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Home Opinion A paradoxical politics: The Great Transformation and the future of social democracy

A paradoxical politics: The Great Transformation and the future of social democracy

Adrian Pabst - 25 June 2010

In rejecting both market liberalism and state socialism, Polanyi’s blend of political idealism and economic realism offers some telling insights for the modern centre-left

Twenty years after the collapse of state communism, the ongoing crisis of ‘free-market’ capitalism, which has plunged Europe into the worst economic turmoil since the Great Depression of 1929-32, provides a unique opportunity to chart an alternative path. Now that the dominant orthodoxy of neoliberalism has been shown to be intellectually dead and morally bankrupt, both left and right must look to genuinely fresh ideas and transformative policies.

While in some European countries like the UK and France the centre-right has switched from a neo-liberal to a more communitarian discourse, it is unclear whether ruling parties have the political will to curb the power of global finance or the determination to improve the lot of workers, families, local communities and underdeveloped regions. Meanwhile, European social democracy looks to Keynesianism and Green movements for new economic and political inspiration. Notwithstanding the important insights which the Keynesian and Green traditions offer, both remain in the end wedded to a social-liberal, utilitarian creed that privileges personal choice and individual emancipation at the expense of communal interest and the wider public good.

This ideology of social liberalism is entirely compatible with the ideology of economic liberalism that has failed so spectacularly. Indeed, the dominant language of ‘choice’ legitimates the extension of free-market mechanisms (aided and abetted by the regulatory state) into virtually all areas of socio-economic and cultural life – including education, health, the family and sex. Today’s scale and intensity of commodified labour and social relations is beyond Marx’s worst fears. Thus, much of the contemporary left and right remains caught in a fundamental contradiction between calling for more economic egalitarianism, on the one hand, and advocating ever-greater social liberalisation, on the other hand.

Moreover, older civic virtues of justice, mutuality and reciprocity have been sidelined and supplanted by the new economic values of fairness and aspiration. Worse, these ‘progressive’ values represent a new cosy consensus that endorses the logic of capitalist democracy which tends towards an ever-greater centralisation of power, concentration of wealth and financial abstraction from the real economy and the shared natural world on which we all depend.

On these and other issues, the significance of Karl Polanyi’s intellectual legacy can hardly be overstated. In his seminal book The Great Transformation – The Political and Economic Origins of Our Time published in 1944, he combines a compelling critique of unbridled ‘free-market’ capitalism with a non-statist vision of socialism that is politically far more democratic and economically much more egalitarian than the false ‘third-way’ of Clinton and Blair or the vapid communitarianism of the post-neoliberal centre-right.

Debunking the state versus market myth

First, Polanyi radicalises Marx’s critique of capitalism. Since Marx, we know that capitalism treats money as if it had a life of its own. As such, capitalism views capital as a reality in its own right, with power and agency. And in order to enhance the reach of money, the capitalist economy turns human labour into a commodity whose value is determined exclusively by its market price – itself the product of the iron law of supply and demand.

The trouble is that the Marxist critique of capitalism does not go nearly far enough. Left to itself, the capitalist economy also views land and human relations as commodities that can be freely traded on the universal marketplace. As such, the unfettered free market violates a universal ethical principle that has governed virtually all cultures in the past: nature and human life have almost always and everywhere been recognised as having a sacred dimension. Indeed, the Industrial Revolution and its aftermath have led to a “catastrophic dislocation of the lives of the common people” – a ‘satanic mill’ grinding men into masses, as Polanyi puts it. In thus subordinating society and the environment to the self-regulating ‘free’ market, capitalism does not simply disrupt traditional cultures (as Marx already remarked). It also causes widespread social disintegration and ecological devastation. Long before the contemporary Green movement, Polanyi linked the future of our common natural habitat to the forces of economic market liberalisation.

Secondly, Polanyi repudiates centralised solutions like uniformly regulated markets or nationalised industries in favour of pluralising the bureaucratic state and strengthening the autonomy of civil society. Unlike most Marxists and social-democrats, he argues that the conventional liberal opposition of state and market is largely deluded. Just as the ‘free’ market needs the state to remove social barriers that hinder the free flow of capital, so the central state needs the market to dissolve communal bonds that limit intrusive state control. In The Great Transformation, Polanyi notes that the creation of free-market exchange in labour, land and money in Britain in the 1830s coincided with an unprecedented expansion of state power aimed at disciplining the populace – an account that precedes and in some measure surpasses Michel Foucault’s work on bio-politics and Giorgio Agamben’s writings on ‘bare individuality’.

