[ xiv ] Foreword
Hong Kong saw New York speculators trying to devastate their econ-
omy by simultaneously speculating on the stock and currency mar-
kets, it intervened massively in both. The American government pro-
tested loudly, saying that this was an abrogation of free market
principles. Yet Hong Kong's intervention paid off—it managed to sta-
bilize both markets, warding off future threats on its currency, and
making large amounts of money on the deals to boot.
The advocates of the neoliberal Washington consensus emphasize
that it is government interventions that are the source of the problem;
the key to transformation is "getting prices right" and getting the gov-
ernment out of the economy through privatization and liberalization.
In this view, development is little more than the accumulation of capi-
tal and improvements in the efficiency with which resources are allo-
cated—purely technical matters. This ideology misunderstands the
nature of the transformation itself—a transformation of society, not
just of the economy, and a transformation of the economy that is far
more profound that their simple prescriptions would suggest. Their
perspective represents a misreading of history, as Polanyi effectively
argues.
If he were writing today, additional evidence would have sup-
ported his conclusions. For example, in East Asia, the part of the world
that has had the most successful development, governments took an
unabashedly central role, and explicitly and implicitly recognized the
value of preserving social cohesion, and not only protected social and
human capital but enhanced it. Throughout the region, there was not
only rapid economic growth, but also marked reductions in poverty.
If the failure of communism provided dramatic evidence of the supe-
riority of the market system over socialism, the success of East Asia
provided equally dramatic evidence of the superiority of an economy
in which government takes an active role to the self-regulating market.
It was precisely for this reason that market ideologues appeared almost
gleeful during the East Asian crisis, which they felt exposed the active
government model's fundamental weaknesses. While, to be sure, their
lectures included references to the need for better regulated financial
systems, they took this opportunity to push for more market flexibil-
ity: code words for eliminating the kind of social contracts that pro-
vided an economic security that had enhanced social and political sta-
bility—a stability that was the sine qua non of the East Asian miracle.
Foreword [ xv ]
In truth, of course, the East Asian crisis was the most dramatic illustra-
tion of the failure of the self-regulating market: it was the liberaliza-
tion of the short-term capital flows, the billions of dollars sloshing
around the world looking for the highest return, subject to the quick
rational and irrational changes in sentiment, that lay at the root of
the crisis.
Let me conclude this foreword by returning to two of Polanyi's
central themes. The first concerns the complex intertwining of poli-
tics and economics. Fascism and communism were not only alterna-
tive economic systems; they represented important departures from
liberal political traditions. But as Polanyi notes, "Fascism, like social-
ism, was rooted in a market society that refused to function." The hey-
day of the neoliberal doctrines was probably 1990—97, after the fall of
the Berlin Wall and before the global financial crisis. Some might ar-
gue that the end of communism marked the triumph of the market
economy, and the belief in the self-regulated market. But that inter-
pretation would, I believe, be wrong. After all, within the developed
countries themselves, this period was marked almost everywhere by
a rejection of these doctrines, the Reagan-Thatcher free market doc-
trines, in favor of "New Democrat" or "New Labor" policies. A more
convincing interpretation is that during the Cold War, the advanced
industrialized countries simply could not risk imposing these policies,
which risked hurting the poor so much. These countries had a choice;
they were being wooed by the West and the East, and demonstrated
failures in the West's prescription risked turning them to the other
side. With the fall of the Berlin Wall, these countries had nowhere to
go. Risky doctrines could be imposed on them with impunity. But this
perspective is not only uncaring; it is also unenlightened: for there are
myriad unsavory forms that the rejection of a market economy that
does not work at least for the majority, or a large minority, can take. A
so-called self-regulating market economy may evolve into Mafia capi-
talism—and a Mafia political system—a concern that has unfortu-
nately become all too real in some parts of the world.
Polanyi saw the market as part of the broader economy, and the
broader economy as part of a still broader society. He saw the market
economy not as an end in itself, but as means to more fundamental
ends. All too often privatization, liberalization, and even macro-
stabilization have been treated as the objectives of reform. Scorecards
[ xvi ] Foreword
were kept on how fast different countries were privatizing—never
mind that privatization is really easy: all one has to do is give away the
assets to one's friends, expecting a kickback in return. But all too often
no scorecard was kept on the number of individuals who were pushed
into poverty, or the number of jobs destroyed versus those created, or
on the increase in violence, or on the increase in the sense of insecurity
or the feeling of powerlessness. Polanyi talked about more basic val-
ues. The disjunction between these more basic values and the ideology
of the self-regulated market is as clear today as it was at the time he
wrote. We tell developing countries about the importance of democ-
racy, but then, when it comes to the issues they are most concerned
with, those that affect their livelihoods, the economy, they are told: the
iron laws of economics give you little or no choice; and since you
(through your democratic political process) are likely to mess things
up, you must cede key economic decisions, say concerning macro-
economic policy, to an independent central bank, almost always dom-
inated by representatives of the financial community; and to ensure
that you act in the interests of the financial community, you are told to
focus exclusively on inflation—never mind jobs or growth; and to
make sure that you do just that, you are told to impose on the central
bank rules, such as expanding the money supply at a constant rate; and
when one rule fails to work as had been hoped, another rule is brought
out, such as inflation targeting. In short, as we seemingly empower in-
dividuals in the former colonies through democracy with one hand,
we take it away with the other.
Polanyi ends his book, quite fittingly, with a discussion of freedom
in a complex society. Franklin Deleano Roosevelt said, in the midst of
the Great Depression, "We have nothing to fear but fear itself." He
talked about the importance not only of the classical freedoms (free
speech, free press, freedom of assemblage, freedom of religion), but
also of freedom from fear and from hunger. Regulations may take
away someone's freedom, but in doing so they may enhance another's.
The freedom to move capital in and out of a country at will is a free-
dom that some exercise, at enormous cost to others. (In the econo-
mists' jargon, there are large externalities.) Unfortunately, the myth of
the self-regulating economy, in either the old guise of laissez-faire or
in the new clothing of the Washington consensus, does not represent a
balancing of these freedoms, for the poor face a greater sense of inse-
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