Friday 20 February 2015

Reading Karl Polanyi: how wild goats and gold explain the last two centuries of global history (part 2)



The first part of this post got as far as explaining how Polanyi sees the liberal-capitalist view of labour inaugurated by arguments for the abolition of poor relief (or social security), put forward in 1786 by Joseph Townsend. Insofar as they were imagined as living agents at all, and not simply as a mechanical force of production with an attached price-tag, the poor were pictured like hunted wild goats, driven by hunger and fear. The second part of this post investigates the effects of commoditizing another factor of production - not land, although the history of how land-ownership has come to be valued in purely monetary terms is fascinating and important, and explains much of the terrible history of North American and Australian indigenous peoples over the last 200 years - but money.

Is money a commodity? Contemporary anti-neoliberal writers on the subject such as Ann Pettifor deny that it is. Pettifor actually cites Polanyi as her authority on this: "the dominant, orthodox or neoclassical school of economists...conceive of [money] as akin to a commodity... Because all commodities have a scarcity value, these economists theorise as if money is subject to market forces of supply and demand, and like commodities, can become scarce. But money is not like a commodity. To define it as such is to create a ‘false commodity’ as the political economist Karl Polanyi argued" (Ann Pettifor, Just Money: How Society Can Break the Despotic Power of Finance (2014), introduction). All well and good - and personally I agree with Pettifor that we should stop treating money as a commodity and start to see it according to an alternative definition: as a token of "purchasing power", in Polanyi's view (Great Transformation, pp. 205-6).

What difference does that make? It means money is only useful insofar as it is spent (or, perhaps, directly invested). It should never be something that accumulates value simply by existing, by being hoarded while its public supply grows scarce. This is the basis of recent suggestions such as George Monbiot's that Europeans - starting maybe with the Greeks, if they exit the euro - revive the "stamp scrip" systems that were experimented with in the 1930s: local currency tokens that lost value over time, thus encouraging rapid circulation and preventing hoarding. Economic activity would thus be boosted equitably, without having to rely on the power of banks.

Yet Polanyi does not actually make a philosophical decision as to whether money "really is" pure purchasing power, rather than being a commodity: he is too much of a historian to do that. Money "really is" however people have treated it. And in the system of 19th-century "market society", whose functioning and eventual collapse Polanyi analyses, money in large measure did work as a commodity, because those wielding global power treated it as such. In fact it was precisely by making money work as a commodity that certain financiers and governments - above all, the British - actually sustained their global power. For it was commodity money that had the unique power to overcome the nation-state-centred model of markets that I discussed at the end of part 1 of this post. It did so during the 19th century through the mechanism known as the gold standard.

The gold standard was theorized and enforced in the interests of international trade - trade in which the British Empire surpassed all its competitors. It meant that all national currencies were given a value in terms of gold: they were "pegged to" gold. Gold is of course literally a commodity, in that it is produced (mined and minted) for exchange. One might think that it differs from other commodities in not having a use-value: but it does - gold jewellery, or even finely-wrought salt-cellars for a king's table, as in this famous piece by the Renaissance goldsmith Benvenuto Cellini:

Previously in history it had mainly circulated as what is technically known as "specie": gold coins - which could be stolen, lost at sea, melted down, or subject to any number of other unpredictable misfortunes. Banknotes allowed for greater security: large amounts of gold could stay in bank vaults, while the notes that were theoretically exchangeable for them circulated instead. However, when it came to international trade, a country's gold reserves actually came into play - in ways that could prove devastating for its national economy.

Theoretically, the gold standard worked like this: if a nation was running a deficit on international trade, that meant it was buying in more goods than it was managing to sell, which meant that more of its currency was circulating abroad (in exchange for imports) than the amount of foreign currency it was acquiring (in exchange for exports). Its currency was thus in greater general supply, and supply gaining an edge over demand means that prices drop: the value of the currency, its exchange rate, is reduced. Movement of gold reserves is supposed to balance this out: gold leaves the country for abroad, where it can be exchanged for higher-value currencies, meaning that the amount of gold backing for the country's currency is reduced. Yet because the currency remains pegged to gold, this means that the amount of currency circulating in the country itself must also be reduced. The money supply shrinks - and with it, the economy.

This economic contraction is supposed to act - in purely financial terms -  as part of an adjustment to international trade balances. If the supply of money shrinks, then so do prices and wages: this is deflation. People earn less and can pay less for imports from abroad (whose prices are of course unaffected). At the same time, exports reduce in price and thus come to seem more attractive to foreign buyers. The country starts exporting more and importing less: equilibrium is gradually restored.

But at what social cost? Apart from the effects on consumers, unexpected contractions in the whole of a national economy can be devastating for businesses. It's all very well looking forward to increased exports, but if the "adjustment" that precedes such an increase puts a significant proportion of companies out of business (because they can't secure credit any longer), then who's going to be around to profit from all the exporting? (Someone, for sure: but probably a large, perhaps even multinational company which has no trouble weathering the storm. Not good for competition.)

