Karl Polanyi
The Great Transformation part 1
Since the start of my undergrad, and the small gap year before grad school, every great professor I’ve ever had has recommended The Great Transformation by Polanyi. Reading part 1 I can see why. This book is beyond amazing, you get a sense of what he is doing as well as the scope of his project almost immediately. Right from the start he introduces you to the 4 great old-world institutions, how they maintained what he calls the ‘100-year peace’ and how these institutions started to crumble under the new system. With the death of the old-world institutions and the inexperience that the world powers had with the new system of global capitalism Polanyi noticed the obvious, the connection between that and the catastrophe’s of the 20th century were inexorably connected.
To flesh out more of what I said, Polanyi thought the 19th century civilizations was hoisted on “the four great institutions”
1) the balance of powers system: which prevented big wars between the great powers
2) the international gold standard: which organized the world economy and gave it a lens to examine and quantify itself
3) self-regulating market: which brought untold wealth
4) the liberal state
These four institutions were bound up together by what Polanyi called Haute Finance, or high finance. The big bankers and financial capitalist of the world ensured peace between nations because they made the big nations recognize that peace was in everyone’s best interest. Haute Finance had incredible power and range, they were at conferences between nations, they served as liaison and middlemen in minor disputes. Even if a war did break out, Haute Finance reminded everyone of the costs of being too destructive. Haute Finance was the 5th hidden institution that kept the oil in the machine and lubricated all the parts.
But while Haute finance and the economic organization of the world rested on peace, the political organizations of the world were built and maintained by the threats and mechanisms of war. Of the four great institutions, the balance of powers and the international gold standard were of prima importance for the continuation of peace. While Haute finance seemed to be continually organized and uninterrupted in their goals, the political organizations were far from it. For Polanyi, what kept the great powers at bay was the fact that there were 3 distinct power groupings controlling most of the 19th century world. So, if one grouping tried its hand at a power grab, the other two groups would band together to stop it. With the combination of Haute Finance, it was doubly against the great powers interest to go to war, both on the political and economic realm. But this changed drastically in 1904. To quote Polanyi directly here;
“In 1904, Britain made a sweeping deal with France over Morocco and Egypt; a couple of years later she compromised with Russia over Persia, and the counter alliance was formed. The Concert of Europe, that loose federation of independent powers, was finally replaced by two hostile power groupings; the balance of power as a system had now come to an end”
A little sidenote, you can see just how passioned a writer he is here, truly brilliant.
Back to the story however, you can see the importance of the reorganizing power groupings controlling the world. The game dynamics with 3 powers vs 2 completely changes the rules of the game, and while they still had Haute Finance, this to them was a minor incentive to keep them from overreaching. The balance of powers system collapsing lead to the first of the great wars, but it was still characterized as a 19th century hangover, still a vestige of the old world, whereas World War 2 as we will see later is almost completely the opposite.
However, after the war they did their best to maintain some semblance of normalcy, to try to get things back on track, and all this was done with the faith given to the gold standard. Of the last four great institutions, the gold standard was the last to fall, and its death was the nail in the coffin, the “railroad” which brought Europe and the great powers to its doom. Once the gold standard failed, which was the backbone of the world economy, there was no argument whatsoever to be made for peace between the nations. it seemed everyone was emboldened to keep the gold standard stitched together. “It would be hard to find any divergence between utterances of Hoover and Lenin, Churchill and Mussolini, on this point.”
The gold standard could not be maintained, however. To run through the technicalities, after the war, Great Britain and the pound was the currency used to stabilize and finance the losers of the first great war. however, the position of the pound became somewhat of a concern to America, which wanted to prevent capital flight from London to New York in hopes of keeping the pound strong and stable. the Federal Reserve kept a policy of low interest rates and so did New York. America was in need of high interest rates however, as their prices were becoming more and more inflated by the day, a boom eventually brought the bust. The slumps of the great depression were heralded in, and America was forced to go off the gold standard to avoid even more deflationary spiraling. This was important not just for America and Britain, but for the world. America at the time was the leader in gold, so when they left the gold standard, everyone else followed suit. The faith the world placed in the gold standard, the trend of trying to keep it alive, was reversed, and the symbol of world solidarity had cracked.
Before I move to Polanyi’s part one finale, I want to mention Polanyi’s disgust for the league of nations. He has two sections about the gold standard in chapter 2, with a break in the middle of the sections just to talk about the league and his hatred for it. Which I really quite enjoyed. Basically, the league for him failed on 2 fronts. 1) they disarmed the group of losers from the first world war, making the balance of powers problem exponentially worse. 2) by their own rules the winners of the war became powerless to prevent crises developed by the antagonisms of the losers, which still organized and had some power after the war.
So, they disarmed the powerless, causing them to feel aversion to the winners, and in their small rebellions, the winners were helpless to solve the disputes caused by their own bureaucracy. It was a lose-lose situation all around.
Coming back to the story, and the part 1 finale of Polanyi’s great work, as the gold standard fell, we saw one by one the institutions came crashing down.
“The liberal state was in many countries replaced by totalitarian dictatorships, and the central institution of the century— production based on free markets—was superseded by new forms of economy. While great nations recast the very mould of their thought and hurled themselves into wars to enslave the world in the name of unheard-of conceptions of the nature of the universe, even greater nations rushed to the defence of freedom which acquired an equally unheard-of meaning at their hands”.
This section following the cataclysm and the catastrophes following the death of 19th century world led to what seemed to be a world revolution in the eyes of Polanyi. Here he finally shows us his cards, why he setup the book the way he did and what the aim of this book is even about. “This leads up to our thesis which still remains to be proven: that the origins of the cataclysm lay in the Utopian endeavor of economic liberalism to set up a self-regulating market system.” If Haute Finance was the glue that kept all the institutional pieces together, the self-regulating market was the foundation. The other three great institutions were designed and operated with the self-regulating market in mind. Polanyi thinks the reason the collapse was so extreme was because the worlds foundations were economic in nature. While other eras of the world were also limited by their material and economic sense, this economic order was entirely distinct. Its motive was gain, and the level of justification needed to support this system became so massive and intertwined that when the vestiges of the old world finally broke, we saw war and violence on a scale we had no idea was possible.
“The mechanism which the motive of gain set in motion was comparable in effectiveness only to the most violent outbursts of religious fervor in history. Within a generation the whole human world was subjected to its undiluted influence.”
Polanyi leaves this section with a taste for more understanding. Which for me is truly the mark of a great author. To move further, to understand German fascism and the events of world war 2, we need to go back to the roots, back to the industrial revolution in England. We need to see why Polanyi blames the ideologies propping up self-regulating markets as the main cause of our problems today and in his time. This he will begin in part 2.
I hope you all enjoyed this section, I love Polanyi, I think he is truly a great author, excited to see where he takes us on this intellectual journey and hope you all join me for a walk through of section 2.
The Young Econ Scholar 