[ viii ] Foreword
clarifies the interplay between ideologies and particular interests: how
free market ideology was the handmaiden for new industrial interests,
and how those interests used that ideology selectively, calling upon
government intervention when needed to pursue their own interests.
Polanyi wrote The Great Transformation before modern econo-
mists clarified the limitations of self-regulating markets. Today, there
is no respectable intellectual support for the proposition that markets,
by themselves, lead to efficient, let alone equitable outcomes. When-
ever information is imperfect or markets are incomplete—that is, es-
sentially always—interventions exist that in principle could improve
the efficiency of resource allocation. We have moved, by and large, to a
more balanced position, one that recognizes both the power and the
limitations of markets, and the necessity that government play a large
role in the economy, though the bounds of that role remain in dispute.
There is general consensus about the importance, for instance, of gov-
ernment regulation of financial markets, but not about the best way
this should be done.
There is also plenty of evidence from the modern era supporting
historical experience: growth may lead to an increase in poverty. But
we also know that growth can bring enormous benefits to most seg-
ments in society, as it has in some of the more enlightened advanced
industrial countries.
Polanyi stresses the interrelatedness of the doctrines of free labor
markets, free trade, and the self-regulating monetary mechanism of
the gold standard. His work was thus a precursor to today's dominant
systemic approach (and in turn was foreshadowed by the work of gen-
eral equilibrium economists at the turn of the century). There are still
a few economists who adhere to the doctrines of the gold standard,
and who see the modern economy's problems as having arisen from a
departure from that system, but this presents advocates of the self-
regulating market mechanism with an even greater challenge. Flexible
exchange rates are the order of the day, and one might argue that this
would strengthen the position of those who believe in self-regulation.
After all, why should foreign exchange markets be governed by prin-
ciples that differ from those that determine any other market? But it
is also here that the weak underbelly of the doctrines of the self-
regulating markets are exposed (at least to those who pay no attention
to the social consequences of the doctrines)! For there is ample evi-
dence that such markets (like many other asset markets) exhibit excess
Foreword [ ix ]
volatility, that is, greater volatility than can be explained by changes in
the underlying fundamentals. There is also ample evidence that seem-
ingly excessive changes in these prices, and investor expectations more
broadly, can wreak havoc on an economy. The most recent global fi-
nancial crisis reminded the current generation of the lessons that their
grandparents had learned in the Great Depression: the self-regulating
economy does not always work as well as its proponents would like us
to believe. Not even the U.S. Treasury (under Republican or Demo-
cratic administrations) or the IMF, those institutional bastions of be-
lief in the free market system, believe that governments should not
intervene in the exchange rate, though they have never presented a
coherent and compelling explanation of why this market should be
treated differently from other markets.
The IMF's inconsistencies—while professing belief in the free
market system, it is a public organization that regularly intervenes in
exchange rate markets, providing funds to bail out foreign creditors
while pushing for usurious interest rates that bankrupt domestic
firms—were foreshadowed in the ideological debates of the nine-
teenth century. Truly free markets for labor or goods have never ex-
isted. The irony is that today few even advocate the free flow of labor,
and while the advanced industrial countries lecture the less developed
countries on the vices of protectionism and government subsidies,
they have been more adamant in opening up markets in developing
countries than in opening their own markets to the goods and services
that represent the developing world's comparative advantage.
Today, however, the battle lines are drawn at a far different place
than when Polanyi was writing. As I observed earlier, only diehards
would argue for the self-regulating economy, at the one extreme, or
for a government run economy, at the other. Everyone is aware of the
power of markets, all pay obeisance to its limitations. But with that
said, there are important differences among economists' views. Some
are easy to dispense with: ideology and special interests masquerading
as economic science and good policy. The recent push for financial and
capital market liberalization in developing countries (spearheaded by
the IMF and the U.S. Treasury) is a case in point. Again, there was little
disagreement that many countries had regulations that neither
strengthened their financial system nor promoted economic growth,
and it was clear that these should be stripped away. But the "free mar-
keteers" went further, with disastrous consequences for countries that
[ x ] Foreword
followed their advice, as evidenced in the recent global financial crisis.
But even before these most recent episodes there was ample evidence
that such liberalization could impose enormous risks on a country,
and that those risks were borne disproportionately by the poor, while
the evidence that such liberalization promoted growth was scanty at
best. But there are other issues where the conclusions are far from
clear. Free international trade allows a country to take advantage of its
comparative advantage, increasing incomes on average, though it may
cost some individuals their jobs. But in developing countries with
high levels of unemployment, the job destruction that results from
trade liberalization may be more evident than the job creation, and
this is especially the case in IMF "reform" packages that combine trade
liberalization with high interest rates, making job and enterprise cre-
ation virtually impossible. No one should have claimed that moving
workers from low-productivity jobs to unemployment would ei-
ther reduce poverty or increase national incomes. Believers in self-
regulating markets implicitly believed in a kind of Say's law, that the
supply of labor would create its own demand. For capitalists who
thrive off of low wages, the high unemployment may even be a bene-
fit, as it puts downward pressure on workers' wage demands. But for
economists, the unemployed workers demonstrate a malfunctioning
economy, and in all too many countries we see overwhelming evi-
dence of this and other malfunctions. Some advocates of the self-
regulating economy put part of the blame for these malfunctions on
government itself; but whether this is true or not, the point is that the
myth of the self-regulating economy is, today, virtually dead.
But Polanyi stresses a particular defect in the self-regulating econ-
omy that only recently has been brought back into discussions. It in-
volves the relationship between the economy and society, with how
economic systems, or reforms, can affect how individuals relate to one
another. Again, as the importance of social relations has increasingly
become recognized, the vocabulary has changed. We now talk, for in-
stance, about social capital. We recognize that the extended periods of
unemployment, the persistent high levels of inequality, and the perva-
sive poverty and squalor in much of Latin America has had a disas-
trous effect on social cohesion, and been a contributing force to the
high and rising levels of violence there. We recognize that the manner
in which and the speed with which reforms were put into place in Rus-
sia eroded social relations, destroyed social capital, and led to the ere-
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