So once again, according to Polanyi's "double movement", the institution of a gold standard was followed by countries taking steps to protect their economies from the worst effects of deflation. One such step was the institution of central banks. Their "normal function was cushioning the immediate effects of gold withdrawal on the circulation of notes" (p. 203). The country does not "go off" gold, but the central bank makes sure that adjustment is more gradual and general than it would otherwise be. Interest rates are lowered; loans are made.

Yet there was only so much that nation-states and their central banks could do. When their economies were weakened, deflation was inevitable - if they were to stay on the gold standard. (Without it, as in the early 1920s, they would print money in ever greater quantities to replace the currency leaving the country, and the value of banknotes would drop precipitously: hyper-inflation instead of deflation.) "Under nineteenth-century conditions", writes Polanyi, "foreign trade and the gold standard had undisputed priority over the needs of domestic business" (p. 203). Gold was a language even the Chinese could understand; abandon it, and you lost your ability to buy and invest all over the world. The British, before all others, were unwilling for that to happen.

How had the British attained this position - of relying on and promoting gold as universal commodity currency? I suggested the answer in my earlier blog post, Calicoes and capitalism. It was simple: they had stolen vast quantities of it, so naturally they had an interest in its value and power being as universal as possible. Piracy was phase no. 1, generating booty for the Crown that led to the establishment of the East India Company. But what I didn't record in that post was that phase no. 2 of the British gold hunt was conducted in India itself.

Having run a long-standing trade surplus created by exporting fine cottons, spices etc, the riches of the East were now ripe for plunder. On Clive of India's victory at the battle of Plassey, the treasuries of the Nawab of Bengal were thrown open. Macaulay described the scene: "There was piled up, after the usage of Indian princes, immense masses of coin, among which might not seldom be detected the florins, and byzants with which, before any European ship had turned the Cape of Good Hope, the Venetians purchased the stuffs and spices of the East. Clive walked between heaps of gold and silver, crowned with rubies and diamonds, and was at liberty to help himself" (Essay on Clive (1840/1903), p. 53).

As one military historian of India, Colonel Malleson, put it: "There never was a battle in which the consequences were so vast, so immediate and so permanent" (The Decisive Battles of India (1883), p. 68). And the nexus of military and economic history established by Clive's victory did not cease to grow and transform itself over the next two hundred years - as not only economists but military historians themselves testify. For the source of my last two quotes is not Polanyi: it is a book by a figure about as dissimilar in character and outlook from this gentle, bespectacled, socialist Hungarian Jew as one could possibly imagine - the severely moustachioed British Army officer, military historian, and fascist sympathiser Major-General J. F. C. "Boney" Fuller:


Image result for jfc fuller
Fuller's three-volume masterwork The Decisive Battles of the Western World (1954-6) was some of my favourite non-fiction reading matter during my later childhood, before I started to lose interest in military history, wargaming and toy soldiers and get interested in philosophy. I still remember buying the Picador edition of the book (ed. John Terraine, 1970) in the shop of the National Army Museum in Chelsea. What I was really interested in (as I recorded in the first blog post on this site) was the diagrams of battles it contained - the moves and countermoves, strategy and tactics of the famous generals. But some of the surrounding historical context must have sunk in at some level: because when I read Polanyi on the significance of the gold standard for the origins of the Second World War, I suddenly recalled Fuller having given a surprising amount of attention to this exact same topic. Digging my dog-eared copy out of a cardboard box in the under-stairs cupboard, I found that gold and the economics of the gold standard formed a thread running more or less unbroken through Fuller's interpretation of the history of modern warfare ever since the late eighteenth century.

He starts with the impact of Clive's gold grab on the Industrial Revolution and Empire - "The most world-changing [of the western world's "big ideas"] was the use of steam as power... All that was lacking was gold to fertilize it, and it was Clive who undammed the yellow stream" (Decisive Battles, vol. 2, p. 16). Over the next half-century, the British banking system underwent massive expansion: "in 1750 Burke informs us that there were 'not twelve Bankers' shops' in the provinces, while in 1796 they were to be found 'in almost every market town'" (ibid., p. 17). "Out of the field of Plassey...there sprouted forth the power of the nineteenth century. Mammon now strode into supremacy... What the Cross had failed to achieve, in a few blood-red years the trinity of piston, sword, and coin accomplished: the subjection of the East and for a span of nearly 200 years the economic serfdom of the Oriental world" (ibid., p. 18).

