The Power of Market Fundamentalism

Fred Block, Margaret R. Somers

• Publisher: Harvard University Press
• Year: 2014
• ISBN:
  9780674416352
• Topic: Economía
• Subtopic: Economía política

What is it about free-market ideas that give them tenacious staying power in the face of such manifest failures as persistent unemployment, widening inequality, and the severe financial crises that have stressed Western economies over the past forty years? Fred Block and Margaret Somers extend the work of the great political economist Karl Polanyi to explain why these ideas have revived from disrepute in the wake of the Great Depression and World War II, to become the dominant economic ideology of our time.Polanyi contends that the free market championed by market liberals never actually existed. While markets are essential to enable individual choice, they cannot be self-regulating because they require ongoing state action. Furthermore, they cannot by themselves provide such necessities of social existence as education, health care, social and personal security, and the right to earn a livelihood. When these public goods are subjected to market principles, social life is threatened and major crises ensue.Despite these theoretical flaws, market principles are powerfully seductive because they promise to diminish the role of politics in civic and social life. Because politics entails coercion and unsatisfying compromises among groups with deep conflicts, the wish to narrow its scope is understandable. But like Marx's theory that communism will lead to a "withering away of the State, " the ideology that free markets can replace government is just as utopian and dangerous.

1

KARL POLANYI AND THE POWER OF IDEAS

It was a little more than twenty years ago that the decades-long Cold War between the United States and the Soviet Union ended. When the Soviet Union collapsed, some analysts optimistically claimed that we had reached the “end of history” because the institutions of Western societies had definitively proven their superiority over all others (Fukuyama 1992). Since then the United States has suffered the trauma of the September 11, 2001 terrorist attacks, fought extended wars in Afghanistan and Iraq, and has experienced the worst economic downturn since the Great Depression. Over this same twenty-year period, politics in the United States has become ever more polarized, stalemated, and dysfunctional. From the attempted impeachment of Bill Clinton, to the deceptions and manifest incompetence of the George W. Bush Administration, to the excesses of the Tea Party during the Obama Administration, the political system continues to careen out of control. Suffice it to say, the triumphalism expressed when the Soviet Union collapsed is now only a distant memory.

Nonetheless, however ludicrous “the end of history” may sound to us now, the proclamation cannot be dismissed as simply the hubris of a handful of overly optimistic prognosticators. After all, very little in contemporary social and economic theory prepared us for the multiple traumas of the last two decades. Economists were particularly complacent as they vigorously promoted the doctrine that “deregulation,” labor “flexibility,” tax cuts for the wealthy, and unfettered free markets would produce unprecedented prosperity. In fact, the U.S. model was held out as an example to others as a preferable alternative to both the “Eurosclerosis”¹ that allegedly plagued Continental Europe and the “crony capitalism” that undermined the major Asian economies.

There were, of course, some important exceptions to the celebratory mood. Starting in 2000, the Nobel-winning economist Joseph Stiglitz (2000, 2002, 2003) challenged the wisdom and sustainability of the economic policies that Washington was urging on the rest of the world. The financier and philanthropist George Soros produced a series of books (1998, 2000, 2002) questioning the arguments underlying the spectacular growth of global financial markets. John Gray (2000), the British political theorist who had earlier been a supporter of Margaret Thatcher, questioned whether the bad “Anglo-American” version of capitalism was undermining the stability of the more productive type of capitalism that had flourished on the European Continent. And Mark Blyth (2002), a Scottish born political scientist, questioned the dramatic increase in wealth of the top 1% of households in the U.S. that resulted from Reagan-era policies.

Many of these dissenters and skeptics explicitly drew inspiration from the work of Karl Polanyi (1886–1964), a twentieth-century Hungarian refugee intellectual and economic historian, whose most important book, The Great Transformation (hereafter GT), was originally published in 1944.² In that work, Polanyi sought to understand the historical forces that had led to the Great War (World War I), the Great Depression of the 1930s, the New Deal, the rise of fascism, and the coming of World War II. He develops what many consider to be the twentieth-century’s most powerful and systematic critique of free market ideas and practices, one that has extraordinary relevance for understanding our own historical period.

