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

The thesis presented in The Great Transformation was a dark one that challenged the basic foundations of capitalist democracy. At the end of the book, however, Polanyi looked to the future and struck a more upbeat note. Throughout it all—the collapse of Red Vienna, the years of struggle in Britain, and his move to the United States—he had retained his belief in democratic socialism as a sane and civilized alternative to fascism. Even events in the Soviet Union hadn’t caused him to abandon the faith. Despite the show trials of the 1930s, he continued to defend Stalin’s collectivist policies as historically necessary and economically productive.

Since his first visit to the United States, in the mid-1930s, he had found fresh reasons for optimism. He was greatly enamored of the New Deal, its grand public works projects, and its creator, FDR, whom he regarded as a “great leader” who was creating a “great transformation” in the United States.54 When, after Pearl Harbor, the Roosevelt administration rapidly placed the US economy on war footing, using administrative fiat to convert great swaths of industry into a huge armaments factory, Polanyi was even more impressed. He hailed the rapid economic mobilization to confront the Axis powers as a demonstration of “democracy at its marvellous best.”55 He fervently hoped that the wartime shift to economic planning and interventionism on both sides of the Atlantic marked a historical turning point. In the final chapter of The Great Transformation, he wrote:

The passing of market economy can become the beginning of an era of unprecedented freedom. Judicial and actual freedom can be made wider and more general than ever before; regulation and control can achieve freedom not only for the few, but for the all. Freedom not as an appurtenance of privilege, tainted at the source, but as a prescriptive right extending far beyond the narrow confines of the political sphere into the intimate organization of society itself. Thus will old freedoms and civic rights be added to the fund of new freedom generated by the leisure and security that industrial society offers to all. Such a society can afford to be both just and free.56

These ringing words appeared the same year that Friedrich Hayek, Polanyi’s more famous Austrian contemporary, published The Road to Serfdom, his jeremiad against socialism, social democracy, and wartime planning. In Vienna during the 1920s, Polanyi had engaged in a debate with Hayek’s intellectual mentor, Ludwig von Mises, about the practicality of socialist planning. As a supporter of democracy, he was sensitive to the argument of Mises, Hayek, and their followers that planning led to the abridgment of freedoms and, ultimately, to dictatorship. He argued that in a guild socialist economy of the sort he favored, decision-making could largely remain decentralized, he argued, with conflicts being resolved through negotiations between groups representing all the major economic interests. By the middle of the Second World War, the debates of the 1920s may have seemed somewhat remote to Polanyi. But at the very end of The Great Transformation, he returned to the issue of socialist planning and liberty, writing: “As long as [man] is true to his task of creating more abundant freedom for all, he need not fear that either power or planning will turn against him and destroy the freedom he is building by their instrumentality. This is the meaning of freedom in a complex society; it gives us all the certainty that we need.”57

Unlike The Road to Serfdom, The Great Transformation didn’t cause much of a stir when it was published. Hayek was invited to go on an American book tour, where he spoke to packed halls, and Reader’s Digest put out a condensed version of his book. Polanyi was left to mull over his academic reviews, some of which were mixed. “Despite the brilliance of The Great Transformation the work is marred by serious flaws,” a reviewer in The American Historical Review said.58 At least the book got written about in the United States. In Britain, leading academic journals initially ignored it. This may have been partly because their editors still regarded Polanyi as an outsider lacking prestigious affiliations, but there was another factor. Many English historians regarded his account of British history as oversimplified and, in some aspects, plain wrong. In a letter to Polanyi, G. D. H. Cole described his claim that before 1834 the Speenhamland system of outdoor relief had prevented the emergence of a competitive labor market as a “monstrous exaggeration.”59

Largely lost in these criticisms was a recognition that The Great Transformation wasn’t really a history book. It was a work of political economy, which presented a stark and stripped-down model of capitalist development. In assessing any such model, the pertinent question isn’t whether it is wrong—any such model is contradicted by some particulars— but whether it is useful in organizing disparate facts and explaining overall trends. Hobson’s model of imperialism satisfied this requirement. So did Kondratiev’s “long wave” model of capitalist development and Keynes’s model of an economy trapped in an underemployment equilibrium. Polanyi’s “double movement” was another theory that explained a lot with a little. Its emphasis on the role that the state played in creating a market economy, and on the pressures for reform this unregulated economy inevitably generated, was to stand the test of time.

