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Polanyi had now seen two democratic leftist governments overthrown from the right in fifteen years. With fascism firmly established in much of western Europe, including its biggest country, he was determined to write about the phenomenon, but first he needed to get a job in his new home, London. He didn’t find it easy, but through his contacts in the Christian Socialist community, he was eventually invited to coedit a collection of essays for a book entitled Christianity and the Social Revolution. The job gave him the opportunity to contribute an essay of his own.

At the time, there was a good deal of confusion about the relationship between fascism, Christianity, and capitalism. In 1929, Mussolini and the Vatican had signed the Lateran Treaty, in which the Italian dictator recognized papal sovereignty over the Vatican City and Italy’s bishops agreed to take an oath of loyalty to the Italian state. In Germany, the Catholic Church originally opposed Hitler and the Nazis. Shortly after he took power, however, the Vatican negotiated a treaty with his regime—the Reichskonkordat—in which the German church agreed to stay out of politics in return for its followers being allowed to practice their religion freely. Polanyi regarded these accommodations with fascism as abominations. At the start of his essay, which was published in 1935 under the title “The Essence of Fascism,” he wrote: “Victorious Fascism is not only the downfall of the Socialist Movement; it is the end of Christianity in all but its most debased forms.”13

His argument wasn’t based simply on the evil designs of Hitler, Mussolini, and their followers: it rested on philosophical foundations. Polanyi argued that in prioritizing individual development and natural rights, Christianity and socialism—his version of socialism, at least—were both based on individualism, whereas fascism represented the negation of individualism. Citing the works of Othmar Spann, a conservative Austrian philosopher who was popular at the time, he pointed out that many intellectuals sympathetic to fascism traced the rise of socialism to the emergence of individualism and democracy and believed that, in order to remove the socialist threat, it was necessary to eliminate the phenomena that gave rise to it. “Thus, if Socialism is not to be, democracy must go,” Polanyi wrote. “This is the raison d’être of the Fascist movements in Europe.”14

The essay also discussed fascism’s relationship with capitalism. The fascists’ propaganda, Polanyi pointed out, often coupled individual capitalists with socialists as enemies of the patriotic common people, but they largely spared big corporations from criticism. “The popular resentment against Liberal Capitalism is thus turned most effectively against Socialism without any reflection on Capitalism in its non-Liberal, i.e., corporative, forms,” Polanyi wrote. “Though unconsciously performed, the trick is highly ingenious. First Liberalism is identified with Capitalism; then Liberalism is made to walk the plank; but Capitalism is no worse for the dip, and continues its existence unscathed under a new alias”—fascism, that is.15 In the early days of capitalism, Polanyi noted, it had been taken for granted that capitalism and democracy were compatible, partly because they had emerged around the same time. This comforting assumption had now been challenged.

“The mutual incompatibility of Democracy and Capitalism,” Polanyi wrote, “is almost generally accepted to-day as the background of the social crisis of our time.”16 The left widely assumed that democracy would lead to some form of socialism. On the right, too, many argued that democracy threatened capitalism because workers’ parties gradually undermined the sanctity of property rights. Polanyi referred to a statement from Mussolini that democracy was an anachronism because “only an authoritative State can deal with the contradictions inherent in Capitalism.”17 In other essays that Polanyi wrote in the mid-1930s, he pointed out some of these contradictions, including a tendency for democratic parties to interfere with the market mechanism and undermine corporate profitability. In one of these pieces, he said that democracy and capitalism “have reached a deadlock, because they have become the instruments of two different classes of opposing interests.”18

In “The Essence of Fascism,” Polanyi emphasized the agreement on the left and the right that there were only two solutions to this problem: “The extension of the democratic principle from politics to economics, or the abolition of the Democratic ‘political sphere’ altogether.”19 In the first option, private ownership of the means of production would be ended, and the economy would no longer exist as an autonomous entity separate from politics. “This, essentially is Socialism,” Polanyi remarked. The second option involved the abolition of the “democratic political sphere,” thus creating a situation in which “only economic life remains; Capitalism as organized in the different branches of industry becomes the whole of society. This is the Fascist solution.”20

Although Polanyi didn’t, at this stage, explicitly endorse the catastrophist analysis that liberal capitalist democracy was doomed, his essay certainly suggested that history was moving in this direction. So far, he noted, neither the democracy/socialism nor fascism/capitalism options had been fully realized. In Russia, Polanyi wrote, socialism was “still in the dictatorial phase, although the tendency toward Democracy has become clearly discernible.” (Like many on the European left, he initially was reluctant to recognize the reality of Stalinism.) In Germany and Italy, meanwhile, Hitler and Mussolini were moving “reluctantly towards the setting up of the Corporative State,” seemingly mindful of the fact that “a generation which has known Democracy cannot be trusted to be ripe for corporative citizenship.”21

