No Such Thing as a Free Market

It is hardly surprising that the neo-conservative New York Sun chose to publish a reconsideration of Karl Polanyi's, The Great Transformation, written by Greg Clark, a U.C. Davis economic historian. Polanyi was one of the last century's most articulate critics of "free market" ideology--an ideology that is on the defensive today because of the Bush Administration's disastrous management of the economy. Following the old maxim that the best defense is a good offense, Clark’s strategy is to change the subject by attacking critics of the free market as wooly headed, naïve, and in energetic denial of “historical reality.”

Clark's piece is filled with enough errors that it appears he reconsidered without bothering to reread. He mistakenly claims, for example, that the transformation of the title was the rise of the market in the 18th century, but Polanyi is clear in the book's first paragraph that he is talking about the transformation produced by the global economic collapse of the 1930's that he traces back to the rise of a market economy at the beginning of the 19th century. Clark goes on from there to denounce a straw man version of Polanyi’s argument.

Clark’s denunciation is a way to get at his real targets­-those lesser social sciences such as sociology, political science, and anthropology--that have found Polanyi’s work to be extraordinarily useful in analyzing the last three decades of destructive market fundamentalism. He writes:

"The Great Transformation has attained the status of a classic in branches of sociology, political science, and anthropology. Stacks of it await undergraduate initiates each year in college bookstores. Citations to the work continue to accumulate in scholarly articles. Yet in economics the work is unknown or, when discussed, derided."

This last assertion will come as a surprise to Joseph Stiglitz, the 2001 Nobel prize winning economist, who wrote a foreword to the most recent edition of the book. Rather than deriding the book, Stiglitz insists that “Economic science and economic history have come to recognize the validity of Polanyi’s key contentions." (p. xiii) [Full disclosure: I wrote the introduction for the edition that includes Stiglitz' foreword.]

But Clark's piece also fails to grasp one of Polanyi's most important distinctions. According to Clark: "Indeed, the more we learn of history, the more evident it is that the free market was not an 18th century innovation, but one of mankind's oldest social institutions." Clark's insertion of the four letter word "free" into that sentence is the issue. In fact, Polanyi spent years documenting that markets are indeed one of humankind's oldest institutions, but markets thrived historically because they were controlled by social institutions such as kinship, religion, and politics. What was novel at the beginning of the 19th century was the invention of the "free market"--the idea popularized by Malthus and Ricardo that human society should be organized around an integrated system of self regulating markets for land, labor, goods, and capital that were supposed to be free of any kind of social control.

Polanyi insists--and Stiglitz and many others agree--that this idea of a "free market" society is utopian. It is utopian because it assumes that humans can once and for all be released from all forms of social regulation and legal coercion and that the market forces of supply and demand will spontaneously and freely produce optimal outcomes. History in fact has shown us again and again that market-based societies only work because markets are embedded within legal and political rules that prevent opportunistic and predatory behaviors and that can also assure that the supply and demand for land, labor, money and other key commodities will roughly balance. According to the Polanyian view, the actual history of market society of the last two hundred years has involved systematically increasing the state's economic role in order to make markets work.

Polanyi's framework helps us to differentiate between two recent periods--the early post-war years (1945-1970) and the Reagan-Thatcher years (1980-2008). In the earlier period, "free market" ideology was in retreat and governments played an unapologetic role in regulating business and finance and providing necessary services. That was one of the world's greatest periods of sustained economic growth. In the more recent period "free market"ideology has been ascendant, government regulation and services have been rolled back, and economic growth has been sluggish in much of the world. In this more recent period, inequality has risen dramatically in the U.S. and the world economy has been shaken by a series of financial crises, most recently, the crisis that began with a failure of regulation in the U.S. mortgage market.

But Clark refuses these kinds of distinctions. He insists that:

"Free-market capitalism is a resilient and stable system in much of the world--particularly in English-speaking countries. It is the policy of world bodies such as the International Monetary Fund and the World Bank. It is conquering vast new domains in places such as China, Eastern Europe, and India."

In short, Clark's definition of "free-market capitalism" is so broad and undifferentiated that it includes China under the dictatorship of the Communist Party. Whether he wants the role or not, Clark effectively becomes an apologist for the most reactionary global interest groups that routinely use the ideology of the free market to resist and oppose necessary regulatory measures. Both hedge fund managers and big oil companies insist that any increase in government regulation violates the logic of "free-market capitalism" which only works when markets are left alone to allocate resources. It is puzzling-- at this late date--that Clark can not understand that the mindless celebration of the free market comes with huge costs in economic dislocation and environmental degradation.