Unfortunately for Polanyi’s standing as a public intellectual, at the moment that The Great Transformation was published it didn’t seem to be particularly relevant. The disastrous experiences of the interwar years had discredited free market capitalism in many people’s eyes, and there was no immediate prospect of it being resurrected in its pre–Great Depression form. As Hayek lamented, history appeared to be moving in the opposite direction. During the Second World War, there was broad political consensus in favor of centralized direction of production and other emergency measures, such as taxing high incomes and windfall profits. And after the war ended in 1945, Keynesianism and social democracy, of various stripes, rose to the ascendancy on both sides of the Atlantic.

In this political environment, Polanyi’s work received little attention outside the academy. He remained a good deal less celebrated than his brother Michael, who, in 1944, was elected to the Royal Society in recognition of his scientific achievements. At the end of 1944, Polanyi and his wife, Ilona, returned to London, where he again failed to secure a fulltime academic post. After a couple of years of part-time teaching, he decided to return to the United States and wrote to Columbia University, in New York, which had a strong tradition in institutional economics. The economics department offered him a visiting professorship for the spring term of 1947, which he gladly accepted. On arriving in Morningside Heights, he impressed his new colleagues. Shortly after his visiting professorship came to an end, Columbia offered him a more permanent teaching post. So did the University of Chicago and the New School for Social Research, in New York. He accepted the offer from Columbia.

Finally, in his early sixties, Polanyi settled into the life of a respected academic. He lived near the Columbia campus, presided over a graduate seminar in economic history, worked on his own research projects, and socialized with other intellectual refugees from central and eastern Europe. The one major complication in his life was that the US government refused to grant a permanent resident visa to Ilona on account of her Communist past. Eventually he persuaded her to move to Toronto, where he visited her on weekends. In 1953 he retired from his teaching duties at Columbia and moved to Canada himself, although he returned to New York regularly to participate in seminars and other events.

During these years, Polanyi’s research focused largely on precapitalist societies, but he also toyed with writing a sequel to The Great Transformation. He even came up with a provisional title—Freedom from Economics. In a letter he wrote to a colleague in January 1952, he said the new work would “theorize the adjustment of the world to a post-market society with the economy ‘consciously embedded’ in non-economic institutions.”60 Polanyi didn’t complete this book, and his optimism about the possibilities of transcending the market faded. He had lost faith in the postwar British Labour government of Clement Attlee for being too moderate after its initial raft of reforms. He loathed the rise of the Cold War and its chilling impact on intellectual freedom. The reality remained, however, that governments on both sides of the Atlantic had largely jettisoned the religion of laissez-faire, accepting the need for a social safety net, financial regulation, and countercyclical macroeconomic policies. If the process of embedding economic activity in nonmarket institutions wasn’t proceeding as rapidly as Polanyi had hoped, there was a widespread recognition among Western economic policymakers that unleashing capitalism in the raw would risk repeating the catastrophes of the 1930s. Until this consensus shattered and the supporters of laissez-faire regained political power, Polanyi and other critics of the postwar order would remain somewhat peripheral. But that didn’t necessarily imply that their arguments didn’t have force. Modern history didn’t stop in 1945 or 1955. In many parts of the world, it was only beginning.

Two Skeptics of Keynesianism: Paul Sweezy and Michał Kalecki

It’s easy to see why the three decades after the Second World War are often referred to as the Golden Age of industrial capitalism. In the United States between 1950 and 1973, inflation-adjusted GDP grew at an annual rate of 4 percent,1 and the jobless rate averaged about 4.7 percent.2 In western Europe, the economic performance was even better: inflation-adjusted GDP grew at an annual rate of 4.8 percent,3 and unemployment averaged just 2.6 percent.4 In Japan, where the Western allies created a democratic political system after occupying the country in 1945, economic growth was little short of miraculous: more than 9 percent a year between 1950 and 1973,5 a period in which the unemployment rate averaged just 1.6 percent.6 Throughout the advanced economies, productivity, wages, and life expectancy all rose steadily. In the United States, for example, inflationadjusted median family income—the income of the family right in the middle of the income distribution—doubled between 1947 and 1975.7

The official statistics don’t identify who the median American family was each year, but it was most likely headed by a non-college-educated factory worker or office worker. In the Western core of the global economy, at least, Keynesian managed capitalism was delivering steadily rising living standards to many workers, especially members of labor unions. In two landmark contracts that General Motors reached with the United Auto Workers in 1948 and 1950, the carmaker agreed to give its workers annual pay raises tied to the cost of living and productivity improvements, as well as providing them with pensions and health insurance. In return, the UAW agreed to respect GM’s authority to make managerial and investment decisions. These collective bargaining agreements, the latter of which Fortune magazine labeled “The Treaty of Detroit,” provided a model for other manufacturing firms. The postwar prosperity was far from shared equally. The United States was still riven by regional and racial divides. Discrimination against Blacks in employment, education, housing, and other aspects of daily life remained a blight on US society. But the overall trend was upward, and it was slanted toward the section of society that Americans refer to as the middle class and other countries call the propertyowning working class. As wages and living standards rose, income inequality declined. In 1950 the top 1 percent of American households received about 16 percent of pretax income; by 1973, that figure had fallen to about 11 percent.8

