The Market or the State: Why Polanyi Still Matters

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During the 1990s, although the market paradigm was dominant in economics and public policy, a new literature stressing the importance of the role of the state in industrialization rose to fame. We can mention Alice Amsden’s Asia Next Giant (1989), Robert Wade’s Governing the Market (1990) or Peter Evans’ Embedded Autonomy (1995). This literature dwelled on the East Asian miraculous industrialization and showed with empirical and historical evidence how the state apparatus was necessary to spark the economic take off. More recently, these academic attempts multiplied (for instance in the developmental state literature with Ha-Joon Chang’s Kicking away the Ladder, 2002) and gained new interest after the 2008 financial crisis. Yet, this literature is not novel and draws its inspiration from previous economists and social scientists, who for a long time warned us of the danger of disintegrating the state from the economic sphere. On the other hand, mainstream theorists tend to undermine, if not ignore, state intervention and consider it as an exogenous variable to economic growth (see for example Bela Balassa, Lord P. T. Bauer, Anne Krueger and Deepak Lal). The post-1980s era had provoked academic debates around the role of the market versus the role of the state for developing countries: the claim made by mainstream economists and politicians was that countries which pursued a state-led industrial policy failed greatly and that the Latin-American debt crises was an illustration of this (see for example the 1983 World Development Report). On the contrary, it was observed that the East Asian newly industrialized countries (the so-called ‘four tigers’) ‘miraculously’ developed by pursuing market-oriented policies (see for example the World Bank). As heterodox economists, such as Amsden, Wade, and Evans, retaliated by stating the exact opposite, the extent to which the state could be an industrial actor or not become a new agora for both camps.

However, what if the terms of the debate were problematic at the conceptual level from the beginning? Is the dichotomy “state vs. market” as evident as it appears to be in policy debates? A theoretical detour going back to Karl Polanyi might help us shed some light on this issue.

In his famous book The great Transformation (1944), Karl Polanyi proposed a theory of industrialization embedded in human institutions. Polanyi’s thesis was pretty radical, although a truism in itself: ‘Our thesis is that the idea of a self-adjusting market implied a stark utopia’. And by market economy, Polanyi means: ‘an economic system controlled, regulated and directed by market prices’ (p.71).

The 19th century was the age of liberalism and the laissez-faire doctrine was the directing principle in economic policy (initiated by the British abolition of the corn laws in 1846). The sole path to industrialization was to trust market forces, at least in theory (see Chang). Indeed, three major elements are necessary to the industry: land, labor and capital. These were treated as commodities that needed a market mechanism to be distributed in the most efficient way. As a consequence, industrial policy excluded state intervention or planning in the three markets. Yet, the conceptual implications of this doctrine are very problematic: are these three commodities, real commodities that could be subjected to market mechanism? What is the anthropological tissue behind the industrial process? Polanyi was mainly concerned with this issue and tried to unearth the metaphysical grammar of the liberal doxa by enquiring on the nature of these commodities and on the nature of the market process. His argument goes as follows:

a) Capitalism and industrialization mechanisms rely on three commodities: labor, land and capital.
b) A commodity is an object that is produced to be sold in the market.
c) Labor is an aggregate term to signify human laborers, land is in fact nature itself and capital is a purchasing power through a banking and monetary system that is not produced.
d) Humans, nature and money are not a production for market sales and purchases.
e) Therefore labor, land and capital are fictitious commodities.

The conclusion (e) of the argument leads to Polanyi’s main critique: implementing a market economy for these three commodities means the total destruction of society. Since these commodities are fictitious and are in essence what constitutes a society, their fate cannot be rendered to the unique market prices. Rather, the state acts as a preserver and protector of society and industrial policy falls into this role. As Polanyi expresses it: ‘The protection of society, in the first instance, falls to the rulers, who can directly enforce their will’ (p. 174). Namely, the state/bureaucracy leads policies to protect/develop society (indeed, the nature of the bureaucracy and political system makes implementing effective ‘protection’ problematic. We will deal with this issue later on). Here we can have an interpretation of Polanyi’s view of protection related to the normative definition of development as a process that broadens and expands individual social choices (perhaps the idea of protection here implies more a focus on negative freedoms- namely, freedom from –rather than an attention on positive freedoms. The latter is what Sen refers to most of the time in his capability approach. Indeed a clear distinction between both freedoms is conceptually problematic as MacCallum’s concept of freedom as a triadic relation shows. Yet, the idea of protection in Polanyi’s corpus of concepts also implies a social security system that empowers individuals’ capabilities).

As a matter of fact, society is not a homogenous ensemble and although it has a structure, it also has classes with different and opposite interests that render the implementation of industrial policy very problematic. Polanyi acknowledged this problem. Furthermore, an international monetary system embodied by institutions such as the IMF, the World Bank and the WTO, where bargaining power is a major issue, industrial policy, and government intervention in general, becomes contentious (see Wade or Stiglitz, for example). Polanyi published his book in 1944 and could not forecast the upcoming neoliberal era in the 1980s.

Nonetheless, the reference to Polanyi’s work enlightens us in questioning the frontiers between the market and the state. As to planning being opposed to a market-oriented economy, Polanyi remarkably argued that: ‘while laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not’ (p.147). In fact, the market itself requires a plan as well as planning, but the 19th century liberals did not plan to implement a planning economy. Hence, although planning is ubiquitous in the economic sphere, its idiosyncratic meaning remains distinct from a market mechanism in the literature.

Mohamed Obaidy is an MS student in Economics at The New School

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