Our project in this book is to show that Polanyi’s thought is as critical as ever for making sense of the surprising political-economic developments of the past few decades and their contemporary social and economic consequences. Our focus is on the rebirth in the 1970s and 1980s of the same free market ideas that were widely assumed to have died in the Great Depression. Driven by this free market ideology, conservative politicians have engaged in a decades-long campaign to reverse the reforms originally introduced in the 1930s by Franklin Roosevelt’s New Deal and extended in the 1960s by Lyndon Johnson’s Great Society programs. Those regulations and programs had placed severe restrictions on speculative activity by financial institutions, reduced the extreme inequality of income and wealth distribution of the 1920s, provided organized labor with a stable and recognized position in both the workplace and in the polity, and created protections for citizens from the risks involved in becoming unemployed or growing old. Businessmen and right-wing intellectuals had railed against these changes for many decades, but their fortunes changed in the 1970s as conservatism again became a powerful force in United States politics. Once Ronald Reagan gained the presidency in 1980, the conservative movement began to make significant headway in dismantling much of the New Deal framework (Phillips-Fein 2009; Smith 2012).

The fruits of these efforts are now glaringly familiar. Income inequality in the United States has increased dramatically since 1981, the labor movement has suffered a precipitous decline in numbers, and ordinary citizens are substantially less protected from risks that diminish their incomes (Hacker 2006; Wilkinson and Pickett 2009; Hacker and Pierson 2010). Most spectacularly, the share of income going to the top 1%—including capital gains—grew from 10% in 1981 to a peak of 23.5% in 2007 just before the crisis and the level for the most recent year—2012—was just below that peak (Saez and Piketty 2013, Table A3).³ Jeffrey Winters (2011) has estimated that the top 400 taxpayers in the United States exercise 10,000 times the material power of the average citizen in the bottom 90%. This differs little from the power differential in Ancient Rome between the Senators, and slaves and farm laborers who made up most of the population. This enormous imbalance of power and dominance—itself facilitated by the spectacular rise of finance and the relaxation of its regulatory framework—inexorably set the stage for the catastrophic global financial crisis in the fall of 2008 (Stiglitz 2010).

The extraordinary influence of free market ideas in justifying the project of dismantling the New Deal over the last thirty years is no longer disputed. There is some dispute as to what to call them. Some use the term “neoliberalism,” others “laissez-faire,” and still others just plain “free market ideology.” Following George Soros (1998), we use the label “market fundamentalism” because the term conveys the quasi-religious certainty expressed by contemporary advocates of market self-regulation. Moreover, we want to emphasize the affinity with religious fundamentalisms that rely on revelation or a claim to truth independent of the kind of empirical verification that is expected in the social sciences (see Chapter 6). But whatever the term, these free market theories and policies were successfully revived in the 1970s in response to the perceived failure of New Deal and Great Society policies to address widespread economic and social problems. Pushed by powerful interest groups, they quickly defeated the entrenched Keynesian ideas and policy prescriptions that had been dominant in the United States from the mid-1930s through the 1960s. Over the next four decades, this updated version of laissez-faire moved from the margins of influence to become conventional political wisdom with world-transforming effects that continue today (Cassidy 2009; Burgin 2012; Jones 2012).

To be sure, others have stressed the importance of free market ideas in the recent transformation of politics in the U.S. (Blyth 2002; MacKenzie 2006; Quiggin 2010; Peck 2010). Valuable work also traces out the history of these ideas and the elaborate networks that disseminated these ideas and assured their influence over critical political elites (Krugman 2009b; Phillips-Fein 2009; Crouch 2011; Frank 2011; Burgin 2012). Our focus, however, is somewhat different. We are seeking to explain what it is about these free market ideas that give them such extraordinary command. What, we ask, is the source of this power? How is it that ideas once marginalized and seemingly defeated in the 1930s and 1940s again became this society’s conventional wisdom?

We approach these questions using theoretical tools we derive from our engagement with Polanyi’s work. We recognize that despite Joseph Stiglitz’s observation that “. . . it often seems as if Polanyi is speaking directly to present day issues” (GT, ii), Polanyi’s ideas have never achieved the broad public circulation of those of John Maynard Keynes, Milton Friedman, and Friedrich Hayek. Yet in a way that differs from much of what we read today, GT’s account of the origins of the crises of the 1930s and 1940s, written seventy years ago, reveals a profound understanding of the very same free market ideas that have loomed so large in transforming our recent world. In fact, the target of Polanyi’s critique—the early nineteenth-century classical political economy of T. R. Malthus and David Ricardo—is credited proudly as their theoretical inspiration by the two intellectual figures most closely associated with the revival of free market ideas in the second half of the twentieth century—Friedrich Hayek and Milton Friedman. Indeed, it is the very success of his theoretical opponents in reestablishing the moral and political authority of free market doctrine that has made Polanyi’s analysis even more relevant for understanding the present era. It is for this reason that we seek to introduce his ideas to a wider audience.