Moreover, the growing convergence of state and market mirrors the increasing ambivalence of left and right – Polanyi’s third argument. The commonly held belief that the left protects the state against the market while the right privileges the market over the state is economically false and politically questionable, as Polanyi’s book intimates. Just as the left now views the market as the most efficient delivery mechanism for private wealth and public welfare, so the right has always relied on the state to secure the property rights of the affluent and to turn small proprietors into cheap wage labourers by stripping them of their land and traditional networks of support. The latter were never perfect, and there is certainly no golden age that we could or should return to. But the point is that such networks are based on the principles of reciprocity and mutuality. Here Polanyi draws on the important anthropological insight that human beings desire social recognition more than material wealth and that culture restricts commercial exchange: pace Adam Smith, “not the propensity to barter, but reciprocity in social behaviour dominates”. As a result, the economic system should be a function of social organisation, not vice-versa. In turn, that’s the reason for Polanyi’s imperative to re-embed both state and market within social relations.

Some uncomfortable truths for contemporary social democracy

Taken together, Polanyi’s three arguments about the nature of capitalism and the nexus between state and market confront social-democracy with some uncomfortable truths about appealing to the central state as a bulwark against the ‘free’ market. First of all, Polanyi’s book is a call to uphold the sanctity of life and land against the commodification by the ‘market-state’. In this respect, social-democracy must denounce not just Thatcher’s disastrous policy of financial liberalisation and deregulation but equally Blair’s and Brown’s support for the privatisation of the public sector as well as New Labour’s shameless attack on civil liberties and its mindless promotion of equality and other ‘social’ legislation. In reality, equality laws do not simply protect individuals from unjust privilege or unfair discrimination – though they can correct some scandalous instances of injustice. The trouble is that such laws also mark the central imposition of sameness on all sorts of different groups and intermediary bodies by enforcing monolithic norms and standards upon social actors who should benefit from exemptions based on freedom of conscience.

All this has brought about a historically unprecedented situation where universal liberty and happiness are equated with personal choice and comfort – an impoverished utilitarianism of which Jeremy Bentham would have been proud. Likewise, decisions over life and death are reduced to matters of individual will and negative freedom. By thus removing legal and moral provisions to defend the inviolability of human (and other animal) life, the Thatcherite-Blairite settlement betrays the humanist legacy that many progressives purport to uphold but in reality betray.

Linked to the convergence of state and market is the second lesson of Polanyi’s book for social democracy today, namely that the centralisation of political and bureaucratic power has also facilitated a concentration of financial and property wealth at the expense of real wage growth, thus producing soaring income and asset inequality. For the extended reach of markets creates economies of scale that favour the sort of consolidation that can only be described as cartel capitalism. Unlike statist socialists, Polanyi argues for the decentralisation of power and the ‘localisation’ of wealth, re-embedding political and economic processes in social relations. Far from advocating a naïve communitarianism that masks the retrenchment of the state, Polanyi’s thinking gestures in the direction of a guild socialism as envisioned by G.D.H. Cole and others, whereby both workers and consumers would co-own capital and receive assets as part of elected councils or ‘guilds’.

The third lesson that Polanyi’s Great Transformation holds for contemporary European social democracy relates to welfare reform. Centralised statist welfare plays at best a compensatory role in relation to laissez-faire economics and at worst is secretly complicit with the extension of the market into hitherto largely self-regulating areas of the economy and society. Indeed, the welfare state merely regulates the conflict between capital owners and wage labourers without fundamentally altering relations between capital and labour. Whilst it does provide some much-needed minimum standards, statist welfare subsidises the affluent middle classes and undermines (traditional or new) networks of mutual assistance and reciprocal help amongst workers and within local economies. Today, a renewed emphasis on the principles of reciprocity and mutuality translates into policies that incentivise the creation of mutualised banks, local credit unions and community-based investment trusts.

