Neoliberal Discontents and the Enduring Relevance of Karl Polanyi

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By Harry Clennon

When human society triumphantly reached “the end of history” with the collapse of the Soviet Union in 1991, its (perceived) teleological culmination of progress was defined by the ideology of neoliberalism. Premised on the idea that the free flow of goods and capital internationally combined with limited domestic government would generate significant benefits for humankind, neoliberalism became a juggernaut political force after its emergence in the 1970s. 

However, decades after the collapse of the USSR, activists, academics, and politicians are re-examining the effects of neoliberalism and economic globalization. The immediate standout fact is the extent to which the principles of neoliberalism dominate the global economy. National economies are more integrated than ever. The volume of trade between countries is five times what it was in 1980. Global capital flows have fluctuated but are still considerably higher than they were in 1980, increasingly unencumbered by national borders. In 1970, there were approximately 7,000 transnational corporations; by 2015 that number had reached around 60,000, with 500,000 subsidiaries.

These developments have admittedly brought a number of benefits to people of all backgrounds and all nations. Trade deals like NAFTA have lowered prices and poverty has decreased significantly in the developing world. There is also strong evidence that trade is a bulwark of peace between nations. These benefits are significant, and too often discounted by pundits and politicians who criticize economic globalization. However, free trade has also resulted in depressed wages and employment for low-skill work in the developed world, and may even be connected to increasing economic inequality within countries around the globe. Furthermore, most international trade agreements lack the kind of environmental or labor protections that are necessary to improve conditions for workers in developing countries over the long term, and are balanced heavily in favor of transnational corporations’ bottom lines. 

Let’s be clear: economic globalization has generated a number of important benefits that have left people around the world better off. It is neither desirable nor possible to dramatically reverse the status of the global economy. However, it is also the case that the expectations set for globalization by proponents of neoliberalism from the 1970s to the 1990s were unrealistic, misleading, and even deleterious to the fabric of human society. The idea that everyone (or almost everyone) would be a winner in this system has been exposed as patently false. While President Donald Trump’s various engagements in protectionist policy are misguided and a poor approach to ameliorating the myriad problems of economic globalization, they are evidence of the inevitable backlash against the political-economic project of neoliberal economists and their allies in the business class.

The best way to understand the present moment is through the work of political economist Karl Polanyi, primarily his 1944 book The Great Transformation, which focuses on the free market excesses of the industrial era and their role in the Great Depression and the two world wars. Although his work preceded the hyper-capitalism of the neoliberal era by twenty-five years, it is remarkably prescient. Polanyi’s central thesis is that the concept of a self-regulating market system is utopian, and thus unachievable. He argues that economic systems have always been and will always be subordinate to politics, culture, and society; attempts to create an independent economic sphere will necessarily result in disaster. The book serves as an economic history of Europe, from the seventeenth century up to the time of writing. Polanyi traces the political and economic developments in a number of European countries (with a focus on England) leading up to the Industrial Revolution, analyzing the causes and laying out evidence for his argument that pre-industrial economies were highly embedded in social, cultural, and political institutions.

His analysis of the industrial era supports his assertion that the “self-regulating market” has never been self-regulating as such, with its development consistently marked by policy decisions made by its own proponents to protect human society from the havoc that it wreaks. Polanyi offers a compelling critique of the theoretical foundations of the self-regulating market system, charging economists with a limited view of human nature that defines humans as narrowly self-interested, individualistic beings. He claims, supporting his argument with evidence from tribal and pre-industrial societies, that human beings have desires for social status, dignity, and spiritual fulfillment. In other words, the desire to flourish within one’s own culture and rooted way of life transcends the economists’ view of man as an economic creature. The theory of self-regulating markets requires the commodification of humans and their labor in order for there to be a separate economic sphere, and thus is destructive to the social and cultural institutions that nourish the human condition.

Consider Polanyi’s thesis in our modern context. In the United States, where a variety of well-paying jobs in manufacturing and other sectors long formed the basis of many Americans’ way of life, economic globalization has had some truly disastrous effects as those jobs have been exported across borders and overseas. Increasingly, the only options left to “low-skill” workers are brutal service jobs with next to no labor protections. In developing countries on the periphery, the free encroachment of transnational corporations seeking cheap labor and resources has been ruinous for domestic cultures, and has often reduced the independence of those countries’ governments as foreign companies that prioritize profit over the well-being of citizens become important political constituents. In both cases, Polanyi’s assertion–that the reduction of human labor to a simple commodity ignores human nature and in turn dissolves the fabric of society–holds up remarkably well.

