The Great Transformation

"The Great Transformation is the sort of book that you will only get after reading it three times. Well, that’s what happened to me. It’s one of these books that have the greatest reputation, but are in some sense hardest to read. But it’s worth reading. It’s really a history of the spread of markets, the spread of the gold standard. It makes a rather important point, especially if you have spent a lot of time studying economics. You tend to think of economics, or the economy, as an independent sphere of society, that economies tend to be self-standing and self-supporting, almost independent from the rest of society. Then you start to say ‘Politicians shouldn’t interfere in the economy, because it worsens resource allocation’, and things like that. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . What Polanyi’s work underscores is that this is never how an economy has actually worked historically. To use his terms, the economy has always been embedded in society, and when we try to disembed it from society and treat it like an independent institution – i.e. not dependent on societies, values and other institutions – then we’re really going to run into trouble. political conflict, social and economic instability and some kind of backlash. I think the big lesson from Polanyi’s work is As we keep rethinking the institutions of economic globalisation, we need to ensure that those mechanisms are fundamentally responsive to the values and demands of society and that if we lose track of that, then we risk another set of instabilities and an eventual collapse of globalisation. I think the financial crisis we just went through is a very good illustration. For too long we lived off this fiction that financial markets could exist independently, that they could regulate themselves, and in this fashion they could be a foundation of wealth and well-being. What we found is that, actually, financial markets, left to themselves, are a very dangerous weapon. They need to be built on top of some very strong regulations and the moment you start talking about regulations then of course you have to ask: what are regulations for? That requires figuring out all sorts of questions. What are society’s values? How much income inequality is desirable or feasible? What should earning differentials be, how much is OK? How much should financiers/bankers earn that is OK? What role should finance play – supporting the real economy, as opposed to the real economy supporting finance? What is the right trade-off between financial innovation and financial stability? The more we allow finance to innovate, the less stability you’re potentially going to have because of the risks that are generated. And each society may have different answers to these questions, and that has very important implications, going forward, as to how much financial globalisation we’re going to have. Get the weekly Five Books newsletter I would say that we are making a very big mistake to assume that we can go back to a world of extreme financial globalisation, because that’s inevitably going to leave the regulatory underpinnings of the system very weak; it’s going to set us up for another financial crisis in the future. I’d much rather see us being much less ambitious on financial globalisation and have much more sound regulation at the domestic, national level. So I think Polanyi’s book has very real implications for how we think about the future of financial globalisation. My book is also fairly historical. It goes back to the 17th century and talks about an early model of globalisation that was sustained by chartered trading companies. It describes the 19th century and the collapse of the gold standard and then comes to the present. Part of the book is historical, part of it is a survey of economists’ ideas about globalisation, and how they’ve gone back and forth from the silly to the more reasonable. It gently pokes fun at various economists, both dead and alive, for their ideas. I lay out what I call the political trilemma of the world economy. I say that of the following three things – national self-determination, political democracy and hyper-globalisation – we can have at most two, and that we need to make an explicit choice as to which two we want. Many of our troubles stem from the fact we seem to be pushing for all three things simultaneously. We want more economic globalisation, while we embrace democracy and our national sovereignty, and that’s an incompatibility of the first order. I advocate giving up hyper-globalisation. It’s not an argument against globalisation per se, but it’s an argument against an extreme form of globalisation or pushing for increased globalisation. Because both democracy and national self-determination are also important values. We will have a better, safer, healthier economic globalisation if we accept – and do so explicitly – that democracy will remain mostly a national phenomenon, and that national self-determination is a value in and of itself, because each society has the right to select its own institutions and rules and regulations. And once you accept those, then you have to give up an extreme form of globalisation, and act accordingly. I think every country that has been successful has managed to leverage globalisation with a domestic strategy. It’s always been a combination of a solid domestic growth strategy alongside the forces of globalisation. It is a careful, managed kind of globalisation that has worked. The countries that have simply opened themselves up to world trade and finance without a complementary growth strategy at home haven’t done that well. Take China. Obviously without globalisation China wouldn’t have been able to grow as rapidly as it did. But China is not a simple story of letting globalisation work its magic. They, in fact, have opened up very gradually, very carefully and always after having established strengths in their domestic economy. It was on the basis of their domestic industrialisation that they progressively opened up to international trade and when they opened up to trade it was very partial too. It wasn’t ‘Let all the tariffs come down!’ It was through special economic zones, so only in parts of the country. They protected their state-owned enterprises so there wouldn’t be large-scale unemployment. They made sure foreign investors would transfer technology to their domestic counterparts. They entered the WTO relatively late, only after they had already become a manufacturing powerhouse. With respect to international finance, to this day they have capital controls, they prevent free inflow of capital and they’re intervening heavily to make sure that they have a very competitive currency – which effectively subsidises their exports and their manufacturing industry. So China has had a combination of highly interventionist domestic policies to diversify and develop its industries alongside a policy of export-orientation and taking advantage of globalisation. This combination has been key. Other countries that have tried to take advantage of globalisation simply by lowering their barriers to trade and letting their capital flow freely, such as the Latin American countries since the 1990s, have actually done relatively poorly. I say that China has succeeded in globalisation because it has played the globalisation game by the Bretton Woods rules, referring to an earlier period in globalisation where there was a much better balance between the forces of globalisation on the one hand and room for domestic policy making on the part of national governments on the other. And I think those rules, the Bretton Woods rules, were and are much more conducive to successful economic development than those we’ve had since the 1990s – which progressively limit the role a national government can play in domestic restructuring."

"This book is a wonderful way of looking at social change in general, without it becoming a class story. Marx is very important, but was ultimately wrong about certain things. I have never seen the utility of the labour theory of value – it seems to me that doesn’t explain how most markets work. I also don’t buy historical materialism. What you get with Polanyi is a story which stretches from 1815 to 1914. He says it was 100 years of peace, although that’s not actually true because if you were a colonial subject it was hardly peaceful. However, there was no war between the major European powers. Why was this? A lot of people would say that it was the balance of power. What Polanyi says is that the balance of power between these states was an effect and not a cause. What united them all for the first time ever was what he called “peace interest,” which came from one thing – money. Where did that money come from? It came from the fact that the world was becoming capitalist. What began in Britain was spilling out across the world. States were trying to catch up with the British and you had the emergence of a global economy for the first time. What Polanyi says is that rather than things being made for personal or local use, everything was made for sale. You had, in a Marxist sense, commodity production on a global scale. And what did that mean? It meant the transformation of people into labour and the transformation of land into something that could be bought and sold globally. Money became capital. Capital became investment. Investment begat stock markets and exchanges. All of which ushered in a whole new role for the state. The paradox is that the role for the state here is duplicitous as ultimately it undermines itself. This nineteenth century order rested upon three fundamental institutions: a limited liberal state, a self-regulating market and the gold standard. So all these countries are becoming economically integrated through trade where peasants were being made into workers or into agriculturalists who work for export markets. But there’s just one problem with this happy system. It basically takes people who customarily lived in embedded institutions and tears those institutions apart and throws them into this impersonal thing called the labour market. This huge social dislocation leads to rebellions and to vast inequalities. When this happens, the state responds in two ways – repression and reform. But the problem with reforming is that you are undermining the basic institutions of the self-regulating, liberal market state and ultimately the gold standard. This reaction that the state has to improve the lot of the majority – particularly when the state becomes democratic – runs against the liberal precepts of the gold standard and the limited liberal state. Ultimately, this causes such tension in these societies that these states begin to collapse, and the tensions build up to World War One , which was a giant nationalistic distraction to get over these problems, resulting in mass slaughter and the bankruptcy of these nations, and the depression of the 1920s and 1930s. Polanyi writes this book in 1944, just as it seems the Allies are about to win the war. He’s not too happy. He’s glad that communism is checked and fascism is dead, but there is a wistfulness in him. He’s not a modern social democrat. If he could go back to a state of nature, a pre-industrial society, he probably would, and you have to read him with that in mind. But what he tells us is that this brave new world of the 1940s – the Beveridge report and the foundation of the welfare state in Britain etc – rests upon these paradoxes whereby you have to intervene to keep the machine stable, but the more you intervene, the more unstable you make it."