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# Capitalism-and-Its-Critics-A-History-From-the

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In interpreting these passages, it’s important to remember the context in which Keynes was writing. By 1936 the fascist states of Germany and Italy had abandoned laissez-faire for central direction and free trade for autarky. In the Soviet Union, Stalin’s regime had completed the brutal collectivization of agriculture and was investing massively in heavy industry. Some of Keynes’s colleagues and students at Cambridge were embracing communism. The only way to save capitalism and democracy, he believed, was to rid the capitalist system of mass joblessness, even if that meant a significant expansion of state intervention. “It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated—and, in my opinion, inevitably associated—with present-day capitalistic individualism,” he wrote. “But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.”46

The argument that Western capitalism, left to its own devices, would eventually succumb to stagnation and high unemployment echoed some left-wing arguments, but Keynes remained the furthest thing from a Marxist. He portrayed capitalism not as an oppressive system that was doomed to collapse but as a trusty old vehicle that had developed a problem with its starter—“magneto trouble,” as he put it in one of his journalistic essays about the great slump.47 To his mind, the problem lay not with the vehicle but with the repair shop’s failure to recognize what was ailing it and its refusal to apply new thinking about how to fix it. In his famous closing passage of The General Theory, he wrote:

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The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.48

★ ★ ★

Over the long run, The General Theory was to prove enormously influential. In immediate terms, however, it didn’t have much impact on policy. By 1936 the unemployment rate was finally falling on both sides of the Atlantic, and political pressure for additional relief spending was relenting. In Britain, Stanley Baldwin’s National Government, which had taken office in 1935, concentrated largely on foreign policy and the threats presented by Hitler and Mussolini. In Washington and on Wall Street, concerns were rising over the budget deficit, which had exceeded 4 percent of GDP for most of FDR’s first term.49 In 1936–37 these concerns prompted the Roosevelt administration to reduce federal spending. Following this negative shock to aggregate demand, the US economy fell back into recession, just as Keynesian theory predicted.

On both sides of the Atlantic, what finally brought the Great Depression to a permanent end was the enormous expenditure on armaments before and during the Second World War. This was a Keynesian stimulus on a huge scale, but at the time it wasn’t thought of, or labeled, as such. Keynesian methods weren’t officially adopted until World War II and its aftermath. In 1944 Winston Churchill’s government published a white paper on employment policy that began: “The government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war … A country will not suffer from mass unemployment so long as the total demand for its goods and services is maintained at a high level.”50 This passage could have been taken from The General Theory.

In the United States, there were parallel developments. In 1944 Alvin Hansen, a Harvard economist who had written an influential primer on The

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General Theory for an American audience, prepared a memorandum for policymakers in the Roosevelt administration, in which he called on the federal government to “ensure and underwrite an adequate volume of purchasing power and effective demand” by greatly expanding public investment and social spending.51 This Keynesian thinking was subsequently reflected in the Employment Act of 1946, which said “it is the continuing policy and responsibility of the Federal Government  … to coordinate and utilize all its plans, functions, and resources … to promote maximum employment, production, and purchasing power.”52

Keynes spent much of the Second World War working on international questions and ways to avoid a repeat of the interwar period, when many countries had resorted to economic nationalism, introducing tariffs and engaging in competitive currency devaluations. The result had been financial chaos and a collapse in global trade. To prevent this from happening again, Keynes came up with an ambitious plan for a new international currency, which countries that ran into financial difficulties would be able to borrow at will from a new international lending agency. However, he knew that with Britain virtually bankrupt from financing the war, and with the United States emerging as an economic superpower, making any new international framework a reality depended on gaining the support of Washington.

The Roosevelt administration also wanted an open trading system, which would benefit US exporters. But with the dollar now in the ascendancy, it was wary of plans for a new international currency. Keynes engaged in a series of negotiations with Harry Dexter White, a senior US Treasury official. At an international conference in Bretton Woods, New Hampshire, in July 1944, where Keynes and White led the British and US delegations, representatives from more than forty countries agreed to create a system of fixed but adjustable exchange rates. To help make this system work, the Bretton Woods agreement provided for the establishment of an International Monetary Fund, which would have the power (but not the obligation) to help countries that ran into difficulties maintain a fixed exchange rate; an International Bank for Reconstruction and Development (later called the World Bank), which would help countries rebuild from the war; and an International Trade Organization, which would work to reduce tariffs and other barriers to trade. The proposal for a formal trade body ran aground in the US Senate, which still contained many protectionists. But in October 1947, twenty-three nations, including the United States, reached a General Agreement on Tariffs and Trade (GATT), which committed them to opening up markets. It would subsequently be expanded in long-running rounds of negotiation.

