi’s argument. Sometimes he wrote as if the “self-regulating” market economy did come into being, at least in Britain. Elsewhere, he saw it as a purely utopian aspiration, insisting that the full commodification of land, nature, and money would destabilize and disintegrate human society.

The Countermovement

In Polanyi’s schema, the “countermovement” inevitably arose to resist that destructive course, preventing the economy and the state from becoming fully liberal. Ricardo had assumed that, if a state tried to intervene in the self-regulating market, spontaneous social forces would resist its efforts. Polanyi turned this assumption on its head, arguing that the imposition of unrestricted market competition upon society would spontaneously provoke a protective countermovement, manifested in some countries in a “vast extension of government functions,” and in others through “Trade Unions, Cooperatives, the Churches.”

The countermovement would press for state intervention in the form of factory laws, social legislation, tariffs, central banking, and the management of the monetary system to check the market’s destructive effects. It would empower the state as the guarantor of basic social welfare and a modicum of equality. The state, as Polanyi saw it, thus became the “chief organ of social self-protection.

Socialism, in Polanyi’s understanding, was “the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society.” It is with reference to this definition that Patrick Iber and Mike Konczal have described the socialism of Bernie Sanders as “very Polanyian.”

As Michael Burawoy has noted, the definition contains “more than a whiff of teleology.” The coming of socialism may not be preordained, strictly speaking, but if it constitutes “an inherent tendency of industrial civilization,” its victory appears almost inevitable. There is a clear parallel here, Burawoy notes, with Eduard Bernstein’s notion of evolutionary socialism, which envisaged a “law-like expansion of democracy from the political to the economic arena.”

In a liberal democracy, Bernstein believed, the expansion of the proletariat would tend to translate into an increase in workers’ political power, culminating in a gradual transition to socialism. Until that point was reached, the labor movement could best enhance its influence by forming coalitions with the “progressive” bourgeoisie. Their shared enemy was not capitalism itself or the capitalist state but the small camp of private interests who, refusing to see the light of reason and social justice, resisted democratization.

Bernstein and Bauer

Burawoy’s comment is astute, for the young Polanyi had indeed found inspiration in Bernstein and the “liberal socialist” movement of which he was a leading voice. In his Budapest days, he had belonged to a circle of “bourgeois radicals” for whom Bernstein was an intellectual authority. His mentor, Oscar Jászi, was a personal friend of the German socialist. Polanyi, like Bernstein, felt confident that democracy would march forward to socialism.

Later, after his move to Vienna in 1919, Polanyi’s political orbit shifted closer to the Austro-Marxists — especially Otto Bauer, a leader of Austria’s Social Democratic Party (SDAP). This was a critical moment in the history of Europe’s socialist movement. Mass political strikes and antiwar demonstrations were sweeping through the region. Sailors of the Austro-Hungarian navy mutinied, and revolutionary socialists set up council republics in Bavaria and Hungary.

The experience of war and revolution was driving a wedge between the revolutionary and patriotic wings of European socialism. The former tendency opposed the war effort of their national states from 1914, the latter — including Bauer’s SDAP and the SPD in Germany — supported it. The former supported a model of soviet democracy based on workers’ councils, the latter a liberal-democratic system based on parliaments.

In 1919, Austria was in the throes of revolt. The following year, SDAP government minister Julius Braunthal could still maintain that “the Austrian working class has had the ability ever since November 1918 to establish its own power, the dictatorship of councils, at any time it wishes.” Otto Bauer, too, was convinced that Austria’s workers’ and soldiers’ councils had the strength to push toward a situation of dual power.

Missed Opportunity

Bauer gained a reputation as — in the words of Peter Loewenberg — a “cautious, balancing, obsessional theoretician who uses his superior intellect to avoid making decisions.” As Polanyi’s wife, Ilona Duczyńska, observed, Bauer’s “brilliant mind” and rhetorical talents underpinned his influence on the socialist left. Yet at every moment of decision, he was “incapable of action.” According to Duczyńska, Bauer rooted his gradualism and passivity in a deterministic conception of social progress.