Introducing Karl Polanyi

As we elaborate in the next chapter, Karl Polanyi was a Jewish-born European refugee intellectual who was repeatedly displaced by war and social conflicts. Born in the Austro-Hungarian Empire in 1886, he was a founder of the Galileo Circle, a club of Hungarian intellectuals that included Karl Mannheim and Georg Lukacs. He fought in World War I and supported the October 1918 Aster Revolution that overturned the landed aristocratic regime. Just months later in 1919, Polanyi went into exile when the Communist Béla Kun revolution sought to establish a Soviet Republic in Hungary. He left for Vienna, where he was a witness to its fifteen-year “socialist municipality”—an urban laboratory of working class co-operative life, from housing to health care, from work to education. He later described this period as one of the formative experiences of his intellectual development: “Vienna achieved one of the most spectacular cultural triumphs of Western history . . . an unexampled moral and intellectual rise in the condition of a highly developed industrial working class which, protected by the Vienna system, withstood the degrading effects of grave economic dislocation and achieved a level never reached before by the masses of the people in any industrial society” (GT, 299).

The rising tide of fascism, however, ultimately brought this socialist and democratic experiment to a brutal end in 1934. Warned that he was personally in danger because of his strongly anti-fascist views, Polanyi departed for England in 1933 where he made his living by teaching adult education courses to British workers through the Workers’ Educational Association—the extramural outreach arm of the Universities of Oxford and London. His direct encounter with English workers and the English class system had a deep impact on him. Comparing the English working class with Central European workers, he was shocked by the former’s political views and ignorance of their own past struggles. His experience with England’s working people became central to his analysis in GT, which he wrote with the support of a fellowship from the Rockefeller Foundation after leaving England for what he expected to be a brief visit at Bennington College in Vermont. After World War II, he taught in the Economics Department at Columbia University before retiring to Canada, where he died in 1964. In 1986, both Karl and his wife Ilona Duczynska were welcomed back posthumously by the Hungarian Academy of Arts and Sciences for a full-fledged academic celebration of the centennial of Polanyi’s birth.⁴

His multiple homelands and a nontraditional academic career that bridged history, economics, sociology, classics, and anthropology contributed to Polanyi’s tenuous place in both scholarly and policy discourse. He was initially invited to teach at Columbia because his work was compatible with the institutional economists then dominant in that department. But by the end of the 1940s, institutionalism had gone into sharp decline in mainstream economics (Yonay 1998), and he was left without a disciplinary home. In the political climate of the Cold War, moreover, Polanyi’s complex and unique understanding of different economic systems had little purchase for an intellectual world highly polarized between East and West. His vision of a moral social democracy supported by vigorous democratic participation from civil society did not fit neatly into either of the dominant categories of the 1950s and 1960s. With a few critical exceptions, his work had little impact on mainstream scholarship in the social sciences until the late 1970s.⁵

With the rise of Thatcher and Reagan at the end of the 1970s, however, Polanyi’s influence began to grow, as his critique of their free market ideas and policies became ever more relevant.⁶ As the crisis of socialism deepened with the 1989 fall of the Berlin Wall, a number of scholars who were searching for a non-Marxist alternative to the triumphalist celebration of the status quo discovered Polanyi’s work. As the world began to seem more and more like “Everything For Sale” (Kuttner 1996), his powerful analysis of how the unchecked dominance of the market would inevitably devastate social solidarity and the foundational institutions of civil society was increasingly illuminating and convincing. Polanyi’s argument that markets are invariably embedded in social relations also challenged the ascendant precept that freedom and individual rights depended exclusively on an economy driven by a system of self-regulating markets and severely diminished government spending on social and economic provisioning and protection. His work also critiqued the ideology that associated prosperity, choice, and efficiency exclusively with the free market, while attributing inefficiency, corruption, and coercive power entirely to government. He insisted that the economic sphere is as much a site of power as the state, and that a robust human freedom depends on a coalition of state and civil society that has the power to protect society against the destructive forces of marketization.⁷

Perhaps most influentially, Polanyi’s work challenged the idea that the market and the state are separate and autonomous entities, a premise that was built into the assumptions of classical and neoclassical economic theory alike. He demonstrated that underneath the claim that only a self-regulating autonomous market can produce optimal results was the conviction that the laws of the market are no different from the biological self-regulatory organisms of nature—a claim that throughout this book we call social naturalism. By deconstructing these assumptions that had long passed as proven truths, Polanyi undermined the claim that protecting people against some of the market’s worst inequalities was tantamount to tampering with nature itself.