While Clive was subjecting Bengal, the French were still competing with Britain in the global conflict of the Seven Years' War: soon that too was settled in Britain's favour in the concluding peace treaty of 1763. "France not only lost her colonial empire and her navy, but was left in that financial ruin out of which emerged the French Revolution" (ibid., p. 21). The Revolutionary regime could have been stifled at birth, had the campaign led against it by the Prussians in 1792 been successful: instead they were repulsed at Valmy by a new kind of national army, prepared for total war. It was this army that Napoleon was to lead - and his intentions in fighting Britain with it were, once more, economic.

Once defeated by Nelson at Trafalgar, the French had to give up hope of controlling the Channel or being able to launch a direct attack on England (as the Spanish had tried to do with the Armada). But what Fuller calls the "indirect approach" remained, which "depended on the command of the coastal ports of Europe. Could [Napoleon] gain control of them, England's foreign trade, the source of her financial power, would be strangled, and without a heavy purse it would be impossible for the English Government to subsidize their continental allies... Therefore, as Paul H. Emden states in his Money-Power of Europe in the Nineteenth and Twentieth Centuries [the kind of obscure economic-historical source Fuller constantly refers to in these discussions!], 'The strongest of all the powers allied against Napoleon was the power of British finance'" (ibid., p. 97).

How could Napoleon combat that power? Not simply by accepting the terms on which this "nation of shopkeepers" wanted to run international politics - the terms of free trade, on which gold would count most heavily. Since he was dictator, Napoleon could summarily ignore the interests of France's merchant class and consider only the national interest; "he held that free trade would make France become the debtor of England. His economic ideas were those of Rousseau, according to whom 'the perfect state was one that suffice for all its needs and could do without foreign trade'." (ibid.). This became elaborated into the European trade blockade against England known as the Continental System: and it was to enforce the Continental System that Napoleon began the Peninsular Wars in 1807 and invaded Russia in 1812, both of which proved militarily disastrous.

With Napoleon finally defeated in 1815, Britain almost immediately began to lay the currency foundations for the free-trade regime of the "Hundred Years' Peace" that was to follow: the Great Recoinage of 1816 produced a flood of specie in both gold and silver and stabilized the pound. As Polanyi explores in The Great Transformation, and as I mentioned at the end of part I of this post, the Hundred Years' Peace and the stability of the gold standard could only be maintained by constant colonial expansion. Just as has happened since World War II, wars became "cold", essentially colonial-economic affairs, or contained adjustments to the balance of power (e.g. the Franco-Prussian War of 1870-1); and in all cases, trade between the countries concerned was allowed to continue - as had not been the case in the Napoleonic Wars, and would once again cease to be the case in the twentieth century (Polanyi, p. 17).

The balance of power was of course upset by World War I, which disrupted world trade so much that the gold standard was finally broken. It continued to be an ideal for European political leaders of all stripes throughout the 1920s. But its brief re-establishment in the latter part of that decade - for the sake of which "small and weak" peripheral countries including Greece "literally starved themselves to reach the golden shores" (Polanyi, p. 27 - the present parallels are plain enough) - was once again curtailed by the Wall Street Crash, an event whose location pointed to a critical difference between post-war and pre-war financial regimes: the new economic priority of the U. S. A. Britain went off gold in 1931, America in 1933: "the snapping of the golden thread was the signal for a world revolution" (Polanyi, p. 29).

What kind of revolution? A fascist one, most obviously. It is because of its underlying economic interests in undermining the golden substructure of international trade that Polanyi describes fascism in terms that may shock many readers: "If ever there was a political movement that responded to the needs of an objective situation and was not a result of fortuitous causes, it was fascism" (p. 245). "The appearance of such a movement...should never have been ascribed to local causes" (ibid.); rather "the part played by fascism was determined by one factor: the condition of the market system" (p. 250). Without denying that fascism was "degenerative", a "remedy...[which] would everywhere produce sickness unto death" (p. 245 - and it hardly needs to be mentioned that its rise forced Polanyi himself into exile), Polanyi seems to be suggesting that it was, in a sense, a necessary phenomenon.

For as Napoleon had discovered in quashing the interests of his own commercial middle class, a campaign against economic liberalism could be most effectively (which is to say, ruthlessly) led by an absolute dictator. Instead of businesses, trade unions and social classes democratically voicing their interests - which it must be said were, at the height of the nineteenth-century system, all pretty squarely behind expanding international trade, and thus exploiting the natural environment and colonial populations to the hilt - you had a Leader backed by a united People, hypnotized into renouncing their identity as part of a single national mass.