Take another example. Polanyi’s overarching argument rests on an additional claim, that capital must be commodified in a self-regulating market. When considering our incredibly complex system of international banking and finance, which radically distorts and ignores human needs in a quest for ever-increasing points on the stock market, and its contributions to the economic crisis of the late 2000s, it becomes even clearer that the priorities of human society are misplaced. Once one looks beyond the limited horizon of the economists, the picture of the human condition under the neoliberal order becomes significantly more bleak. 

With Polanyi’s work in mind, an explanation for protectionist populism (both right and left) emerges. In line with Polanyi’s thesis, the self-regulating market cannot ever truly come into being, subordinate as it is to politics, society, and culture. When it reaches a certain point of development, as it did in Polanyi’s time and as it is doing now, political movements seeking to (perhaps unconsciously) re-subordinate it will emerge. The twin rises of Donald Trump, and to some extent Bernie Sanders, are evidence of this. It is unlikely that Trump has read any of Polanyi’s work, but Sanders is almost certainly well-versed in his ideas. What they understand, either instinctively or intellectually, is that the economic view of human nature and need falls critically short.

However, the manifestations of Mr. Trump’s understanding (to really assess Mr. Sanders’ concrete policies or his ability to realize them he would have to be in a position to implement them) in terms of specific policy action or recommendation are wanting. Polanyi credits the system of international trade and banking during the second half of the 19th century with maintaining the peaceful balance of power between the great power countries of Europe. Mr. Trump’s trade war with China, while plausibly described as a re-embedding of the United States’ economy in society, has incurred costs at home and in the long term could threaten the peace between the world’s two greatest powers. The United States’ peaceful relationship with China is rooted in large part in economic symbiosis. If that relationship were to disintegrate, it could have serious consequences for peace around the world. In an era of an increasingly multipolar distribution of power among nations, trade is crucial to preventing war. Furthermore, while Mr. Trump has made some efforts to re-embed the market, he has also reduced the corporate tax rate, allowing transnational corporations to move their resources around the globe in an even more disembedded fashion. He lacks the understanding and the will to re-embed the national economy in a manner that is anything but thoughtless and self-contradictory.

As stated above, it should not be a goal of future politicians and bureaucrats to end free trade and economic globalization. The international system is too highly integrated and provides too many benefits to too many people; attempting to undo it entirely would be the equivalent of letting a bull loose in a china shop. Rather, what is needed now is prudent economic statesmanship and a set of careful and clear-sighted policies that avoid shooting at the problem from the hip.

What might this look like? First of all, national governments in developed countries should invest in sectors of the economy that are underdeveloped and have high potential for jobs, and subsidize the employment of workers. Second, they should increase the accountability and oversight of transnational corporations and their activities beyond national borders. These bodies are not self-policing; they care almost exclusively about their bottom line without regard to the well-being of workers in either their home countries or countries abroad. Making them more accountable to the people through elected government is an explicit form of re-embedding that does not necessarily restrict trade. Third, governments should begin, incrementally, to restrict the free flow of capital across borders. This was common practice during the Bretton-Woods era of free trade (1945-1970), and while it may not be possible to the extent it was before the advent of neoliberalism, it helps to assert that the relationship between money and human life cannot be reduced to the mere exchange of commodities. Finally, international trade agreements should have stronger environmental and labor protections for workers in the developing world. People deserve dignified existences and a planet that can sustain them. For the sake of human flourishing, it is necessary to preserve the natural environment and compensate workers decently for their labor.

The economists will respond that these policies will produce market inefficiencies, instances of “deadweight loss” that are equivalent to burning handfuls of cash. They could very well be right. Surely some “efficiency” will be lost in a re-orienting of policy that does not favor their framework. But if it is true that the economists’ identification of the human good with the economic good is erroneous, then this is less of a problem. Once one steps out of the purely economic framework and prioritizes the human good, while admitting the benefits that markets bring, as Polanyi does, one’s perspective and goals must change. It goes without saying that there are tradeoffs–it will not be possible to preserve every single benefit brought about by neoliberalism and economic globalization. That, however, is the reality of politics. Tradeoffs and compromises are inherent to the process. What Polanyi understands, and what we should consider today, is that the exchange of efficiency or self-regulating markets for a state that prioritizes the common good of its citizens, and an international system that recognizes the need for states to do so, is worth it.

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