Even today, however, Polanyi’s writings defy easy classification. He was an expansive social theorist and social democratic thinker who still believed in the indispensable role of markets: “. . . the end of market society means in no way the absence of markets” (GT, 252). He was dedicated to social protection, but from a government held accountable by the democratic participation of an active citizenry (GT, 264–265). He held tenaciously both to individual rights and to an enlarged idea of freedom—which, like that found in FDR’s “Second Bill of Rights,” included not just civil and political rights but also economic justice and freedom from want.⁸ And while there are others equally dedicated to democratic theory and economic justice, Polanyi is unique in his understanding of both the vitality, endurance, and appeal of free market ideas, as well as the profound threat they pose to human civilization.

Most importantly, Polanyi’s writings defy the main intellectual traditions of his era and of our own. As we have noted, he was fiercely critical of the tradition of economic liberalism in both its nineteenth- and twentieth-century variants. But while he described himself as a socialist and was deeply influenced by the Marxist tradition, he expressed great disagreement with other strands of socialist and Marxist thought. He was particularly cynical about the “economistic fallacy” that he attributed in part to Marxist theory (GT, 158–159; Polanyi 1977). He was also unique in insisting that the idea of a self-regulating market was nothing short of “utopian”—a term that had previously been reserved by conservatives to use against leftist critics of market societies (see Chapter 4). Moreover, he also saw the world very differently from the twentieth century’s most important theorists of political liberalism because he was, above all, a theorist of social discontinuities. His analysis of the three centuries previous to the twentieth emphasized radical breaks and reversals rather than slow and relentless progress.⁹

Precisely because of his distance from these other more familiar traditions, understanding Polanyi’s arguments calls for significant interpretive work. It requires the reader to bracket some of the more recognizable assumptions that he or she has about how the world works. In fact, one cannot make sense of Polanyi’s arguments without a willingness to at least suspend belief in those very assumptions. To facilitate this kind of work, our book is an exercise in interpretative social science—digging beneath the words on the printed page to uncover the deeper structures of meaning and argument that gives Polanyi’s analysis its remarkable ability to make sense of recent events.

We are not, however, claiming to adjudicate definitively what Karl Polanyi “truly” meant when he used a particular concept or developed a specific line of argument. The work of the canonical figures of social thought, whether it be Adam Smith, Marx, Weber, Freud, or Keynes, is full of complexities and ambiguities and open to multiple interpretations. Karl Polanyi is no different, and our interpretation is only one of many possible readings (for other recent readings, see Burawoy 2003; Buĝra and Agartan, eds. 2007; Gemici 2008; Dale 2010). Our purpose is instead to elaborate an emergent inventory of concepts that provides leverage for illuminating and explaining the complex socioeconomic and political developments that have brought us to the crisis we find ourselves in today.¹⁰

Polanyi’s Conceptual Armature

To guide the reader through the substantive breadth of the chapters that follow, we have devised a three-pronged conceptual armature to unify our analysis. Polanyi’s writings are so multidimensional that different interpreters would certainly emphasize different themes than these. But these are the themes that have captured our attention over our years of engaging with his work, and they serve as a foundation for the arguments of this book.

First, while markets are necessary, they are also fundamentally threatening to human freedom and the collective good. They are necessary, as we learned from the tragic experiment in Communism in the Soviet Union and Eastern Europe, because they are mechanisms through which individuals exercise choice. At the same time, most of what makes life possible is not actually produced to be sold on the market and will be endangered by being treated as such. These are the necessities of social existence that, along with material sustenance, make it possible for us to be full members of the social world we all inhabi...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Preface
• 1. Karl Polanyi and the Power of Ideas
• 2. Beyond the Economistic Fallacy
• 3. Karl Polanyi and the Writing of The Great Transformation
• 4. Turning the Tables: Polanyi’s Critique of Free Market Utopianism
• 5. In the Shadow of Speenhamland: Social Policy and the Old Poor Law
• 6. From Poverty to Perversity: Ideational Embeddedness and Market Fundamentalism over Two Centuries of Welfare Debate
• 7. The Enduring Strength of Free Market Conservatism in the United States
• 8. The Reality of Society
• Notes
• Bibliography
• Index