Fuller, who records in a footnote that he "met Hitler on a number of occasions", and was the first to theorize the Blitzkrieg strategy by which Nazi armies overwhelmed half of Europe in 1939-40, saw Hitler as an embodiment of a powerful alternative myth to the capitalist notion of Economic Man. This was "Heroic Man", the self-sacrificing, idealist warrior (Decisive Battles, vol. 2, p. 433). And challenging Economic Man meant not only waging war on the nations that believed in him; it also meant challenging the central tool of his economic power - the gold standard. Fuller's summary of Hitler's economic doctrines is startling, for the Führer emerges not just as a second Napoleon, but as a prophet of what are, in the 21st century, standard tenets of anti-neo-liberal economics, including the idea that money is not a commodity and that international financial exchanges should not function as means of speculation:

"Hitler's goal was Napoleonic: to establish a German Continental System under the aegis of Germany. Also, his means were not far removed from those of the great emperor: to liberate Germany from the shackles of international loan-capitalism...

"Hitler held that, as long as the international monetary system was based on gold, a nation which cornered gold could impose its will on those who lacked it. This could be done by drying up their sources of exchange, and thereby compelling them to accept loans on interest in order to distribute their wealth - their production. He said: 'The community of the nation does not live by the fictitious value of money, but by real production which in its turn gives value to money. This production is the real cover of the currency, and not a bank or a safe full of gold'. He decided: (1) To refuse foreign interest-bearing loans, and base German currency on production instead of on gold. (2) To obtain imports by direct exchange of goods - barter - and subsidize exports when necessary. (3) To put a stop to what was called 'freedom of the exchanges' - that is, licence to gamble in currencies... And (4) to create money when men and material were available for work instead of running into debt by borrowing it.

"Because the life of international finance depended upon the issue of interest-bearing loans to nations in economic distress, Hitler's economics spelt its ruination. If he were allowed to succeed, other nations would certainly follow his example... This financial pistol was pointed more particularly at the United States, because they held the bulk of the world's supply of gold, and because their mass-production system necessitated the export of about 10 per cent of their products in order to avoid unemployment." (Fuller, Decisive Battles, vol. 2, pp. 435-6)

The outbreak of actual war in 1939 was thus preceded by what the U. S. embassy's military attaché in Berlin termed "an economic war in which Germany is fighting for her very existence" (ibid., p. 437), waged between the "loan-capitalism" propagated by the U. S. and Britain and a new barter system backed by Germany. And here Fuller formulates a statement that I am almost reluctant to quote, because it may well reflect in part his pre-war fascist sympathies (he had been a member of the British Union of Fascists led by Oswald Mosley). Yet as a judgement on international economics, quite separate from Fuller's (condemnatory) judgements on Nazi anti-Semitism and Blut und Boden ideology, it is too thought-provoking to ignore: "When we consider these economic causes of the Second World War it must be borne in mind...that the struggle between the two economic systems is not a question of right and wrong, but of survival values. It was no more right or wrong for loan-capitalism to fight for its supremacy than it was for Hitler to fight for his barter system" (p. 437). Compare it to Polanyi's above-quoted statement that "the part played by fascism was determined by one factor: the condition of the market system", and you have a single diagnosis made independently by two highly intelligent and deeply-read scholars who lived through the events in question - a diagnosis whose relevance to our present-day situation is intense, and frightening.

It is that relevance I should probably now get around to addressing explicitly. Polanyi is not an economic determinist in the sense we would normally interpret that term. Though he acknowledges early on that an economic "explanation of one of the deepest crises in man's history must appear as all too simple", and promptly insists with his habitual gift for paradox and controversy that despite how it must appear, such an explanation is necessary and justified (p. 4), his "economics" is precisely not the sphere of mathematical system to which the subject was reduced by classical liberal thinkers. And so the machinations of the gold standard system did not lead inexorably to fascism: they provoked it as one, very sudden and militarily aggressive, reaction among a number of others. One alternative which was scarcely any better in humanitarian terms was Stalinist "socialism in one country", which Polanyi shows to be based on an economic model significantly different from Leninism, very similar in crucial respects to that of Nazi Germany, and as exploitative as the latter of terror, dictatorship and enforced labour. But Roosevelt's New Deal was also a turn away from liberal laissez-faire economics, one that never required - despite the false arguments of Polanyi's rival Hayek - the renunciation of traditional political freedom. "The emerging regimes of fascism, socialism, and the New Deal were similar only in discarding laissez-faire principles" (Polanyi, p. 252).