Among Polanyi’s English friends and associates, his article was well received, but it didn’t bring him the full-time academic post that he had been hoping for. After Ilona and Kari moved to England in 1936, the family found life to be a financial struggle. Eventually Polanyi got a job teaching British social and economic history at the Workers’ Educational Association, which provided evening instruction for people who hadn’t had a higher education. He taught classes in Sussex and in Kent. The obligations of the job were taxing and the pay modest, but Polanyi used his lectures to develop his ideas about the historical roots of fascism, which he planned to turn into a book at some point.

In the meantime, he cited some of the historical material he was teaching in another essay, “The Fascist Virus,” which he completed at the end of the 1930s. Mentioning, among other things, the rise and fall of Chartism in Britain, Polanyi noted that the tensions between democracy and capitalism went back to the early industrial era. During the rapid economic growth of the late nineteenth century, it had seemed possible that the two phenomena could coexist peacefully. “During this short period of time, capitalism and democracy seemed to flourish side by side,” he wrote. “The illusion of harmony was the result of transitory factors, such as the enormous expansion of [the] market, the sharing of trade unions and labour parties in the benefits of the advance, as well as the false impression created by the American scene. The worldwide mass unemployment of the 1930s has caused a re-emergence of the dilemma of capitalism vs democracy.”22

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Although Polanyi, his wife and daughter, and his brother Michael were now living safely in England, the expansion of fascism’s most pathological variant, German National Socialism, presented a deadly threat to some of his family members who had stayed in Vienna, particularly his younger sister, Sophie, her husband, Egon, and their son Karl, who had developmental issues. By 1939, Austrofascism had succumbed to the Nazis and Hitler. In March 1938, German troops marched across the border to enforce an Anschluss. Soon after that, Gareth Dale recounts,23 Egon was arrested in a random raid and sent to the Dachau concentration camp, near Munich. Shortly before the Second World War began, the Nazi regime agreed to grant passports to Sophie and Egon, despite his captivity, but it refused to release Egon unless they left young Karl behind or secured a visa for him. Refusing to abandon her son, Sophie stayed in Vienna.

Polanyi, meanwhile, was about to move again. His continued failure to obtain a full-time academic job in Britain had frustrated him, and in 1940, the year Hitler’s forces invaded the Low Countries and France, Bennington College, in Vermont, offered him a post as a visiting lecturer. His old mentor, Oszkár Jászi, had been teaching in America for many years, at

Oberlin College in Ohio. Polanyi accepted the job. Once more leaving behind Ilona, who didn’t have a US visa, he sailed for the United States. After he had settled in the verdant foothills of the Green Mountains, he began working in earnest on his book, in which he intended to trace the clash between capitalism and democracy back to nineteenth-century Britain, and the creation of a society organized according to the precepts of laissezfaire. The “present world crisis is ultimately due to market-economy, as the first phase of industrial civilization,” he wrote in a November 1940 letter to Ilona. “The past quarter century was a result of the dissolution of the international economic system based on that economy.”24

The following year Polanyi obtained a fellowship from the Rockefeller Foundation that enabled him to stay at Bennington and concentrate on his book. To his delight, the college offered Ilona a lectureship in mathematics and physics, and she arrived in Vermont in December 1941. Other aspects of Polanyi’s personal life were much less happy. In March 1941, as the Nazis’ onslaught on the Jews of Germany and Austria intensified, his sister Sophie and her young son were transported to Poland. A month later Sophie’s husband, Egon, was killed at Dachau. According to Dale, Sophie’s last known location was a Jewish ghetto in the city of Kielce. Polanyi later wrote: “My dearest little sister was murdered by the madmen.”25

Physically and psychologically, Bennington was a long way from the horrors taking place in central Europe. Polanyi continued to work on his manuscript, which he had provisionally titled Origins of the Cataclysm: A Political and Economic Inquiry. By the time it was ready for publication, in 1944, his publisher, Farrar and Rhinehart, had changed its title to The Great Transformation: The Political and Economic Origins of Our Time. “Nineteenth century civilization has collapsed,” the first chapter began. “This book is concerned with the political and economic origins of this event, as well as with the great transformation which it ushered in.”26

Polanyi quickly got to the heart of his argument, which was that the vanished civilization, which he largely equated with industrial Britain, had been built on an unstable foundation: laissez-faire economics. “Our thesis is that the idea of a self-adjusting market implied a stark utopia,” he wrote. “Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness.”27 Confronted with the ravages inflicted by the free market, society inevitably took steps to protect itself in the form of social reforms and other measures, Polanyi continued. “But whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it.”28