Yet Bauer was perfectly capable of acting to douse the flames of revolt. Although the soldiers’ and workers’ councils impressed him, he fought tirelessly against the formation of a councils’ republic. The councils, Bauer later reflected, could have inaugurated a soviet republic at any moment and “no power was in sight to stop them.” However, the aim of the SDAP leadership was to have working people accommodated within the existing political architecture, not to demolish that structure.

Bauer justified his actions and inactions as having been necessary to prevent “catastrophe” in the form of a counterrevolutionary backlash. Duczyńska, in contrast, saw a historic opportunity missed, a betrayal of nerve that set the course for a spirit-sapping series of climbdowns that culminated in 1934 with “open civil war and the crushing of the working class.” From her perspective, the SPAD’s “rejection of revolution” in 1919 had inaugurated

…a long sequence of Social Democratic retreats, of contests never contested … straining to ward off civil war for the time being, if not entirely to escape it, the party step-by-step gave in to the forces of reaction and fascism.

Otto Bauer speaks in front of the Vienna City Hall, 1930. (Wikimedia Commons)

Bauer’s strategy, designed to prevent counter-revolution, had failed. There had not been a slow march along a bridge of compromises to socialism. Instead, the Austrian ruling class had unceremoniously dispensed with democracy.

From Equilibrium to Impasse

By revisiting Polanyi’s Austria years and his affinities with Otto Bauer, we can get a better grasp on his understanding of socialism, his account of fascism’s rise, and the pivotal role that democracy plays in both.

Bauer subscribed to the social-democratic belief that the extension of suffrage rights to the masses had paved, in his words, a “safe and painless road to power” for the proletariat. But he went further than that. For Bauer, democracy was not just a mechanism that would assist in the advance of socialism; socialism itself was an extended version of democracy. Although democracy, in this conception, could serve as a tool of class power, in the Austria of 1918–20, the major classes existed in equilibrium, and this, according to Bauer, necessitated compromise.

In the 1920s, he believed in the inevitable progress of democracy and its evolution toward socialism. However, when political events refuted that conviction in the following decade, Bauer reworked his previous “equilibrium” thesis. The rise of fascism, he argued, was the result of a stalemate of class forces resulting from democratization: workers had used the vote to demand concessions, undermining the profits of capitalists, who in turn responded by sponsoring fascism.

Polanyi developed his own perspective in close connection with Bauer’s. His understanding of the countermovement was bound up with the process of democratization: the dispossessed classes would cast their votes to demand protection from market forces, but the market mechanism tightly circumscribed any flexing of their newfound political muscles.

The result was an impasse. Workers defended their interests by electing parties that “interfered with the working of the market.” This prevented market forces from functioning efficiently, and the captains of industry reacted by trying to subordinate democracy to their interests, or to abolish it altogether.

Democracy vs. Capitalism

One illuminating example of democracy’s subordination was the intervention in Austria by the League of Nations in the early 1920s. Britain, France, Italy, and Japan tasked the league with raising loans for the stricken country, and with supervising its repayments. Ostensibly, their motivation was economic and technical, but they also had a patently political goal in mind: to undermine the SDAP.

As the league’s staffers knew very well, the imperial-financial interests that they represented wanted them to undermine the SDAP-run “Red Vienna” administration, in collaboration with the right-wing Christian Social national government. The plan was to implement harsh austerity measures. Unemployment predictably soared, undercutting the working-class strength on which Austrian Social Democracy depended.

In the mid-1940s, Polanyi argued that these events — and similar episodes elsewhere — had inaugurated the demise of the liberal world order. From today’s vantage point, we might see them more prosaically as the forerunner of IMF stabilization programs.

The outright abolition of democracy was the fascist project. In Polanyi’s view, it aimed to overcome society’s division into economic and political spheres by subordinating politics (democracy) to the unconstrained rule of capital. In an early outline of The Great Transformation’s theses which he titled “The Fascist Transformation,” he drew a sharp contrast between socialism — “democracy made supreme over capitalism” — and fascism, which represented the restoration of capitalist power through the sacrifice of democracy.