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The statistics for wages and incomes don’t fully capture the scale of the postwar transformation, which also involved a big expansion in the role of government. In Britain, the Labour government of 1945–51, led by Clement Attlee, provided universal old-age pensions, child allowances, unemployment benefits, and sickness benefits. The 1944 Education Act, which was passed by Churchill’s wartime coalition, had already introduced universal secondary education. And in 1948, the taxpayer-financed National Health Service went into operation, supplying universal healthcare that was free at the point of service. The Attlee government also strengthened workers’ negotiating rights, launched a substantial home-building program, and nationalized some major industries, including coal, power generation and transmission, iron and steel, and the railways.

Attlee and his colleagues viewed these policies as the enactment of democratic socialism British style—a “new Jerusalem” that combined Keynesian economics with active social policy; a Fabian belief in the possibility of creating new public institutions, like the National Health Service; and a limited commitment to state ownership and control. The postwar reforms were born of a dual desire to honor the sacrifices the British citizenry had made during the Second World War and create a more stable, inclusive economy that transcended the individualistic model that had failed so disastrously in the 1920s and ’30s. The Attlee government’s policies went beyond the US New Deal, but they reflected the same communitarian philosophy that FDR had expounded in his 1941 “Four Freedoms” speech, when he added freedom from want and fear to the traditional mantra of freedom of speech and worship. In an address that Attlee gave when he introduced Labour’s manifesto for the 1951 election, the transatlantic echoes were evident:

We want a society of free men and women—free from poverty, free from fear, able to develop to the full their faculties in co-operation with their fellows, everyone giving and having the opportunity to give service to the community, everyone regarding his own private interest in the light of the interest of others, and of the community; a society bound together by rights and obligations, rights bringing obligations, obligations fulfilled bringing rights; a society free from gross inequalities and yet not regimented nor uniform.

Although the break with the prewar era was particularly evident in Britain, state intervention and state spending also ramped up elsewhere. Taking France, Germany, the UK, and Holland together, total government spending as a share of GDP rose from 29.8 percent in 1950 to 42 percent in 1973, an unprecedented jump outside wartime.9 In the United States, a big rise in federal spending was initially driven largely by the defense budget, but in the 1960s spending on nondefense programs also picked up sharply. Taking account of federal, state, and local expenditures, overall government spending as a share of US GDP rose from 21.4 percent in 1950 to 31.1 percent in 1973.10 In virtually all the industrial countries, the fastestgrowing area of spending was on social security and other social programs, which increased from 7 percent of GDP to 15 percent between 1950 and 1973, on average.11

Especially in Britain, there was a widespread recognition that the creation of a comprehensive welfare state and the expansion of government intervention in other areas of the economy were historic developments. Some center-left thinkers hailed them as utterly transformative. In a 1951 essay entitled “The Transition from Capitalism,” Anthony Crosland, a Labour MP and author, wrote: “The most characteristic features of capitalism have all disappeared: the absolute rule of private property, the subjection of the whole of economic life to market influences, the domination of the profit motive, the neutrality of government, typical laissez-faire division of income, and the ideology of individual rights.”12 That definitive assessment was premature, to say the least. But Crosland was correct when he pointed out that an epochal change was taking place. In Britain, the state had taken on the responsibility to build an adequate social safety net, keep unemployment low, tame the financial sector, bring utilities under public ownership, tax the rich, and rationalize some key industries. This new form of managed capitalism was more than a mirage, and some of the shrewder left-wing critics of capitalism quickly realized that it represented a serious challenge to their doctrines.

★ ★ ★

In 1942 Paul Sweezy, a young economics lecturer at Harvard, published The Theory of Capitalist Development, which to this day is perhaps the clearest introduction to Marxian and post-Marxian economics. As well as expounding Marx’s surplus value theory, Sweezy examined various accounts of capitalist breakdown, including the theories of falling profits and underconsumption, and he went on to discuss imperialism and fascism. It was a panoramic survey, and one of the things that distinguished it from earlier treatments was Sweezy’s acknowledgment that Keynesian economics represented a big challenge to some classic leftist theories. “By instituting and continuing a sufficient rate of state consumption … it would seem that the state is in a position to bring the economy to a level of full employment and hold it there,” Sweezy wrote. Once full employment was achieved, the government could, “through altering the pattern and volume of taxation and expenditure, influence total consumption and total accumulation in any desired direction.”13 In this new policy framework, Sweezy went on, the tendency to underconsumption, “instead of translating itself into chronic depression at a certain stage of development, becomes merely a tendency  … which may be counteracted by new force, the deliberate action of the state.