The fact that the parties of the more moderate alternative won the war probably has more to do with the historical depth of their economic advantage than anything else (Hitler was in the end forced into economic dire straits that resulted in a gold-looting spree of his own; and even that could not pay for the costs of the war effort). It has not turned out to be the dawn of a new era that Polanyi predicted: instead the "nineteenth-century civilization" has re-emerged, based now not on gold, but on a tightly interconnected system of supposedly "self-regulating" currency and bond markets that functions (or fails to function) in alarmingly similar ways. As Joseph Stiglitz observes in his preface to the 2001 re-edition of The Great Transformation, Polanyi's "concerns are consonant with the issues raised by the rioters and marchers who took to the streets in Seattle and Prague in 1999 and 2000 to oppose the international financial institutions" (p. vii):



Polanyi's closing reflections on "freedom in a complex society" are relevant to our roughly parallel situation, in which the global "market society" is on the verge of collapse and fascist alternatives are already rearing their ugly heads across Europe. He saw the problem of defining human freedom as crucial - and in his analysis, the failure of market society proved the failure of the liberal definition of freedom, which had seen it as a purely political, legal matter, separated from the economic sphere. The Western "comfortable classes enjoy the freedom provided by leisure in security; they are naturally less anxious to extend freedom in society than those who for lack of income must rest content with a minimum of it" (p. 262). Rights have only been granted to those less materially privileged at a pace sufficiently slow that the "comfortable classes" maintain their comfortable advantage: the African-American is no longer a slave, but he or she still often lives without the material "freedom provided by leisure in security".

In other words, if you want true liberté, it cannot be separated from égalité and fraternité. And that may well mean restricting its current, more absolute forms: in other words, introducing regulation, the enemy of classical liberalism. To quote Polanyi, "To turn against regulation means to turn against reform. With the liberal the idea of freedom thus degenerates into a mere advocacy of free enterprise...[which] means the fullness of freedom for those whose income, leisure and security needs no enhancing, and a mere pittance of liberty for the people, who may in vain attempt to make use of their democratic rights to gain shelter from the power of the owners of property" (p. 265). 

Regulation does mean compulsion - Polanyi is open about this. His response is simply that maintaining an absolute conception of freedom will lead to the collapse of society and its swift reconstitution without freedom, in the name of fascist unity: "Freedom's utter frustration in fascism is, indeed, the inevitable result of the liberal philosophy, which claims that power and compulsion are evil, that freedom demands their absence from a human community. No such thing is possible; in a complex society this becomes apparent. This leaves no alternative but either to remain faithful to an illusionary idea of freedom and deny the reality of society, or to accept that reality and reject the idea of freedom. The first is the liberal's conclusion; the latter the fascist's. No other seems possible" (pp. 265-6). No other is possible, unless we first revise and moderate our conception of what it means to be free.

And that means revising and moderating our conception of economic value - for some version of such value must be a given in society: unless we are hermits, we cannot help but contribute to it. "Any opinion or desire will make us participants in the creation of power and in the constituting of economic value. No freedom to do otherwise is conceivable" (p. 267). As I suggested earlier, we surely do need to get away from the stranglehold exerted by the classical commodity conception of money - of which gold has for most of history been the prime exemplar. But we also need to learn the lessons of history concerning the pitfalls of those attempts that have been made to break that stranglehold. It is an uncomfortable truth that the most radical global-scale challenges to modern capitalism have been made by charismatic dictators: Napoleon, Hitler, Stalin. Can we break out of the trap of neo-liberalism while avoiding a future of dictatorship?

Polanyi suggests we can. His ideal of a truly socialist thinker and activist is Robert Owen, who like the Saint-Simonians in France around the same time, recognized that solving the problem of freedom involved transcending the West's pervasive individualism. The problem with Heroic Man as the alternative to Economic Man is that he rests singular (and masculine). For both Owen, who founded the co-operative movement, and the Saint-Simonians, the future must be based on co-operation, not singularity. Such co-operation requires putting community before "market society", small-scale collective freedoms before the freedom of powerful individuals.

But one thing is clear: a movement like Owen's "townships" or the Saint-Simonian communes will probably not get far today without securing some kind of international legal agreement, some space defined against the current neoliberal consensus. Otherwise it will be shut down swiftly - most probably through the ideological, but superficially "reasonable", insistence that such communities "open themselves up" to wider networks of trade and currency. It is the basis of such insistence that needs to be removed. The future should be "transnational" in one sense: it should be regulated transnationally. Yet the purpose of such regulation should be to restore a balance that allows nations and localities more communal freedom and solidarity than they have been permitted to have to date. The high level of material transnational "flows" that define our consumerist present must be replaced by a a more ideal level of international co-operation.

In other words: we need the internet, we need Skype, we need multiculturalism, translations, flows of ideas, virtual fora in which information, images and descriptions of other ways of life and other communities' issues and problems are exchanged. We do not want to become parochial bigots. We do not, however, need - in fact we must learn to do without - the vision of unlimited consumer choice, boundless cheap air travel and ever-expanding intercontinental trade that the system of the last 200 years has dangled in front of us. That system, as Polanyi makes clear, reifies and exploits its three "fictitious commodities" in unacceptable ways. And even if the poor do accept being treated like wild goats and money does carry on representing a substance to be hoarded, the third factor I have not discussed here - land, or Nature - cannot for much longer continue to be treated as a pure material resource for exploitation without unleashing devastating environmental consequences. If there are no ways to transport commodities around the world other than by burning fossil fuels - and at the moment, green intercontinental freight looks like something of an oxymoron - then "autarchy" or "economic nationalism" should certainly not be considered dirty words, whatever their dubious past realizations.

