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Review: Karl Polanyi-How the State Created Capitalism

by Thursday, Aug. 20, 2009 at 3:49 AM

In "The Great Transformation" (1944), Karl Polanyi deconstructs the myth of a free market economy that develops naturally and spontaneously and the idea of the state as a counter-pole to capital. The transformation of labor and land into commodities was a painful process.



[[This review of Karl Polanyi’s “The Great Transformation. Political and Economic origins of Societies and Economic Systems, 1978 is translated from the German on the World Wide Web,]

In times when “neoliberals” promote a cult around the free market and neo-Keynesians see a panacea in state interventions, reading “The Great Transformation” by classical author Karl Polanyi from 1944 can be rewarding. To speak in a post-modern way, Polanyi in this work deconstructs the myth of a free market economy that develops naturally and spontaneously and the idea of the state as a counter-pole to capital. Polanyi analyses the development of capitalism mainly in the example of England from the 18th century to the 1930s. One of the main theses of the book is: “Economic history shows the genesis of national markets was not the consequence of the slow and spontaneous emancipation of the economic realm from state controls. Rather the market was the result of a conscious and often violent intervention by the government in society for non-economic reasons.” (p.331).


According to Polanyi, markets already existed in antiquity. But with capitalism, society was an appendage of the market and the market was no longer part of society. (p.88). The liberal credo that workers, land and money should be treated as free goods first prevailed in England in the middle of the 19th century. For Polanyi, workers, land and money were “fictional goods” since they are not produced for consumption. (p.108). The worker cannot be separated from the life or survival of the person. Nevertheless the market does this as though the worker were a commodity like any other.

To establish a free labor market, the state in the middle of the 18th century had to remove the “right to livelihood” that the poor had through common law (p.120). A subsidy reducing the price of bread was paid to the poor by the community to guarantee their minimum income. According to the Poor Law, the community recruited the unemployed to work to secure their livelihood. To prevent well-to-do communities from being “flooded with paupers,” the state by law limited freedom of movement and punished vagrancy in the case of repeated offenses as a dangerous crime. In this system, businesspersons relied on the community paying the appearance between the subsistence level and the wage. This system appears in another form today in Germany in the “combined wage” and the 1-euro job.

Different liberal authors attacked the “right to livelihood.” The poor could only be spurred to factory work through hunger. Removing hunger through poor laws was an evil. These laws were the real cause for the existence of poverty and hindered the mobility of workers. In 1813/14 in England the Artisan law and in1834 the Poor law were repealed. In the discourses of Townsend, Hobbes and Malthus, the development of wealth and poverty was declared a natural law.


The transformation of labor and land into commodities had to be enforced by the state in a painful process. In 1860, the freedom of contract was first expanded to land after small farmers were driven from the enclosures by sheep-farmers from the former communal land. In Italy the state carried out the transfer of land to private persons through secularization of church land. In France, the Code Napoleon created middle class property in which the mortgage was made a civil law contract.

The famous Laissez-faire principle was part of the heyday of liberalism. From the state, liberals demanded that formation of unions by workers and the merger of businesses into cartels be prevented. To enforce the dogma of a deflation policy, liberals supported state regulations and dismantling democracy. “In other words, when the demands of a self-regulating market proved incompatible with the requirements of Laissez-faire, liberals turned against Laissez-faire and favored the so-called collectivist methods of regimentation and restriction” (p.205). According to Polanyi, the middle class in England was first ready to approve the workers’ right to vote after unions adopted the smooth functioning of industry as their main concern. (p.236).

Polanyi sees passing laws and the Ten-Hour law of 1847 as the self-defense of the society against the forces of the market. These measures went back less to the working class movement than to “enlightened reactionaries” and big landowners who sought alliances with workers against the factory owners. In Germany, the welfare state was established by the Junker Bismarck and in France by Napoleon III.


Without being aware of this, Polanyi had a similar theory of the genesis of capitalism to Bakunin. Bakunin was convinced capital was created by the state and therefore revolutionaries had to smash the state to abolish capitalism. What are interesting in Polanyi’s approach is that he shows how capitalism was made, that capitalism did not simply arise naturally and that the state played a central role. Therefore it is absurd to think of the state as the counter-pole to capital. Without the state, capitalism could neither have been enforced nor maintained. A free market economy regulating itself is a myth that never existed in reality.

With John Holloway, one could say institutions like private property, capital and paid labor do not simply exist but are fought-over disputed terrain created daily by us. Therefore his watchword is: “Stop making capitalism!’ For Holloway and Bakunin, the state is a part of capitalism that cannot be simply separated from this connection. A theoretical debate on the state could certainly go back to Polanyi.

Like the anarchist, Polanyi is far from any cult of progress around individualization and does not identify it in pre-capitalist times. That Polanyi in 1944 believed that the liberal market economy was history is problematic. “Among liberals, freedom is reduced to an advocacy of the free entrepreneur that became a fiction through the hard reality of gigantic trusts and princely monopolies” (p.340). This sentence could also come from Adorno or Lenin. Like many contemporaries, Polanyi believed competition ultimately led to monopoly.

Today the times of strong state control of the economy and state monopolies as in the systems of the New Deal are over. On this background, reading Polanyi’s book is exciting since neoliberals see a main obstacle for the economic upswing in the “right to livelihood” through the welfare state. The hard hand of the state is summoned to enforce lowering wages by establishing a second and third labor market and ensuring and enforcing private property especially on the intellectual plane. The free market can in no way be maintained through Laissez-faire.

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