This argument, which Polanyi developed at length throughout the book, actually consisted of two separate claims, and both of them concerned the role of the state. Going back to Adam Smith, orthodox economists had presented a narrative in which the rise of the free market economy represented a retreat of an overweening mercantile state and the spontaneous emergence of a decentralized, self-sustaining order based on individual self-interest. Polanyi insisted that this story was a myth, and that the free market had been imposed on society by a strong state. “There was nothing natural about laissez-faire: free markets could never have come into being merely by allowing things to take their course,” he wrote. “Just as cotton manufactures—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.”29 Polanyi went on: “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.”30

Elaborating this point, Polanyi pointed out that in the period from the Napoleonic Wars to the abolition of the Corn Laws and the defeat of Chartism—1800 to 1848, roughly—the British state introduced three essential features of the laissez-faire system: a free labor market, free trade, and a stable currency. Polanyi laid particular emphasis on the Poor Law Amendment Act of 1834 that swept away the last vestiges of the old Speenhamland social welfare system, which had provided “outdoor relief” for workers in distress. As a disincentive to idlers, jobless workers were given the choice of fending for themselves or entering one of the spartan workhouses that featured in Dickens’s Oliver Twist, where they were separated from their families and obliged to work in return for shelter and a daily crust. “The critical stage was reached with the establishment of a labor market in England, in which workers were put under the risk of starvation if they failed to comply with the rules of wage labor,” Polanyi wrote. “As soon as this drastic step was taken, the mechanisms of the self-regulating market sprang into gear.”31 Workers were “physically dehumanized,” and “the owning classes were morally degraded. The traditional unity of a Christian society was giving place to a denial of responsibility on the part of the well-to-do for the conditions of their fellows.”32

By the 1830s, Polanyi said, “laissez-faire had been catalyzed into a drive of uncompromising ferocity.”33 He pointed out that the passage of the Poor Law Amendment Act, and other measures that enshrined the principles of laissez-faire, were possible only because Britain wasn’t yet a proper democracy. Although the Great Reform Act of 1832 had broadened the franchise a little, it still excluded the majority of the population. In subsequent years, when the Chartists demanded universal suffrage (for men), Polanyi noted, their “leaders were jailed; their adherents, numbered in millions, were derided by a legislature representing a bare fraction of the population, and the mere demand for the ballot was often treated as a criminal act by the authorities.”34 This repressive stance was inevitable because it “would have been an act of lunacy to hand over the administration of the New Poor Law with its scientific methods of mental torture to the representatives of the self-same people for whom that treatment was designed.”35 It was only later in the nineteenth century, after industrial capitalism had been given time to develop and wages had risen, that the voting franchise was extended to British workers. And even then, Polanyi pointed out, many ardent free marketeers were distinctly unenthusiastic about this development: “Inside and outside England, from Macaulay to Mises, from Spencer to Sumner, there was not a militant liberal who did not express his conviction that popular democracy was a danger to capitalism.”36

Polanyi’s other major claim was that laissez-faire wasn’t ultimately sustainable because its harsh nature generated pressure for ameliorative countermeasures. Even though the unrepresentative British Parliament had successfully resisted Chartism, it passed the Ten Hours Bill of 1846, which limited the workday; the Public Health Act of 1848, which facilitated the construction of proper sewers and water supplies; and in subsequent decades, legislation that legalized labor unions and regulated gas utilities.

None of these measures were planned or coordinated in advance, Polanyi pointed out. They resulted from efforts by a diverse group of reformers and pressure groups—from High Tory paternalists to workers’ organizations to Benthamite technocrats—who were responding to the degradations imposed on society by unregulated capitalist development. “While laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way,” Polanyi wrote. “Laissez-faire was planned; planning was not.”37

Polanyi described the process of marketization imposed from above followed by social reforms instigated from below as the “double movement.” Although he focused on the British example, he argued that this pattern applied to any capitalist society where market and the profit motive were given free rein. In the final third of The Great Transformation, he moved his narrative to the late nineteenth century and the huge expansion of international trade and commerce that was stimulated by the steamship and other technological innovations. As industrial capitalism developed on a global scale, Polanyi pointed out, it was accompanied by a rise in protectionism, government interventionism, and imperialism. “These conditions themselves were set by the ‘double movement,’” he wrote. “The pattern of international trade which was now spreading at an accelerated rate was crossed by the introduction of protectionist institutions designed to check the all-round action of the market.”38 Polanyi also noted how the socalled Long Depression of 1873–86, which affected many industrial countries, accentuated social and political tensions. By the time the slump ended, he wrote, “Germany had surrounded herself with protective tariffs, established a general cartel organization, set up an all-round social insurance system, and was practicing high-pressure colonial policies.”39