In theoretical terms, Polanyi argued that democracy was not a political regime of capitalist society. Rather, democracy and capitalism were separate systems, pulling in opposite directions. Their incompatibility, he believed, was what had produced the cataclysm of the early twentieth century.

A Blunted Sword

Although Polanyi gave this thesis about the clash of capitalism and democracy a distinctive spin of his own, it was commonplace among interwar European socialists. Left-wing social democrats such as the British Labour politician Nye Bevan saw parliamentary democracy as “a sword pointed at the heart of property-power.” The tension they identified between capitalism, with its steep socioeconomic hierarchy, and democracy, with its commitment to political and legal equality, clearly remains relevant today.

As historical analysis, however, the thesis did not hold up in its strong version, which posited democracy and capitalism as separate systems. Liberal democracy successfully accommodated itself to capitalism — as was the intention of the elites who had drawn up its rules. For all the reforms carried out by Franklin Roosevelt, or by Clement Attlee in Britain with Bevan as one of his ministers, those governments left the entrenched power of capitalist business elites intact.

A year before his death in 1964, Polanyi applauded the victory of the Austrian Social Democrats in the 1963 presidential elections, with 55 percent of the vote for their candidate Adolf Schärf. The old social-democratic dream appeared to have come true as over half the Austrian electorate cast ballots for their party.

Yet the party’s elected representatives went on to construct corporatist institutions mediating between labor and capital rather than socialist ones. At a later stage, they would steer those institutions onto neoliberal tracks, in coalition governments (1987–2000 and 2007–17) with the Christian Democrats of the Austrian People’s Party.

Polanyi’s other predictions did not fare much better in the postwar era. The Soviet Union did not democratize as he had believed it would. No phoenix arose from the ashes of liberal civilization: there was no “great transformation” from market society toward democratic socialism. There were processes of partial decommodification such as Britain’s public health service, but governments could operate such processes in the interests of capital, ultimately reinforcing the wider logic of commodification. Regulated capitalism did not prove to be unstable in the way Polanyi had anticipated; indeed, it oversaw an unprecedented world economic boom.

From Capitalism to Market Society

Polanyi knew that the free-market system in the nineteenth century relied, as he put it, on “continuous, centrally organized and controlled interventionism” by states. However, he was unable to take this argument a step further in the twentieth, to see that capitalism had reformed along bureaucratic-nationalist lines — which came to be labeled variously as the war economy, Keynesian “big government,” import-substitution industrialization, and Soviet “socialism.”

What held him back was a belief that politics and economics had evolved into separate institutional assemblages: the state on the one hand, the “self-regulating market” on the other. Relatedly, Polanyi had no conception of capital as self-expanding value in the tradition of Marx, or a systematic theory of capitalism.

This obstructed his analysis of such fundamental capitalist processes as exploitation, accumulation, capital concentration and centralization, and uneven development. His framework was ill-suited to exploring power dynamics, and tended to treat states, at least under democratic conditions, as representatives of the nation, rather than as fundamentally capitalist bodies.

In the 1940s Polanyi abandoned capitalism as a subject of analysis, and the word “capitalism” disappeared from his vocabulary. He replaced it, in The Great Transformation, with “market economy” and “market system.” These terms, as the economist J. K. Galbraith observed, are “bland” and “meaningless,” in the sense that they direct attention toward exchange transactions rather than conflictual relations of power and exploitation.

From the 1950s on, Polanyi refocused his work, and produced a series of dazzling studies of economic structures in precolonial Dahomey and ancient Mesopotamia, in Classical Athens and Ptolemaic Egypt. Common to most of these societies was an economic dirigisme that had arisen from the exigencies of a hostile security environment — much like Stalinist Russia in his day.

In short, Polanyi’s critique of the market economy remains an inspirational body of work, but it lacks an appreciation of the system’s driving forces. His importance for socialist theory today lies in his critique of economic liberalism, his wide-ranging and often brilliant economic historiography, and his defense of nonmarket utopia.