Thus, Polanyi warns against the fallacy of appealing to a welfare model that traps the poor in dependency and redistributes income to the wealthy. At the hands of Thatcher and New Labour, the welfare state was first rationalised and then deployed to fashion “the freely-choosing reflexive and risking individual removed from the relational constraints of nature, family and tradition”, as John Milbank has rightly remarked. At a time of fiscal austerity, ageing populations and the ballooning deficits of social security and pension systems, the social-democratic left must look beyond redistributive policies to asset-based welfare and decentralised models that foster human relationships of communal care and mutual help – rather than state paternalism or private contract delivery. For example, social democrats could advocate a system that combines universal entitlement with localised and personalised provision, e.g. by fostering and extending grassroots’ initiatives like ‘Get Together’ or ‘Southwark Circle’ in London that blend individual, group and state action. Both initiatives reject old schemes such as ‘befriending’ or uniform benefits in favour of citizens’ activity and community-organising supported by local council – instead of being determined by central target and standards.

Nurturing the social bonds of trust and reciprocity

The fourth set of lessons for contemporary social democracy concerns a series of economic reforms. Polanyi’s vision for an alternative economy, which is re-embedded in politics and social relations, offers a refreshing alternative to the residual market liberalism of both left and right. In practice, an embedded model means that elected governments restrict the free flow of capital and create the civic space in which workers, businesses and communities can regulate economic activity. Instead of free-market self-interest or central state paternalism, it is the individual and corporate members of civil society who collectively determine the norms and institutions governing production and exchange.

Specific measures include, first of all, extending fair-trade prices and standards from agriculture and the food industry to other parts of the economy. This could be done by strengthening the associative framework and giving different sectors more autonomy in determining how to implement a set of desirable goals debated and voted upon by national parliament, regional assemblies or city halls.

Second, replacing the minimum wage with a just, ‘living wage’ that reflects the true value of labour. Here the example of London Citizens is very instructive – a network of different local communities and faith groups that has persuaded City Hall and a growing number of corporate businesses to sign up voluntarily and pay their staff the ‘living wage’. Third, at the level of the G20 and the EU pushing for global capital controls in the form of the Tobin tax and bank levies (including voluntary caps on interest rates), coupled with new incentives to reconnect finance to the real economy, by promoting investment in productive, human and social investment. The overriding aim must be to preserve the sanctity of natural and human life and to promote human associations that nurture the social bonds of trust and reciprocity on which both democracy and markets depend.

Finally, Polanyi debunks the dominant anthropological myth since Adam Smith’s Wealth of Nations that we are economic, ‘trading’ animals with diffuse moral sentiments who follow their “propensity to truck, barter and exchange one thing for another”, as I have already indicated. Instead, Polanyi contends that we are fundamentally gift-exchanging animals who primarily seek mutual social recognition instead of merely individual material gain. Throughout The Great Transformation, he contrasts the modern, secular idea of a universal commercial society dominated by abstract formal contracts and proprietary relations with a more Romantic vision that is neither nostalgic nor utopian but blends political idealism with economic realism. Fundamentally, he rejects both market liberalism and state socialism, arguing that both destroy the autonomy of civic culture and the freedom of civil society. By calling for radical political and economic decentralisation, Polanyi’s guild socialism is far more radical than left-wing communitarians.

Thus, Polanyi’s contribution to twentieth-century political thought is to show that socialism’s statist turn inaugurated either the collectivist statism of the Marxist-Leninist tradition or the complicit collusion of state and market in much of twentieth- and early twenty-first century social democracy. As a European thinker of Hungarian origin who resisted fascism in Austria and Germany, Polanyi is uniquely positioned to help Europe’s social-democrats develop alternatives to neo-liberalism and to the incoherent, ‘liberal’ communitarianism of the contemporary centre-right.

Adrian Pabst is a lecturer in politics in the University of Kent at Canterbury. He writes frequently on political economy, geopolitics and Europe for the comment pages of International Herald Tribune, The Guardian and The Moscow Times. Currently, he is writing The Politics of Paradox, a book about alternative to capitalist democracy
This is a contribution to Policy Network's work on Globalisation and Governance.


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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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