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Karl Polanyi on Unfettered Capitalism

Karl Polanyi condemned profit greed and deregulated markets. Today's capitlaism critics are his heirs and don't know it. An unfettered capitalism is responsible for the world coming out of joint. The ancestors of an orientation that the economy needs social embedding hardly know Polanyi. "Finance capital was put in the driver's seat." Border-crossing capital transactions increased enormously and were used for financial speculation, not for investments in productive projects.

By Rainer Hank

[This article published on 12/26/2018 is translated from the German on the Internet, www.faz.net.]

Karl Polanyi condemned profit greed and deregulated markets. Today's capitalism critics are his heirs and don't know it.

Since the financial crisis in the early 21st century, an unfettered capitalism is responsible in German middle-class circles for the world coming out of joint. Even friends of the market warn that capitalism must be protected from capitalism. The economy must be embedded in society again.

The ancestors of an orientation that the economy needs social embedding hardly know him. Karl Polanyi (1886-1964) was one of the most mysterious and baffling thinkers of the 20th century. "That the market system dug its own grave and destroyed the social institutions on which it was based was a dilemma," Polanyi wrote in his epochal 1944 work "The Great Transformation" under the experience of the Great Depression and the Second World War.

No thinker has resisted the insight offered by Adam Smith (1723-1794) that the market was the dominant institution of modern societies as passionately as Polanyi. For Polanyi, markets are always a threat for society when they operate according to their own laws independent of a regulatory state embedding. This "Great Transformation" that led to a destructive autonomy of the markets - occurred in England from the beginning of the 19th century and later in Germany.

The disaster began in that land, labor and money were treated like very normal raw materials or goods (e.g. potatoes, clothing or coal). That human labor is regarded as a commodity with a price was a scandal for Karl Marx and the early socialists. However, Polanyi, certainly influenced by Marx, argued more systemically than morally. He called land, labor and money "virtual resources" that have their home in social life. Labor is only the name for a human activity. Land is another word for nature and money is a metaphor for purchasing power in a society. Land, labor and money belong in the realm of all-encompassing life, not to the realm of particular markets and tradable goods.

His father's business crashed

In the early 19th century, a first wave of economization occurred in which land, labor and money were torn out of their life-world and forcibly subjected to the laws of supply and demand. The price that people must pay for this was the moral destruction of the social foundations of life: "Vices, perversion, criminality and hunger "are consequences that spread in the social world and dehumanize it.

Polanyi knew his subject. He experienced capitalism's history of disappointment. He was a great personality in the boom years of the economic miracle of the industrial expansion in Vienna and Budapest. The father, a successful railroad entrepreneur, was part of the emancipated Jewish bourgeoisie... Karl and his brothers and sisters were converted to Calvinist Protestantism. The mother, a Russian, managed one of Budapest's prominent salons.

Polanyi experienced the collapse of his father's business in 1900 as a traumatic experience since he was dependent on his family. "Nineteenth century civilization has collapsed." The first sentence of "The Great Transformation" can be understood on the background of his personal humiliation. Polanyi joined the communists and studied this and that and journeyed to England as a political writer. He was an essayist, pamphleteer, brilliant stylist and cultivated historian...

What was "dis-embedded" can be "embedded" again... Polanyi passionately denied that free markets were the natural beginning of history and that the regulatory intervention of the state came into fashion later. He insisted the liberal market order was a result of a political intervention that tore down the protective mercantile fences. With a romantic imagination, he dreamt of the original state of humanity as a paradise of exchanging goods and loving need satisfaction where people are not devoured by greed. There was no market in the paradise of responsible redistribution and good housekeeping.

Polanyi was not so nave to think we can restore this pre-economic original state. The hope for a world where the economy again serves society and is subordinated to society was enough for him. That money (the financial markets), labor (the labor market) and land (the real estate market) should be withdrawn from the market and regulated by the state goes without saying. That would be a second "Great Transformation" that would put straight the mad world and embed the economy in society.

For Polanyi who understood himself as a socialist, the "social market economy" was certainly not the fulfillment of his hope. However, he shared its orientation "joining the principle of market freedom with social balance" (Alfred Mueller-Armack). The tension between stable social integration and self-regulating markets is part of the basic cyclical fluctuation of human life. With increased social integration, society threatens to lose its prosperity-generating dynamic. If the pendulum strikes too strongly in the other direction, inequality and uncertainty threaten to destabilize society and paralyze economic activity.

Many of today's capitalism critics agree with Polanyi's orientation. The criticism of "economism" and "pure capitalism" and the admonition to moderation that are heard daily have their origin here. When German chancellor Merkel says we need a "market-conforming democracy," Polanyi's friends today demand a "democracy-conforming market.


By Wolfgang Merkel

[This essay published on 6/17/2019 is translated from the German on the Internet, www.zeit.de. Wolfgang Merkel is a professor of political science at the Humboldt University in Berlin.]

Capitalism acts more quickly than democracy today.

"Financial capital is in the driver's seat" (George Soros)

Capitalism and democracy are more highly developed than ever. At the same time, they have become more fragile and more vulnerable. The equilibrium between politics and the economy has fallen out of balance. Three theses illustrate this.