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The Bretton Woods agreement didn’t fulfill all of Keynes’s hopes, and he bitterly resented that some American officials seemed intent on undermining what remained of Britain’s international leadership role. But the new international framework did meet his basic goal of reestablishing an open trading order and addressing some of the pathologies of international capitalism that had blighted the interwar years, such as unrestricted speculative flows of financial capital. Although the Bretton Woods agreement contained a long-term commitment to the free movement of financial capital across borders, it allowed countries to maintain capital controls for the foreseeable future. “What used to be heresy is now endorsed as orthodoxy,” Keynes commented approvingly.53

Although Keynes was referring here to the relatively narrow issue of controlling flows of hot money, his statement had application to economic policymaking generally. After the disasters of the interwar era, policymakers in many countries were open to the idea of fashioning a new economic order that stabilized global capitalism, eliminated some of its more offensive and self-destructive features, and allowed more countries to share its bounties. Critics on the left and right expressed skepticism about whether this order would be sustainable, but Keynes believed in it until the last breath he took, which was on April 21, 1946, at his Tilton farmhouse. He died of a heart attack. During the three decades after his passing, an age often referred to as the Keynesian Era, history appeared to prove him right: Western countries enjoyed unprecedented growth and prosperity. But some skeptics remained, including a then-little-known Austro-Hungarian writer and scholar who, during the interwar years, had witnessed the lurch toward fascism firsthand.

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“The time was ripe for the fascist solution”

Karl Polanyi’s Warnings About Capitalism and Democracy

If Keynes’s belief in the salvageability of industrial capitalism and liberal democracy reflected his background in England, Edwardian liberalism, and the mandarin class of a global empire, Karl Polanyi’s much darker view emerged from the tumult and extremism that his native central Europe experienced in the years after the Great War. He was born in 1886 in Vienna, which was then one of the capitals of the sprawling Austro-Hungarian Empire. Like Keynes, he was a product of the educated upper middle class. His father, Mihály Pollascek, was a Hungarian-born Jewish entrepreneur, whose engineering firm built railroads. When Polanyi was young, the family moved to Budapest, where it settled in an affluent neighborhood largely populated by assimilated Jews. The Hungarian capital had a lively arts scene, and Polanyi’s mother, Cecilia Wohl, was an enthusiastic participant. A feminist and a free spirit, she founded a private women’s college, hosted a literary salon, and created an Academy of Eurhythmics.

The Polanyi family, which adopted the Magyar form of its name after Mihály died, emphasized education. Karl and his three siblings were hometutored in English, Latin, and Greek. (One of his brothers, Michael, would become an eminent scientist and philosopher.) After attending the exclusive Minta Gymnasium on a scholarship, Polanyi went to the University of Budapest, where he majored in law and cofounded a student’s club called the Galileo Circle, which was dedicated to the “defence and propagation of unprejudiced science.”1 Hungary afforded Judaism the same legal status as Christianity, but antisemitism was still widespread, especially among the old Magyar elite. On one occasion, some conservative students tried to disrupt a meeting of Polanyi’s student society, and he got into a brawl with them. The university expelled him, forcing him to finish his degree at the University of Kolozsvár, a city in Transylvania that was then under Hungarian rule.

16

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As a young man, Polanyi leaned left. However, like Eduard Bernstein, the German revisionist socialist, he was skeptical of predictions of capitalism’s imminent demise. In a 1910 essay entitled “The Crisis of Our Ideologies,” he wrote: “The next period of the capitalist age will produce largely stable conditions of material existence.”2 Polanyi’s mentor was Oszkár Jászi, a charismatic Hungarian sociologist who founded a progressive journal and espoused universal suffrage. In June 1914, Polanyi helped Jászi establish the National Citizens’ Radical Party, which supported voting rights, state control of education, and distributing land from large estates to the peasantry. Just weeks after the new party was created, the First World War began. The period of capitalist stability ended a lot more quickly than Polanyi (and many others) had expected.

Viewing himself as a Hungarian patriot, he enlisted in the army. For almost three years, he served as a cavalry officer. Assigned to the Russian Front, he was part of a unit that built horse-drawn railways to move military supplies. The carnage and banality of the war appalled him. “Humanity is a Golem which stares with horror at its own frozen mask, the tortured soul at the terrible machine,” he wrote to his aunt Irma.3 In 1917 Polanyi became gravely ill with typhus and was sent home to recover. He survived the lifethreatening illness, but its after-effects continued to bedevil him. In November 1918, after the war finally ended, Hungary severed its longstanding ties with Austria and proclaimed itself a republic led by Count Mihály Károlyi, a wealthy aristocrat.

