The Great Transformation Part 5: Polanyi on Marxian Analysis

Previous posts in this series:

The Great Transformation: Mainstream Economics and an Introduction to a New Series

The Great Transformation Part 1: The Market

The Great Transformation Part 2: More on Markets

The Great Transformation Part 3: Neoliberalism Before It Got Its New Name

The Great Transformation Part 4: Reaction and Counter-Reaction To Self-Regulating Markets

The Great Transformation is an examination of the origin of the theory of self-regulating markets and its errors. Polanyi’s argument is that when a society is threatened by violent intrusions, such as the sudden introduction of markets as the dominant new organizing principle, it fights back. As discussed in Part 4, beginning in the 1840s or so there was a general feeling among the upper classes that the self-regulating markets were so destructive that social control had to be imposed to reduce the damage and prevent further harm. There was no theory, and no plan, just case-by-case legislative action. Factory and agrarian workers and other members of the lower classes could not vote, so that impetus came from other classes.

Polanyi says that for the society to survive, it was necessary for laborers and the impoverished to come into existence as a class with the right to make demands and expect to see them answered. Under the Speenhamland system and the Poor Laws in effect in the early 1800s, this was difficult, perhaps in part because of the split between those on relief and those with miserable poorly-paying work. When those laws were repealed and the poor put on the street where they served as the army of unemployed to keep wages at very low levels, it became possible for them to identify as a class. This sounds a bit like Marxian analysis. And, in fact, Marx agreed with the economic liberals of that day that the natural level of wages was the subsistence level. This is from the Paris Manuscripts:

The lowest and the only necessary wage rate is that providing for the subsistence of the worker for the duration of his work and as much more as is necessary for him to support a family and for the race of labourers not to die out. The ordinary wage, according to [Adam] Smith, is the lowest compatible with common humanity, that is, with cattle-like existence.

The reference to Smith is to Chapter VIII of The Wealth of Nations. Smith’s analysis of the wages of labor is much more complicated than this quote from Marx shows. He says that wages depend on a number of factors including whether a nation is declining or thriving. He says that in England in the 1770s wages were above mere subsistence, and the lives of workmen were improving. That helps explain the reaction to the intrusion of the free market in labor brought on in the early years of the Industrial Revolution. The sudden change from a reasonably pleasant life to a much more miserable existence contributed to the social demand for restraining the self-regulating market. Smith seems to approve of the higher wages workmen were receiving:

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage, or as an inconveniency, to the society? The answer seems at first abundantly plain. Servants, labourers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part, can never be regarded as any inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged.

The laissez-faire cheerleaders of the 1800s and their neoliberal counterparts don’t agree, and perhaps Marx’ pessimism is more realistic than Smith’s approbation.

In Chapter 13, Polanyi gives two reasons for his disagreement with Marxian analysis. First, Marx teaches that classes are the basic elements of society. Polanyi says that far more often classes arise to suit the form society has taken. When a society is stable, class interests can be used to understand the evolution of the society. When society undergoes structural changes, the class structure may fracture. A class that has become functionless may disintegrate and be replaced by other classes or not at all. These structural changes may be environmental, the result of war, technological advance, or the rise of a new enemy. In such cases, class theory doesn’t predict the outcome.

Secondly, there is the equally mistaken doctrine of the essentially economic nature of class interests. Though human society is naturally conditioned by economic factors, the motives of human individuals are only exceptionally determined by the needs of material want-satisfaction. That nineteenth-century society was organized on the assumption that such a motivation could be made universal was a peculiarity of the age. … Purely economic matters such as affect want-satisfaction are incomparably less relevant to class behavior than questions of social recognition. Want-satisfaction may be, of course, the result of such recognition, especially as its outward sign or prize. But the interests of a class most directly refer to standing and rank, to status and security, that is, they are primarily not economic but social. P. 160.

Of course, the assertion that human behavior is motivated solely by material want-satisfaction wasn’t just a peculiarity of the 19th Century, it’s the dominant idea of neoliberal economics. The idea that human beings are solely devoted to getting stuff at the best price is central to their models, and to their understanding of their ill-defined markets. It is just as false today as it was in Marx’ time. I googled the term “experiment pay compared to other people”, and got a bunch of papers and articles saying that pay isn’t the important thing. Other factors, including comparative pay levels, and the intrinsic rewards of the tasks are more important. Here’s one. Beyond that, we know humans have needs that go far beyond material goods. Just take a look at Maslow’s hierarchy of needs. Material goods satisfy the needs for safety and security, but stuff by itself isn’t going to get you much in the way of love and belonging, esteem or self-actualization.

One of the goals of neoliberalism is to re-imagine human beings as the utility maximizers of their theories. Here’s a paper that flatly says that money isn’t the important issue even for the most sociopathic set, CEOs. Giving them huge bonuses for increasing stock prices doesn’t produce higher stock prices. Even the John Galts of the Corporate Jungle aren’t good little neoliberals.