In Polanyi’s telling, no industrialized country could escape the currents and countercurrents of the double movement. “Nations and peoples were mere puppets in a show utterly beyond their control. They shielded themselves from unemployment and instability with the help of central banks and customs tariffs, supplemented by migration laws.”40 The rise of European and US imperialism was another characteristic of the double movement. “Trade and the flag were racing in one another’s wake,” Polanyi wrote. “Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy.”41 By the start of the twentieth century, the double movement was fundamentally changing the nature of that system. “Less and less could markets be described as autonomous and automatic mechanisms of competing atoms.”42 Laissezfaire and the individualist model of society it was associated with were being superseded, and “external wars merely hastened its destruction.”43

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This sweeping narrative set the stage for Polanyi’s treatment of the interwar period. He argued that the great folly of policymakers in the leading industrial countries was to try and re-create the free market capitalist model. “Economic liberalism made a supreme bid to restore the self-regulation of the system,” he wrote, “by eliminating all interventionist policies which interfered with the freedom of markets for land, labor, and money.”44 On the domestic front, this restoration project involved balancing budgets, paying down debts, bringing down inflation, and allowing wages to find their natural price in the market. At the international level, it entailed stabilizing currencies by restoring the gold standard, a goal to which “questions of social organization had to be wholly subordinated.”45

Echoing Keynes, Polanyi said these deflationary policies “heaped up the deficits of the various national economies” and “burdened finance with the unbearable strain of massive economic dislocations” to the point where “a disruption of the remnants of international division of labor became inevitable.”46 In the political realm, the policies accentuated tensions between the forces of capital and organized labor. “The captains of industry were subverting the population from allegiance to their own freely elected rulers, while democratic bodies carried on warfare against the industrial system on which everybody’s livelihood depended,” Polanyi wrote. “Eventually, the moment would come when both the economic and political systems were threatened by complete paralysis. Fear would grip the people, and leadership would be thrust upon those who offered an easy way out at whatever ultimate price. The time was ripe for the fascist solution.”47

Having written extensively about fascism in the 1930s, Polanyi didn’t spend much time in The Great Transformation exploring its philosophical underpinnings. He did say that it, “like socialism, was rooted in a market society that refused to function.”48 If the economic conditions were ripe, he warned, authoritarianism could attract widespread support in many different cultural and racial environments, from Catholic Portugal to Protestant Holland, from militaristic Prussia to civilian Austria, from Aryan Belgium to non-Aryan Japan. “In fact,” Polanyi insisted, “there was no type of background—of religious, cultural, or national tradition—that made a country immune to fascism, once the conditions for its emergence were given.”49

This was the nub of Polanyi’s argument. Efforts to subjugate society to the dictates of the free market and the profit motive weren’t merely destabilizing. Ultimately, they were incompatible with democracy. As a practical matter, Polanyi explained, the fascist solution to the paralysis of capitalist democracy consisted of “a reform of the market economy achieved at the price of the extirpation of all democratic institutions, both in the industrial and in the political realm.”50 In economic terms, the reform program consisted of smashing the independent labor movement and breaking away from the global trading system to create a self-sufficient economy, a capitalist counterpart of Stalin’s socialism in one country.

Pointing to the Nazis’ economic policies in Germany, which combined a drive toward autarky with public works projects to soak up unemployment and the cartelization of various business sectors, Polanyi argued that they had been widely misunderstood. He noted that many foreign observers, including Montagu Norman, the head of the Bank of England, continued to believe that the Nazi economic policies were a temporary aberration, and that Hjalmar Schacht, the president of the Reichsbank, would eventually “restore orthodox economics in Germany.”51 (In the early 1920s, Schacht had introduced the currency reform that ended hyperinflation.) These illusions “survived in Downing Street up to the time of Munich and after,” Polanyi wrote.52 He also criticized free market liberals for supporting deflationary policies during the 1920s and refusing to support any efforts to tame the market. Trapped in their ideology, these liberal thinkers and policymakers couldn’t see that their visions of a self-regulating free market economy were destined to end in tragedy. “Nowhere did the liberals in fact succeed in re-establishing free enterprise, which was doomed to fail for intrinsic reasons,” Polanyi remarked. “Yet the victory of fascism was made practically unavoidable by the liberals’ obstruction of any reforms involving planning, regulation, or control.”53