Polanyi was still ailing during these events, but from his sickbed he supported Károlyi’s coalition government, which included representatives of the Social Democratic Party of Hungary, the Hungarian equivalent of the German SPD, and Jászi’s Radical Party. The new regime was subjected to withering attacks by the Party of Communists, which Béla Kun, a former journalist who had strong ties to the Russian Bolsheviks, had recently founded. Sufficiently recovered to deliver a lecture at the University of Budapest, Polanyi spoke out against the “rising Communist tide.”4

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With workers’ councils springing up in Vienna and other cities, and with much of the country still occupied by foreign troops that had fought on the side of the allies against the Central Powers, Károlyi’s coalition struggled to govern effectively and lasted only a few months. In March 1919 the Social Democrats joined with the Communists to take power and form a Hungarian Soviet Republic. Given the dire situation, Polanyi recognized the need for a government supported by the urban masses, and he accepted a post in the new People’s Commissariat of Social Production.5

The new leftist regime introduced a range of progressive policies, including a right to work, a liberalization of the divorce laws, and free medical examinations and school meals for children. It also organized a military counteroffensive, which, for a time, pushed back the foreign soldiers, who included Romanians, Serbs, and Czech-Slovaks. Polanyi, by this time, was sick in the hospital again, but he seems to have been enthused. On May 2, 1919, he wrote to an associate: “I am joining the [Communist] Party.”6 That didn’t happen. In his deeply researched 2016 biography of Polanyi, which I have relied on for many biographical details, the British political scientist Gareth Dale cited evidence that Polanyi regarded the Kun regime’s economic policies, which included nationalizing thousands of businesses, as counterproductive.7

In June 1919, Polanyi traveled to Vienna for additional medical treatment, which meant he wasn’t in Budapest to witness the demise of the Hungarian Soviet Republic. Its leaders had been hoping that the Allies would intervene to save the republic, but that didn’t happen. In rural areas, many peasants and landowners turned against the Kun government, and the country spiraled into violence and terror. In August, with Romanian troops at the gates of Budapest, Kun and other high-ranking Communists fled to Austria.

After the Romanians occupied the capital, conservative paramilitaries, local police, and their political allies instigated a campaign of violence in which many supporters of the prior government were executed without trial. In early 1920, the National Assembly established a Kingdom of Hungary, in which Miklós Horthy, an ultraconservative navy admiral who had raised a “National Army” of anti-Communists to fight Kun’s government, served as regent. The new regime was avowedly nationalist, Christian, and antisocialist. It continued the so-called White Terror, in which thousands of people were killed and many others were imprisoned. Forces associated with the new regime also carried out anti-Jewish pogroms. Hungary was heading down a path that would see it ally with Mussolini’s Italy and, eventually, with Hitler’s Germany.

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★ ★ ★

Polanyi wanted no part of this present or future. He settled in Vienna, and to support himself, he became a journalist. Initially, he worked on a Hungarian exile magazine edited by Jászi, who had also moved to Austria. Eventually he got a job with a Viennese current affairs magazine, Der Österreichische Volkswirt (The Austrian Economist). After starting out as a freelance book reviewer, in 1925 he became part of the publication’s editing staff, which improved his financial position. By then, he was a married father. His spouse, Ilona Duczyńska, was an irrepressible Polish Hungarian who had trained in mathematics and engineering but quickly turned her energies to revolutionary activity. In Budapest, she had been an official in the Kun regime, and she had also spent a brief period in Moscow working for the Comintern. Subsequently, she had been expelled from the Hungarian Communist Party for criticizing some of its practices. In 1923 Polanyi and Duczyńska got married and had a daughter, Kari.

Like Weimar Germany, Austria had emerged from World War I as a democratic republic riven by class conflict, high rates of inflation, and right-wing paramilitary groups; the Austrian equivalent of Germany’s Freikorps was the Heimwehr. During the 1920s, a series of center-right governments held office at the national level, but in Vienna the Social Democratic Workers’ Party (SDWP), the Austrian sister party to the German SPD, oversaw a unique experiment in municipal socialism. “Red Vienna,” as it came to be known, introduced an eight-hour workday, unemployment benefits, and an extensive system of public services. It built public health centers, kindergartens, bathhouses, and large municipal housing complexes, including the famous Karl Marx Hof. Polanyi spent more than a decade in Red Vienna and came to view it as a moral and intellectual inspiration. Although Ilona’s politics were to the left of his, they both joined the SDWP. He would later say that Vienna and its socialist administration “achieved one of the most spectacular cultural triumphs of Western history.”8

