Polanyi

The Role of the State in Economic Organisation

Until the 19^th century the economy was a subsystem of society and subordinated to politics and social relations. With the adoption of Smithian economics and self-regulating markets this dynamic changed dramatically as liberal economists sought to disembed the economy from the restrictions imposed upon it by society. Polanyi (1944) argued that this process is never truly completed, because to do so would expose both man and nature to market forces leading them to exploitation and eventually destruction.

The market treats labour and land as though they are commodities that are manipulated to the requirements of firms to produce output in the most efficient manner. This definition is entirely fictitious, labour makes up the society for which goods are produced and land makes up the environment which they exist in, exploiting these factors in such a manner has consequences which are beyond the mechanisms of the market. The free market use of these ‘fictitious commodities’ brings about reactionary counter movements to protect them, reigning in the economy and re-embedding it in society.  “laissex faire was planned, planning was not.” (Polanyi 1944) Liberalism required states to forcibly create conditions in which self-regulated markets could exist. Imposing the free market required the transfer of risks to the population in the form of either lower wages, precarious employment, unemployment or environmental degredation. When these risks become unacceptable to society it creates a movement of state policy to minimise these risks. There will always be two forces in society, one for laissez faire and another protective counter movement that will be set in motion as an unplanned spontaneous response by society to avoid disaster. As a result liberalism will always have a voice as they can always claim that the lack of a strong willed state causes the failure in capitalism. This ‘liberal market creed’ cannot be dislodged as there is no historical evidence.

Examples of Liberalism and Counter-Movements: the Gold Standard

The Gold Standard (GS) was a radical new way for countries to encourage trade in the late 19^th century. By each country backing their currency with gold it allowed traders to have confidence in doing business across borders because the foreign money they received was literally “as good as gold”. The system relied on three golden rules:

     1.       Value currency to a fixed amount of gold

           2.       Domestic money supply should be based on the quantity of gold   

           3.       Each country will give its residence freedom to operate and trade internationally

In theory if the citizens of a country imported more than they earner then the country would simply be losing gold to another. As a result domestic money supply would fall, making it harder to get finance, causing the price of money (interest rates) to rise. This cuts down current consumption (people would rather save then spend) so prices fall, and so do wages. This makes demand for imports decline and the country’s exports more competitive directing the economy back to equilibrium. Nation states could decline as the world became borderless and everyone would benefit as a result.

Unfortunately the opposite occurred; the GS imposed economic costs on people which were highly destructive. Deflation was one of the implications for countries with a trade deficit, leading to declining wages, unemployment, reduced consumption, higher business failure rates and a lower standard of living. Ultimately leading to an unstable and uncertain lifestyle for people which governments found intolerable, they broke the third golden rule in attempts to protect their people from the ravages of the self-regulating market. Introducing protectionism such as tariffs reduced the sensitivity to trade but created an incentive to empire. By colonizing governments could exploit raw materials and markets in the colony without competition from other nations. It was a direct reaction to the GS as states could shift any negative consequences onto their colonised people and protect their domestic interests. Empire bubbles were created and expanded until they were forced to clash into one another, leading to conflicts such as WWI. Fascism was another reaction to this problem, protecting society from the market at the cost of human freedom was another way to protect against the consequences of the gold standard that took place in the 30s.

Contemporary examples

Block (2001) wrote that a similar process could be observed today. Integration of the global economy makes national boundaries irrelevant.  Free trade is creating a global market place with free movement of goods and factors in a similar vein to the expected benefits of the GS. Neoliberalism now calls for less interference with markets, allowing for a flexible labour market as once again the risk of employment is shifted from firms to workers in the form of precariarity. As before demands are made which ordinary people cannot face and eventually the state will be needed to intervene for example as a lender of last resort. “Without such institutions particular economies and perhaps the entire global economy will suffer crippling economic crisis” (Block 2001).

Neoliberalism has already had widespread protest as people attempt to resist economic disruptions and this will intensify as people call out for a counter movement to protect them. Eventually states or society may find another solution, possibly by diverting discontent to internal or external areas of society, resulting in conflict. For example Civil wars in Africa, the occupy movement or the Arab spring being possible examples of such reactionary movements.

Conclusion

Polanyi wrote that the solution was to stop social life being subordinated by the economy. Unions, social security, minimum wages, and environmental regulation can all be seen as measures by which society sought to protect itself. Government roles should be used to protect the ‘fictitious commodities’ and prevent them being exploited by the market. Such intervention is vital to prevent disaster