“If the drift to economic stagnation can be successfully countered, then why must we assume that unemployment, insecurity, sharper class and international conflict are in prospect for capitalism?” Sweezy went on.

“Why not, on the contrary, a ‘managed’ capitalist society, maintaining economic prosperity through government action and perhaps even gradually evolving into a full-fledged socialist order?”14

In answering these questions, Sweezy moved beyond the mechanics of Keynesian policies and, reasserting his Marxian perspective, queried their political underpinnings. “The state cannot simply be dragged in as a deus ex machina to solve the demonstrated contradictions of the accumulation process,” he wrote. “Its position and function in capitalist society must be examined to see what can and what cannot be expected of it.”15 The vulnerability of the Keynesian approach wasn’t to be found in theoretical shortcomings, Sweezy explained further on in the book. “Generally speaking their logical consistency cannot be challenged, either on their own ground or on the basis of the Marxian analysis of the reproduction process.”16 The problem with Keynesian policy prescriptions was “their faulty (usually implicit) assumptions about the relationship, or perhaps one should say lack of relationship, between economics and political action. The Keynesians tear the economic system out of its social context and treat it as though it were a machine to be sent to the repair shop there to be overhauled by an engineer state.”17

This was an astute observation. To many mainstream economists, one of the main attractions of Keynesian ideas was that they could be readily translated into mathematical and engineering terms. During the Second World War, Lawrence Klein, an economics PhD at MIT, built a statistical model of the US economy that incorporated Keynesian concepts such as the multiplier and the principle of effective demand. Based on the amounts of inputs (labor, capital, and raw materials) that were available, and decisions about monetary and fiscal policy, Klein’s model could be used to predict the path of GDP, employment, and inflation. At the London School of Economics in the late 1940s, the New Zealand–born economist Bill Phillips, who had trained as an engineer, built a refrigerator-size analog computer model of the economy that used water tanks, pipes, floats, and hydraulic levers to demonstrate how government spending and changes in taxes (represented by water) circulated through the economy. On both sides of the Atlantic, there was excitement about utilizing the new Keynesian methods in policymaking. In 1948, Klein’s doctoral adviser at MIT, Paul Samuelson, published the first edition of his famous undergraduate textbook, which, with the aid of some simple diagrams, illustrated how Keynesian policymakers could manage the level of aggregate demand to ensure full employment.

Ironically, Keynes himself had been skeptical of efforts to turn economics into a mathematical science. He believed there was too much innate uncertainty in the economy, and that psychological factors played too large a role, for economists and policymakers to be able to estimate with any confidence the quantitative relationships between key variables, such as interest rates and the level of capital investment, or government spending and total employment. During the decades immediately following the publication of The General Theory, Keynes’s strictures had little impact. Armed with new statistical models and new estimates of national income and its components, which were another important product of the 1930s and ’40s, the postwar Keynesians were confident in their ability to understand and operate the economic machine. Analyzing its historical and political underpinnings seemed like a secondary concern.

Sweezy had a very different perspective. The son of a New York banker, and a graduate of Phillips Exeter Academy and Harvard, where he edited the college newspaper, the Crimson, he had a top-down view of America’s class system. As a graduate student in Harvard’s economics department during the mid-1930s, he became a teaching assistant for Joseph Schumpeter, the eminent Austrian economist and former finance minister who had moved to the United States in 1932. Although the pair’s political views diverged sharply—Schumpeter was a free market liberal; Sweezy was an avowed leftist—they got along. Sweezy later described himself as “perhaps … something of an ersatz son” to the aristocratic Austrian.18

One thing that Sweezy and Schumpeter shared was a deep interest in Marx’s portrait of capitalism as a dynamic system in which capitalists’ efforts to save costs and raise profits were constantly replacing outmoded products and production techniques with new ones. “This process of Creative Destruction is the essential fact about capitalism,” Schumpeter wrote in his 1942 book Capitalism, Socialism, and Democracy.19 But if Schumpeter agreed with Marx about how capitalism developed, he entirely disagreed with him about its results. Schumpeter viewed capitalistic creative destruction as the engine of economic growth and rising living standards. He downplayed class conflict, arguing that the employees and owners of a capitalist firm usually had a common interest in ensuring its success and profitability. (Not surprisingly, Schumpeter’s views would endear him to generations of business innovators.)