The Poor under Capitalism

The New Poor Law abolished the general category of the poor, the “honest poor,” or “laboring poor” — terms against which Burke had inveighed.  The former poor were now divided into physically helpless paupers whose place was in the workhouse, and independent workers who earned their living by laboring for wages.  This created an entirely new category of the poor, the unemployed, who made their appearance on the social scene.  While the pauper, for the sake of humanity, should be relieved, the unemployed, for the sake of industry, should not be relieved.  That the unemployed worker was innocent of his fate did not matter.  The point was not whether he might or might not have found work had he only really tried, but that unless he was in danger of famishing with only the abhorred workhouse for an alternative, the wage system would break down, thus throwing society into misery and chaos.  That this meant penalizing the innocent was recognized.  The perversion of cruelty consisted precisely in emancipating the laborer for the avowed purpose of making the threat of destruction through hunger effective.  This procedure makes intelligible that dismal feeling of desolation which speaks for us from the works of the classical economists. (232-233)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Times


American Market

The separation of powers, which Montesquieu (1748) had meanwhile invented, was now used to separate the people from power over their own economic life.  The American Constitution, shaped in a farmer-craftsman’s environment by a leadership forewarned by the English industrial scene, isolated the economic sphere entirely from the jurisdiction of the Constitution, put private property thereby under the highest conceivable protection, and created the only legally grounded market society in the world.  In spite of universal suffrage, American voters were powerless against their owners. (233-234)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Times

The Illusion of Freedom

Clearly, at the root of the dilemma there is the meaning of freedom itself.  Liberal economy gave a false direction to our ideals.  It seemed to approximate the fulfillment of intrinsically utopian expectations.  No society is possible in which power and compulsion are absent, nor a world in which force has no function.  It was an illusion to assume a society shaped by man’s will and wish alone.  Yet this was a result of a market view of society which equated economics with contractual relationships, and contractual relationships with freedom.  The radical illusion was fostered that there is nothing in human society that is not derived from the volition of individuals and that could not, therefore, be removed again by their volition.  Vision was limited by the market which “fragmented” life into the producers’ sector that ended when his product reached the market, and the sector of the consumer for whom all goods sprang from the market.  The one derived his income “freely” from the market, the other spent it “freely” there.  Society as a whole remained invisible.  The power of the state was of no account, since the less its power, the smoother the market mechanism would function.  Neither voters, nor owners, neither producers, nor consumer could be held responsible for such brutal restrictions of freedom as were involved in the occurrence of unemployment and destitution.  Any decent individual could imagine himself free from all responsibility for acts of compulsion on the part of a state which he, personally, rejected; or for economic suffering in society from which he, personally, had not benefitted.  He was “paying his way,” was “in nobody’s debt,” and was unentangled in the evil of power and economic value.  His lack of responsibility for them seemed so evident that he denied their reality in the name of his freedom. (266)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Times

Colonialism & the Labor Market

Now, what the white man may still occasionally practice in remote regions today, namely, the smashing up of social structures in order to extract the element of labor from them, was done in the eighteenth century to white populations by white men for similar purposes.  Hobbes’s grotesque vision of the state — a human Leviathan whose vast body was made up of an infinite number of human bodies — was dwarfed by the Ricardian construct of the labor market: a flow of human lives the supply of which was regulated by the amount of food put at their disposal.  Although it was acknowledged that there existed a customary standard below which no laborer’s wages could sink, this was reduced to the choice of being left without food or of offering his labor in the market for the price it would fetch.  This explains, incidentally, an otherwise inexplicable omission of the classical economists, namely, why only the penalty of starvation, not also the allurement of high wages, was deemed capable of creating a functioning labor market.  Here also colonial experience confirmed their own.  For the higher the wages the smaller the inducement to exertion on the part of the native, who unlike the white man was not compelled by his cultural standards to make as much money as he possibly could.  The analogy was all the more striking as the early laborer, too, abhorred the factory, where he felt degraded and tortured, like the native who often resigned himself to work in our fashion only when threatened with corporal punishment, if not physical mutilation.  The Lyons manufacturers of the eighteenth century urged low wages for social reasons.  Only an overworked and downtrodden laborer would forgo to associate with his like in order to escape from that state of personal servitude under which he could be made to do whatever his master required from him.  Legal compulsion and parish serfdom as in England, the rigors of an absolutist labor police as on the Continent, indentured labor as in the early Americas were the prerequisite of the “willing worker.”  But the final stage was reached with the application of “nature’s penalty,” hunger.  In order to release it, it was necessary to liquidate organic society, which refused to let the individual starve. (172-173)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Times

The Underlying Liberal Prejudice

To separate labor from other activities of life and to subject it to the laws of the market was to annihilate all organic forms of existence and to replace them by a different type of organization, an atomistic and individualistic one.