11 replies
  1. scribe says:

    In case you were wondering about the validity of this sentence:

    Material goods satisfy the needs for safety and security, but stuff by itself isn’t going to get you much in the way of love and belonging, esteem or self-actualization.

    you should go watch an episode or two of “Hoarders”. Those folks have literal mountains of stuff, so much so that it’s choking their existence. But they are, in so many ways, some of the most miserable people you’ll ever see.

  2. Alan says:

    The reference to Adam Smith is to Book I, Chapter VIII “Of the Wages of Labour”. Wealth is divided into 5 books. Book I deals with the Division of Labour. One of the main arguments in that chapter is that there are a variety of reasons labourers are usually in a weak negotiating position with regard to employers. In a static or declining economy labour is plentiful and labourers are in a weak position. In an expanding economy there is labour scarcity and labourers can negotiate much higher wages. But part of the argument is also that it is easier for masters to collaborate and conspire against workers, often out of sight, and the law deals with both parties inequitably (for why that might be see below). See sections I.8.12 and I.8.13. In that Chapter Smith makes various comparisons between countries: The UK, China, Bengal, and the American Colonies. He writes that the American colonies are obviously not as rich as the UK but they are more prosperous because they have a rapidly expanding economy, a shortage of labour and high wages (see sections starting I.8.22).
    The section (I.8.35) you quote that includes “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” is important. The argument in Wealth is about what best improves the Wealth of Nations i.e. benefits everyone. It’s not about the Wealth of the Few. He goes on to argue that Mercantilism and the collusion of merchants and politicians restricts economies (see Book IV). In this chapter he takes an early swipe at the British East Indian Company (see I.8.26 “…Bengal….In a fertile country …where subsistence, consequently, should not be very difficult, and where, notwithstanding, three or four hundred thousand people die of hunger in one year”). (BEIC is the company that had it’s tea dumped in Boston. In Bengal, of course, they weren’t just a company but a monopoly and the de facto government with their own private army.) One of the things being attacked in this section (and the book as a whole) is one of the basic principles of mercantilism: that large masses of common people had to be kept in poverty and misery. In mercantilist theory the goal was to maximize production and exports and restrict consumption. The betterment of the lower classes– higher wages, more consumption, education– was thought to hurt the economy.
    I am not sure I would describe Chapter VIII as describing a  “reasonably pleasant life”. He talks about an “improvement in the circumstances of the lower ranks of the people” but he hardly paints a picture of a pleasant life: poverty, hard work, infant mortality, exploitation, and sometimes desperation in their negotiations. As I have written before I think Polanyi gets important stuff wrong. He misunderstands Smith’s truck and barter argument (Book I, Chapter 2) and he paints historical discontinuities where none exist. In I.8 Smith is hardly painting a “reasonably pleasant life” for labourers in the UK (see sections starting I.8.27). It was better than existed in China and Indian but less so than the life of labourers in the American colonies. The dominant economic theory of the time prescribed misery for the lower classes!

    • Ed Walker says:

      I read the two paragraphs before my quote as showing an improvement. I agree the picture of life is grim, but it does seem to be improving. That supports my view that the sudden loss of the gains and the sudden loss of the possibility of more gains would cause much more misery than if their lives had always been miserable and got marginally worse.

      This and other parts of Smith are fascinating because they show a subtlety of mind, but also because he discusses actual facts. But it’s worth noting that the evidence he has is so sparse.

      • Alan says:

        Agreed, I think. See post above on the evidence. On some things he had rather more evidence than others. He was a keen observer and made careful and well constructed arguments.

  3. Alan says:

    Food for thought. Mirowski: Polanyi vs. Hayek? 2014 draft Sydney lecture. The audio of the lecture is here.

    I would instead like to explore the possibility that their respective ideas were in fact far closer than this simply dramedy of pitiless conflict could suggest. They both posited dichotomies that were vertiginously unstable; and in one particular case, one might venture to suggest it was very nearly the same dichotomy. Only recently have one or two commentators begun to trip over that possibility. Polanyi and Hayek also both made bold predictions about the future that were wildly off-base, which their respective followers still seem unable to take to heart. Instead, they keep lobbing the same old canards at each other: “market fundamentalism”, or “closet totalitarians”. If we can get past some of that, and possibly come to see these polar positions as more alike than opposed, we might be able to imagine a discussion of markets which might actually move beyond the repetitive and ancient antimonies.