Wednesday 18 February 2015

Reading Karl Polanyi: how wild goats and gold explain the last two centuries of global history (part 1)





I can't quite remember where I read the name Karl Polanyi first. It must have been in one of the books about ecological economics I've been perusing recently: most likely Tim Jackson's Prosperity Without Growth. In any case, there seemed to be enough material out there on the internet suggesting that Polanyi's was not only a powerful and sociologically sophisticated account of economic history, but one particularly relevant to the crises of the present day. One article even brandished the headline "Karl Polanyi Explains it All". I decided I needed to get hold of a copy of his magnum opus, The Great Transformation: The Political and Economic Origins of Our Time

Having now finished it, I can tell you in all honesty I think the hype is justified. Despite writing in the 1940s, Polanyi really does explain it all. His theses shed new light (new to me, anyway) on all the major events of modern history since the Industrial Revolution - and put the current politics of the financial crisis in a perspective that stretches back to Napoleon and the English Poor Laws of c1800. Combine his case with that made by some of his notable predecessors, such as Brooks Adams, and you have a mode of explanation that embraces a vast swathe of the past since the late Roman Empire. You want proper longue durée history? Just follow the money.

Polanyi is most easily contrasted with an economist who published a far more influential book in the very same year as The Great Transformation, 1944: Friedrich Hayek, author of The Road to Serfdom. Like the older Ludwig von Mises, with whom Polanyi fought a series of running battles in the Austrian press during the 1920s, Hayek was a liberal, believing that the unhindered operation of free markets was the surest route to general prosperity. Polanyi maintained more or less the exact opposite. Rather than being the result of natural human propensities, as classical liberal economists like Adam Smith had argued, the free markets of the modern world were the result of a giant social experiment beginning in the early 19th century, one which had unleashed culturally destructive forces unparalleled in human history. To allow free markets free reign over any sizeable span of time would be civilizational suicide. And so the development of the free-market model demonstrated from the beginning what Polanyi called a "double movement", in which a planned, ideological and violently exploitative economic liberalism proceeded hand-in-hand with spontaneous social resistance.


Does this sound, perhaps, like the demonization of a perfectly peaceful and rational activity? How could trade - which is surely what markets are for - cause such havoc? To explain that, Polanyi, having set the scene for his book's own relevance to its time with his opening two chapters and a third introducing the "Great Transformation" of his title (the Industrial Revolution), strikes out in an unusual direction for an economist: he starts doing some anthropology. His conclusion, gathered from the evidence of various older types of society from ancient Egypt to Melanesia, is summed up in his idea of "embeddedness": in traditional economies, social values subsume economic ones. "Man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end" (p. 48).

One could say - isn't that true now? Why do people buy Rolexes or football clubs except to "safeguard their social standing"? But the difference is that the predominance of social values in traditional economies tended to promote mutuality, even equality, rather than just individual status. Two of Polanyi's principles of "primitive" economic behaviour are "reciprocity" and "redistribution". These not only strengthen community, they do so in culturally rich forms: feasts organized by a clan chief, for instance, or potlatches, or medieval feudalism. Markets, plural, certainly exist, but they facilitate exchange far more than they promote competition. Long-distance trading continues for a long time to be about mutually balancing the unequal resources of geography, facilitated through alliances and monopolies: the Methuen Treaty of 1703 for instance gave Portugal cheaper British wool, and us our taste for a glass of port after dinner.

The establishment of a market system, or what Polanyi calls a "market society", is dependent on trade at the national level, in between the micro-scale of local markets and the convenient arrangements of international exchange. It is here that competition emerged; but it could only do so through the intervention of the state, acting against the interests of individual towns (whose authorities and craft guilds sought to protect their own commercial interests through privileges). Nation-states and "mercantilism", or the controlled regulation of commerce on a national scale, emerged together. However, this system was still what present-day neoliberal economists would call "protectionist" or "interventionist". It was not a "free market", in which prices for all goods and services were allowed to fluctuate freely.

To create such a "self-regulating market" (Polanyi uses the term to indicate a model or principle, rather than a historical reality) required the institution of what Polanyi terms "fictitious commodities". Commodities are goods produced for sale, and the free market demands that their price be determined by the interaction of demand and supply. But the market tends to put the factors of production for goods in an analogous situation: raw materials, of course, but also land, labour, and money (or capital). These last three are "fictitious commodities": none of them are in fact "produced" for sale like goods, but on the market they are treated as if they were (money, as we will see in the second half of this post, can however be represented by an actual commodity, namely gold). The "prices" of these commodities are respectively rent, wages, and interest. Letting those prices fluctuate without any attempt to control them means subordinating to the economic sphere elements which are absolutely central to social and cultural life, traditional or modern.