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Interwar Vienna was also a maelstrom of intellectual activity, particularly in the social sciences, and Polanyi actively participated in some ongoing debates. During his recovery from typhoid at the end of the Great War, he had converted from Judaism to Christianity. When he moved to Vienna, he became friendly with several British Christian Socialists who had settled in the city. He was particularly influenced by the works of G. D. H. Cole, the English historian and guild socialist, whose vision of an ideal society combined political democracy with workers’ control of their places of employment. In a 1921 letter to his brother Michael, Polanyi said that the “English socialist practice confirmed the direction of my work. To discuss social problems from a Christian viewpoint—this is my socialism.”9 In an article he wrote for the Hungarian exile magazine, Polanyi praised guild socialism for its pluralism and encouragement of independent groups such as trade unions, cooperatives, church associations, and municipal councils.10 He envisaged a society where class conflict would be superseded by negotiations between groups representing producers (workers) and consumers.11 He even set up a guild socialism study group. According to Gareth Dale, its members included a young philosopher, Karl Popper, and Peter Drucker, a fellow journalist who would go on to be a well-known writer on management.12

From across Europe, progressives flocked to Vienna to witness the latest innovations of the socialist administration. Austria as a whole remained deeply divided. It was a conservative rural country with a cosmopolitan urban capital ruled by leftists. Throughout the 1920s, there were occasional clashes between right and left. As in Germany, the onset of the Great Depression accentuated political tensions and eventually led to a breakdown. After the country’s largest bank, Creditanstalt, collapsed in May 1931, the economic slump deepened, and the unemployment rate eventually rose to 25 percent. In May 1932 Engelbert Dollfuss, a thirtynine-year-old former army officer and businessman, became chancellor of a new right-wing coalition, which consisted of his Christian Social Party, the Landbund, a right-wing peasants’ party, and the Heimatblock, the political arm of the Heimwehr. Dollfuss had eyes on establishing an authoritarian government. His role model was Benito Mussolini, the leader of Italy, rather than Hitler, but events in Germany were to hasten his efforts.

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On January 30, 1933, Germany’s president, Paul von Hindenburg, a former field marshal who had led the Imperial Army during World War I, invited Hitler to serve as chancellor atop a coalition government. Hindenburg was acting on the advice of Franz von Papen, a conservative aristocrat who had recently served as chancellor. Von Papen argued that bringing Hitler and his National Socialist party into the government in this manner would keep him “boxed in” and prevent the left from taking power. Alarmed by the rise of the Comintern-aligned Communist Party of Germany, which gained about 13 percent of the vote in a federal election held in July 1932, some business leaders supported this strategy, which proved disastrous. Within two months of becoming chancellor, Hitler had established a dictatorship that would last until he committed suicide in his Führerbunker on April 30, 1945.

On March 4, 1933, as Hitler’s brownshirts were moving to eliminate their opponents in the Reichstag and elsewhere, Dollfuss staged a coup of his own. After the parliament in Vienna deadlocked on how to respond to a strike by railroad workers, he declared a state of emergency. With the police, the army, and many business interests supporting him, he claimed the power to rule without parliamentary approval and moved to ban three groups that he considered a threat: the Austrian Communist Party; the paramilitary arm of the SDWP (the Repubikanischer Schutzbund); and the Austrian Nazi Party, which had been emboldened by Hitler’s seizure of power. As an Austrian nationalist, Dollfuss wanted no part of the Anschluss (unification with Germany) that the Nazis were demanding. In August 1933 he reached a mutual defense pact with Mussolini’s Italy, and the following month, he merged the parties that made up his coalition in a new Fatherland Front—an Austrian version of Il Duce’s National Fascist Party.

Although Dollfuss’s government initially left in place the leftist administration in Vienna, it was an unabashedly authoritarian regime that censored the press and harried independent-minded journalists. Polanyi, who had risen to a senior editing post at Der Österreichische Volkswirt, could see where things were heading. He decided to move to London and create a new life for himself and his family. He left Vienna in January 1934, leaving behind, for the moment, his wife and daughter. Within weeks of his departure, violence broke out in the Austrian capital and other cities after elements of the Heimwehr tried to arrest some socialist politicians. Members of the banned Schutzbund barricaded themselves into Vienna’s housing projects, including Karl Marx Hof, and squared off against the police and the Heimwehr. Dollfuss ordered the Austrian army to attack the socialists, which it did with gusto. After putting down the uprising, Dollfuss banned the SDWP, leaving his Fatherland Front as the only legitimate political organization in the country. He also introduced a new constitution that replaced parliamentary democracy with authoritarian corporatism on the Italian model. Austrofascism was born.

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