When the dictatorial regime of Soviet communism began to capsize in 1989, an unknown employee of the US State Department wrote an essay that announced the end of history. In a concatenation of Hegelian philosophy of history, Francis Fukuyama forecast the definitive triumph of economic and political liberalism. With the final breakthrough of the market economy and democracy, history entered its highest stage, Fukuyama argued.

Three decades later, we know capitalism has spread globally in different variants while democracy has stagnated or regressed for 15 years.

If there was ever a Golden Age of the coexistence and symmetry of capitalism and democracy, it was the phase from 1950 to the middle of the 1970s. Capitalism, in Germany people spoke of the social market economy, was tamed by political market regulations and an interventionist Keynesian welfare state. That was true for Northern and Western Europe more than for the US. Forms of the neo-classical-Keynesian synthesis were established (Joan Robinson coined the term "bastard Keynesianism"). Capitalism in the US was subject to social and political obligations in the socio-political reform program called "The Great Society" of President Lyndon B. Johnson.

These decisions were political and democracy-driven, not market-driven. The postwar era was marked by the building of the social state and regulations for the labor- and financial markets. As a result, the inequality of incomes was reduced. The political economy was still a national economy in many respects. Political control was accessible and did not have to fear the sudden outflow of investment capital. Then the era of nationally-coordinated postwar capitalism came to an end in the monetary turbulences at the start of the 1970s, the oil-price crises and the subsequent stagflation.

Released from democratic control

The Golden Era of capitalism began with Margaret Thatcher and Ronald Reagan at the beginning of the 1980s. Neoliberal globalization began with their policy. Then capitalism experienced a double deregulation in the following four decades. Capitalism was global and freed from unreasonable social and political demands by political decisions.

Strong markets and weak states

Democracy and capitalism was long regarded as a perfect symbiosis. But the financial crises showed the world that the world economy can almost completely uncouple from politics. Zeit Online raised the system question in a series of essays: Are capitalism and democracy well-matched?

This led to the paradox that democracy and democratic decisions largely
released the economy from its future democratic control. This is true for Western market economies at least. China and Vietnam's authoritarian bastard capitalism joining proto-liberal Manchesterism with budgetary-mercantile foreign trade control was positioned differently.

In the West, a transition occurred from controlled industrial capitalism to a new form of finance capitalism that is often termed financialization. Border-crossing capital transactions increased enormously and were used for financial speculation, not for investment in productive projects. Great profits arose without any value-creation. Shareholder value was promoted as the only standard.

"Finance capital was put in the driver's seat," the historian Jurgen Kucko quotes Georges Soros who occasionally was an important actor in casino capitalism.

Three theses

How does the new form of finance capitalism affect democracy?

1. The socio-economic inequality has worsened

This is true for income, wealth and education. In many democracies, the lower education stratum has dropped out of practical participation. This is true for the most unpretentious form of political involvement: elections. In the US, 80% of those with a household income above $100,000 voted in the 2012 presidential election while only a third of those citizens with an income below $15,000 voted.

In Germany, the bottom third bailed out of participation. Ge4rmany has become a stable but socially selective tow-thirds democracy. In capitalist democracies, socio-economic inequality translates very directly into inequality of political participation.

2. The state is more vulnerable

Banks, hedge funds and big investors dictate to governments directly or indirectly how they should be taxed. Amazon in the US and Google in Ireland are the most spectacular cases. If governments do not follow the tax exemption demands of investors, these investors migrate to low tax countries. Politicians want to be elected and re-elected. Inadequate investments endanger the economy, growth and jobs - and their reelection. The extortion potential of geographically-flexible investment capital vis--vis democratically elected governments has risen. This was clear in the 2007/2008 financial crisis in Europe. The banks proved to be too big to fail. The state bailed out many of them with the tax money of citizens since it feared the disastrous domino-effect of collapsing banks.

3. Finance capitalism and globalization favor de-parliamentarianism

Finance capitalism has several special features in times of globalization and digitalization: speed, volumes, complexity, spatial deregulation and range of financial transactions. In contrast, parliaments as the institutional core of democracy are territorially limited and need time to prepare, discuss and pass laws. So the de-synchronization of politics and financial markets is systemically conditioned and unavoidable.

This new empire of speed encourages those political procedures that are decisionist and not deliberative and time-consuming. Thus the executive that can often act in the short-term is favored. Expertise in complicated financial questions also exists more in executive administration than with average parliamentarians or their parties. The parliaments can only sit and watch while the executives of states coordinate finance policy.

The executives only partly profit from the shift in political power since some of their decision-makers migrate to central banks, expert circles, financial law offices and to other financial actors. Thus a power shift occurs from the legislative to the executive and from there to private or supra-national financial actors.

A new balance is sought today that codifies the normative superiority of democracy and popular sovereignty. The unequal dislocations of capitalism must be moderated so the democratic command of political equality is not suspended - and simultaneously the power of creative destruction in creative productivity is not broken.

Capitalism can first be reconciled with the basic principles of democracy when the democratic foundations of equality and freedom are no longer eroded by unfettered markets.

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