  4. bevin says:

    ” The dominant economic theory of the time prescribed misery for the lower classes!”
    Did it, though? The dominant economic theory was probably the Tory view that a nation’s strength , wealth and wellbeing were measurable in terms of the living standards of the working people. Hence, inter alia “Roast Beef of Old England” myths and claims that England owed its position in the world to the superior diets and living conditions of its poor.
    This is not to argue that there was more than a tiny grain of truth in these claims, merely that it was certainly not the case that the liberal arguments that the poor must be kept close to starvation in order to make them work, which were becoming more popular among intellectuals, was still a marginal, rather than dominant point of view.
    At risk of seeming banal it ought to be borne in mind how very little Smith knew of India, China or even America. It is not clear to me that, by the last quarter of the eighteenth century, living standards in the English village were superior to those in China or India. The standard of living question is one of the central questions in capitalist ideology- it is a matter of faith among economists that the living standards of the working class rose in a period in which there is considerable evidence, from other observers, that it was falling. The comparison of diets between English farm labourers in the first half the C19th, their brothers and sisters in the textile mills and plantation slaves, seems to favour the idea that the slaves were, if nothing else better, though very ill, fed.

    • Alan says:

      The key mercantilist text is Thomas Mun’s England’s Treasure by Forraign Trade (1628). Smith cites in numerous places. Mun was a director of the British East India Company. Mun argues that “penury and want do make a people wise and industrious” but “the pomp of Buildings, Apparel, and the like, in the Nobility, Gentry, and other able persons, cannot impoverish the Kingdome; if it be done with curious and costly works upon our Materials, and by our own people, it will maintain the poor with the purse of the rich.” He could be writing today. (The current obsession with deficits and the need for uasterity (e.g. in the UK) don’t seem ssort ofr mercantilist.) For discussion see Six centuries of vilifying the poor.

    • Alan says:

      There was a famine in Bengal in 1770. It was caused by drought in combination with the forced cultivation of opium by the EIC. Smith blames the EIC in Wealth and writes of them causing hundreds of thousands of deaths. Wikipedia’s entry for the famine estimates the death toll to be in the order of ten million or a third of the population. I think we can safely assume that living standards in “the English village” no matter how dire were better than they were in Bengal at the time Smith was writing. With regards to China his information may be more speculative. I don’t know. I’d have to read more.
      One of the most admirable features of Wealth is that every argument is documented with evidence or citations. Where the evidence is weak and speculative Smith usually says as much. True he never traveled to India or China (a difficult and dangerous undertakings at the time) but he cites the writings of numerous people who had traveled to these places. (Smith nearly did travel to India as he was recommended as an appointee to a commission to investigate the practices of the EIC.) He draws on his own experiences and those of people he observed or talked to or read. He lived at various times in various places in France, England and Scotland. And although he never traveled to America he lived in Glasgow during a period when Glasgow was becoming a major port for trade with the American colonies. He, along with Glasgow merchants, participated in regular meetings of a club that discussed economic issues. When he traveled from Kirkcaldy to London to have Wealth published he delayed publication so he could absorb and integrate information that was available in London about the disputes with the colonies. After Wealth was published he took an appointment as the commissioner of customs in Scotland so he could better understand the workings of trade tariffs. In later editions there are substantial revisions to Book IV and elsewhere based on this experience. Wealth is not the work of a man who lived in an ivory tower or who was an arm-chair theorist. He was a moral philosopher but today he might be thought of as having done work that is akin to empirical research in sociology or anthropology.

      • earlofhuntingdon says:

        Thanks for bringing up famine and drought. They are recurring issues that can have enormous impact, especially in British India. Colonial rule is an extraction process. India, like Ireland and elsewhere, was meant to pay its way via a generous surplus at the least cost. Natural and man-made disasters, famine, disease, bad weather, were “acts of God” about which a colonial officer was meant to do nothing, except be glad there were fewer people to administer. Maintaining a dramatically favorable balance of trade was the mandate, even if one had to make do with fewer hands, a problem for which, in the Congo, Leopold of Belgium came up with his famous solution.

        But the Brits in India were skilled at doing nothing while entire districts famished under the noonday sun. They were also justly celebrated for solving their lack of specie problem in trading with China by raising opium in India (Patna became a trademark for it, as well as the name Conrad gave to Lord Jim’s ship) and forcing its use as a substitute currency. Hence, development of the famous opium clippers to speed its delivery. Only on the return journey could they be called tea clippers. The CIA must have taken notes.

  5. earlofhuntingdon says:

    It’s probably true that incomes – in-kind as well as wage – were better in the late eighteenth century than after about 1820. After that, the effective completion of enclosures denied villagers commons rights and forced many to subsist on wage labor alone. With the loss of the American colonies and ending of the global wars with France, the English navy and army impressed fewer men. Technology (especially cotton processing) and manufactories expanded considerably, employing many, but at low wages and under poor conditions. So the analysis of options available to people in 1840 would be quite different than for, say, the 1770’s.

    Forcing people into an exclusively homo economicus mold makes everyone play a game dominated by those with the most economic power. It denies the legitimacy of all but wage labor and cash purchasing power. It denies people the right to act together to meet mutual needs (e.g., unions, public services and schools). Hypocritically, businesses and the monied classes remain free to pursue their communistic impulses through enduring social networks (e.g., private schools, neighborhoods, social clubs, dominance among politicians and the professional classes). It’s a splendid strategy to clear the playing field of all but those who already hold the most economic power.

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