Land (or nature) and human beings in particular obviously require a certain stability in planning and prospects in order to thrive. Polanyi's indictment of the dehumanization involved in free-market ideology is damning: "the alleged commodity 'labor power' cannot be shoved about, used indiscriminately, or even left unused, without affecting also the human individual... Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation... Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted" (p. 76). Rapid market movements of capital investment would act similarly upon business (as the 1980s phrase "asset-stripping" graphically conveys). "Protectionism" is simply another term for economic human kindness.

What Polanyi then shows in fascinating detail is how the innovation we call the "Industrial Revolution" did not immediately create a free market: the effects on English society were somewhat delayed, in particular by the protection of labour. A whole series of debates took place about the Poor Laws - what today we would call social security. One particularly generous but ultimately misguided measure was the "Speenhamland Law" of 1795, by which county magistrates benevolently ensured that poor labourers would receive a minimum income from the parish tax "rates", either paid in full or by supplements to income earned. This utterly failed to account for the response of employers, which, logically enough, was to lower wages, counting upon their being made up for by allowances paid by the parish. However, if the parish was thereby funding labour costs, it was not funding productivity - which labourers now had no incentive to maintain. Economic logic sank philanthropy.

It was only with the Poor Law reforms of 1834 that the labour market was freed up and modern industrial capitalism in its full, virulent form emerged - along with the "working class" or proletariat. They worked because they had to: the only alternatives to work found through the market were the horrors of the workhouse, or starvation. Sometimes the workhouse actually meant starvation anyway, as in incidents such as the Andover workhouse scandal of 1845 in which inmates were reduced to gnawing the bones they were supposed to be grinding up for fertilizer:

 

The logic of the solution was precisely not "natural" - it was argued for in the teeth of fierce political opposition. The strange thing about this opposition is that it was organized by the aristocracy, not by the working class (whose interests were not yet consolidated, let alone self-represented). This was "Tory socialism" - a phrase doubtless familiar to British historians of the period, but which made me let out a shout of disbelief when I read it. The Tories - socialist?! What more of a contradiction in terms could you want!

But one says that from the standpoint of a period in which the Tory Party's chief political constituency has long since ceased to be the landed aristocracy, whose numbers of votes or potential funding are simply too tiny to signify today. That was not the case in the 1830s. Rural landowners set themselves up as the last-ditch protectors - in their own interests, it must be said - of a rural culture suffering rapid deterioration through movements of population to the city slums and factories: ironically, a process they had themselves partly facilitated through opportunistic enclosures of common land. They opposed the Whigs and their measures such as the proposed repeal of the Corn Laws (the abolition of grain tariffs, allowing foreign grain in to feed factory workers cheaply and thus help reduce wage costs), because they wanted to hold up the rapid expansion of industry. The setting of humane limits on factory working hours through the Ten Hours Act (1847), "which Karl Marx hailed as the first victory of socialism" - writes Polanyi, relishing the contradiction - "was the work of enlightened reactionaries" such as Lord Ashley (p. 174). Though very much a socialist himself, the lesson Polanyi draws is that "class struggle" is no predetermined pattern of social history, because classes come and go in contingent and unpredictable fashion. Over the course of modern British history, the proletariat came, and the rural aristocracy or "squirearchy" went - but not without the two entering into a peculiar temporary alliance of interests. (That alliance did not play such a powerful role on the Continent, incidentally.)

It was the Whig or future Liberal case that represented the future - that 19th-century future which Polanyi believed had been permanently scuppered by the catastrophic events of the first half of the 20th century, but which we have seen revived in late-20th-century and 21st-century "neo-liberalism". But the future of human society turned out to be based on a theory of the non-human past, of a kind of abstract "state of nature" whose laws could operate without regard for human motives. This is where the wild goats of my title come in. They are a key example in a text that Polanyi regards as a truer expression of liberal economic philosophy than the more famous works of Adam Smith or David Ricardo: Joseph Townsend's 1786 Dissertation on the Poor Laws. Smith's Wealth of Nations (1776) had been written before the debate about the relief of the poor had really got underway in the 1780s. It thus describes an "incomplete" form of capitalism - one which is still "embedded" and protected, and in which the welfare of whole societies is addressed in relatively holistic terms. Townsend's polemic is a very different matter.

Whereas part of the problem of Speenhamland and laws like it was that they encouraged the poor to abandon their dignity as labourers for the security of parish relief - and so part of any humane solution, surely, would have lain in helping them to rediscover that dignity - Townsend argued that such noble motives as the desire to earn one's living never played a role in the lives of the lower classes. They were crude, uncultured brutes, and only the threat of starvation would be effective: "The poor know little of the motives which stimulate the higher ranks to action - pride, honour and ambition. In general it is only hunger which can spur and goad them on to labour" (Dissertation, p. 15). And here Townsend introduces a story which strikingly anticipates (indeed, Polanyi suggests it directly influenced) Malthus, Darwin and late 19th-century "social Darwinism": the story of the wild goats of the Juan Fernandez Islands in the South Pacific.