Such a scheme of destruction was best served by the application of the principle of freedom of contract.  In practice this meant that the noncontractual organizations of kinship, neighborhood, profession, and creed were to be liquidated since they claimed the allegiance of the individual and thus restrained his freedom.  To represent this principle as one of noninterference, as economic liberals were wont to do, was merely the expression of an ingrained prejudice in favor of a definite kind of interference, namely, such as would destroy noncontractual relations between individuals and prevent their spontaneous reformation. (171)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Times


There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course.  Just as cotton manufactuers — the leading free trade industry — were created by the help of protective tariffs, export bounties, and indirect wage subsidies, laissez-faire itself was enforced by the state.  The thirties and forties saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being endowed with a central bureaucracy able to fulfil the tasks set by the adherents of liberalism.  To the typical utilitarian, economic liberalism was a social project which should be put into effect for the greatest happiness of the greatest number; laissez-faire was not a method to achieve a thing, it was the thing to be achieved.


The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.  To make Adam Smith’s “simple and natural liberty” compatible with the needs of a human society was a most complicated affair.  Witness the complexity of the provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in the meritorious task of municipal reform.  And yet all these strongholds of governmental interference were erected with a view to the organizing of some simple freedom — such as that of land, labor, or municipal administration.  Just as, contrary, to expectation, the invention of labor-saving machinery had not diminished but actually increased the uses of human labor, the introduction of free markets, far from doing away with the need for control, regulation, and intervention, enormously increased their range.  Administrators had to be constantly on the watch to ensure the free working of the system.  Thus even those who wished most ardently to free the state from all unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with the new powers, organs, and instruments required for the establishment of laissez-faire. (146-147)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Time

Liberalism against Democracy

Let us focus the issue.  It is agreed that the liberal movement, intent on the spreading of the market system, was met by a protective countermovement tending toward its restriction; such an assumption, indeed, underlies our own thesis of the double movement.  But while we assert that the application of the absurd notion of a self-regulating market system would have inevitably destroyed society, the liberal accuses the most various elements of having wrecked a great initiative.  Unable to adduce evidence of any such concerted effort to thwart the liberal movement, he falls back on the practically irrefutable hypothesis of covert action.  This is the myth of the anti-liberal conspiracy which in one form or another is common to all liberal interpretations of the events of the 1870s and 1880s.  Commonly the rise of nationalism and of socialism is credited with having been the chief agent in that shifting of the scene; manufacturers’ associations and monopolists, agrarian interests and trade unions are the villains of the piece.  Thus in its most spiritualized form the liberal doctrine hypostasizes the working of some dialectical law in modern society stultifying the endeavors of enlightened reason, while in its crudest version it reduces itself to an attack on political democracy, as the alleged mainspring of interventionism. (151)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Time


The “Self-Regulating” Market Itself Demands Regulation

It is highly significant that in either case consistent liberals from Lloyd George to Theodore Roosevelt to Thurman Arnold and Walter Lippmann subordinated laissez-faire to the demand for a free competitive market; they pressed for regulations and restrictions, for penal laws and compulsion, arguing as any “collectivist” would that the freedom of contract was being “abused” by trade unions, or corporations, whichever it was.  Theoretically, laissez-faire or freedom of contract implied the freedom of workers to withhold their labor either individually or jointly, if they so decided; it implied also the freedom of businessmen to concert on selling prices irrespective of the wishes of the consumers.  But in practice such freedom conflicted with the institution of a self-regulating market, and in such a conflict the self-regulating market was invariably accorded precedence.  In other words, if the needs of a self-regulating market proved incompatible with the demands of laissez-faire, the economic liberal turned against laissez-faire and preferred — as any antiliberal would have done — the so-called collectivist methods of regulation and restriction.  Trade union law as well as antitrust legislation sprang from this attitude.  No more conclusive proof could be offered of the inevitability of antiliberal or “collectivist” methods under the conditions of modern industrial society than the fact that even economic liberals themselves regularly used such methods in decisively important fields of industrial organization.

Incidentally, this helps to clarify the true meaning of the term “interventionism” by which economic liberals like to denote the opposite of their own policy, but merely betray confusion of thought.  The opposite of interventionism is laissez-faire, and we have just seen that economic liberalism cannot be identified with laissez-faire (although in common parlance there is no harm in using them interchangeably).  Strictly, economic liberalism is the organizing principle of a society in which industry is based on the institution of a self-regulating market.  True, once such a system is approximately achieved, less intervention of one type is needed.  However, this is far from saying that market system and intervention are mutually exclusive terms.  For as long as that system is not established, economic liberals must and will unhesitatingly call for the intervention of the state in order to establish it, and once established, in order to maintain it.  The economic liberal can, therefore, without any inconsistency call upon the state to use the force of law; he can even appeal to the violent forces of civil war to set up the preconditions of a self-regulating market.  In America the South appealed to the arguments of laissez-faire to justify slavery; the North appealed to the intervention of arms to establish a free labor market.  The accusation of interventionism on the part of liberal writers is thus an empty slogan, implying the denunciation of one and the same set of actions according to whether they happen to approve of them or not.  The only principle economic liberals can maintain without inconsistency is that of the self-regulating market, whether it involves them in interventions or not. (155-156)

Karl Polanyi | The Great Transformation: The Political and Economic Origins of Our Time