Goats had been introduced to these islands, which famously included the location of Alexander Selkirk's marooning (the inspiration for Robinson Crusoe), by the Spanish. In the absence of competition, they proliferated. Besides the natural limits of the islands' edible vegetation, the only other checks on their numbers were the periodic visits of English pirates, for whom goats on islands such as these were an important provision, as depicted here:

Taking on Provisions

 (I mentioned other dimensions of importance assumed by English piracy in the development of global capitalism in another blog post on this site.) According to Townsend's version of the story, which Polanyi notes with a certain satisfaction has no discoverable factual basis, the Spanish responded by trying to wipe out the English pirates' food supply: they set loose dogs on the islands in order to try and kill off the goats.

This measure established a different kind of balance than that which had previously existed between the goats and their food: it created competition, and what Townsend quite clearly identifies as natural selection (though he does not name it as such). In his words:

"As many of the goats retired to the craggy rocks, where the dogs could never follow them, descending only for short intervals to feed with fear and circumspection in the vallies, few of these, besides the careless and the rash, became a prey; and none but the most watchful, strong, and active of the dogs could get a sufficiency of food. Thus a new kind of balance was established. The weakest of the species were among the first to pay the debt of nature; the most active and vigorous preserved their lives." (Townsend, Dissertation, p. 45)

Whereas the natural bounty of their initial situation had made the goats indolent, the ever-present twin threats of fear and hunger induced by marauding predators exerted a constant pressure that favoured the survival of the fittest. Townsend's conclusion? - the poor should be treated like goats. Their indolence and vice would only give way to industry and virtue if there were radical, natural inducements - above all, that of hunger.

Significantly, Townsend recognized that human societies had habitually practised what he called a "community of goods" - or what Polanyi calls redistribution. His argument was simply that this had been under conditions of expansion. When a stage of society was reached at which improvements in agriculture could no longer keep pace with population increases - here Townsend virtually anticipates Malthus, writing 12 years later - the limits of expansion were felt, and original "laws" of non-human nature kicked back in: the weakest must go to the wall. "By establishing a community of goods, or rather by giving to the idle and to the vicious the first claim upon the produce of the earth, many of the more prudent, careful and industrious citizens are straitened in their circumstances, and restrained from marriage. The farmer breeds only from the best of all his cattle; but our laws choose rather to preserve the worst" (Dissertation, p. 62).

Townsend's solution, which already sounds to us thoroughly "Victorian" in its repulsive combination of economic brutality and Christian hypocrisy, is explicitly to permit the commodification of labour, and allow private charity to rescue just that remainder of the poor whose "virtue" seems to merit it: "It is with the human species as with all other articles of trade without a premium: the demand will regulate the market" (Dissertation, pp. 61-2). And this is very close to what was actually implemented after 1834. Liberal capitalism was founded, in a double sense, on a dehumanizing fiction: the fiction of labour as a simple commodity like wood or sugar, based in turn on a fictional story invented to make human behaviour seem as close as possible, in its essential principles, to that of wild animals.

This fiction was a crucial move toward the ideological separation of the economic sphere from politics. As Polanyi writes:

"By approaching human community from the animal side, Townsend bypassed the supposedly [to all previous theorists] unavoidable question as to the foundations of government... Hobbes had argued the need for a despot because men were like beasts; Townsend insisted that they were actually beasts and that, precisely for this reason, only a minimum of government was required. From this novel point of view, a free society could be regarded as consisting of two races: property-owners and laborers. The number of the latter was limited by the amount of food; and as long as property was safe, hunger would drive them to work." (Great Transformation, pp. 119-20)
Yet as mentioned earlier, the crucial characteristic of competitive markets as constituted since the pre-industrial era of "mercantilism" was that they were national, and thus regulated by the nation-state. Throughout the 19th century, as part of Polanyi's "double movement", nation-states spontaneously continued to develop strategies for protecting their labour forces against the worst dehumanizing consequences of the free market. Some of these were laudable, some of them quasi-criminal: they ranged from labour laws to imperialist conquest. (If technological developments boosted production, the obvious way to stop prices falling and protect the wages of your workforce would be to find new markets: and markets in state-controlled colonies were naturally the best, because the state could simply impose favourable trade tariffs rather than having to negotiate them.) The historian must look for another, additional source of pressure on the system to explain why it collapsed so catastrophically in the early 20th century. That pressure was exerted by gold - the subject of the second half of this blog post.