Summary of the Great Transformation by Polanyi

{Short Link for THIS post: ;  Published in Express Tribune on 27 April 2015}. Summary below has been updated to include an additional point — the double movement of Polanyi — on 3 September 2016

An earlier post by Madi provided an introduction to Polanyi’s classic work The Great Transformation. This book is crucial to understanding both HOW and WHY we need to re-structure economic education today. Unfortunately, the book is quite complex, a bit dry and technical at times, and consequently hard to follow. Although many leading economists have praised it, I did not see any glimmer of understanding of its central arguments anywhere in orthodox arena. Even among heterodox economists, it is not frequently mentioned or cited.

Mostly for the purposes of understanding it for myself, I set out to write a compact summary of the key arguments in the book. The central theme of the book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. I quote from the introduction of my article:

The market economy has become so widespread that it has become difficult for us to imagine societies where the market does not play a central role. Yet, for reasons to be clarified in this article, this is the need of the hour. The unregulated market has done tremendous damage to man, society and nature. Bold, imaginative steps to find alternative ways of organizing economic affairs in a society are essential to our collective survival.

Below is a revised and updated version of the ORIGINAL POST. This revision below include some new information, and also provides some clarification of some common confusions related to original post:

In a presidential address to the American Economic Association in 2005, Nobel Laureate Robert Lucas confidently pronounced that economists have solved the fundamental problem of prevention of recessions. The Global Financial Crisis (GFC) of 2008 took economists by surprise, since none of the seven major schools of macroeconomic thought allowed for this possibility. Remarkably, the US Congress set up a committee to investigate the failure of economic theory to predict the crisis. In written testimony, Robert Solow wrote that the theories being used to make policy seemed suitable for some alien planet. Similarly, Paul Krugman said that the profession as a whole was led astray by the beauty of mathematics, and failed to pay attention to the ugly realities. One of the central tenets of economic theory is that prices guide us to the right allocations. Instead, the overheated mortgage market deceived people into making massively wrong investments, which led to the crisis.

The failure of modern economic theories has led to a search for better theories. Authors like Bagehot, Minsky, Kindleberger and Keynes, who had been ignored or discarded are re-gaining popularity. However, the deepest and most penetrating critique of capitalism was produced by Karl Polanyi in his monumental classic The Great Transformation: The Political and Economic Origins of Our Times. Polanyi’s arguments are complex and remain unfamiliar to a majority of economists. They run counter to received wisdom, and are directly opposed to what is taught about economics in leading universities. Our goal in this essay is to provide a brief summary of his ideas.

The central theme of the book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. Today, the victory of the market economy is so complete that it has become difficult for us to imagine societies where the market does not play a central role. Polanyi argues that contrary to popular belief, markets have been of marginal importance in traditional societies throughout history. The market economy emerged after a prolonged battle against these traditions. As Polanyi clarifies, this is not a good development. The commodification of human beings and land required by the dominance of the market has done tremendous damage to society and environment. The value of human life has been degraded to their earning power. This enables the grim calculations made by Ambassador Albright that sacrificing half a million Iraqi children is worth the control of oil. Similarly, precious rainforests, coral reefs, plants, fish, and animal species which took millions of years in the making, and cannot be replaced at any price, are reduced to the value of timber, food or chemicals. This is the root cause of the social and environmental catastrophes we currently face. The analysis of Polanyi can be summarised in the six points listed below.

First, markets are not a natural feature of human society. Nearly all societies other than the modern one we live in used different, non-market mechanisms to distribute goods to members. Our society is unique in having made markets the central mechanism for the production and distribution of goods to its members.Clarification: Markets have existed since ancient times in some societies, but have been peripheral adjuncts — shutting them down would not have caused serious damage to society.

Second, market mechanisms conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms, which govern social relations with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Market societies convert these into commodities causing tremendous damage. This involves (A) changing a nurturing and symbiotic relationship with Mother Earth into a commercial one of exploiting nature, (B) Changing relationships based on trust, intimacy and lifetime commitments into short term impersonal commercial transactions, and (C) Turning human lives into saleable commodities in order to create a labor market.

Third, Unregulated markets are so deadly to human society and environment that creation of markets automatically sets into play movements to protect society and envirnoment from the harm that they cause. Paradoxically, it is this counter-movement, this opposition to markets, that allows markets to survive. If this was not present, markets would destroy the society and the planet. For example, the Great Depression caused the collapse of many free market institutions, and the government stepped in to prop them up and substitute for them. This protective, anti-market, move allowed capitalism to survive. This is called the “Double Movement” by Polanyi, who says that the history of capitalism cannot be understand without looking at both sides — the forces trying to liberate markets from all regulations, and the forces fighting to protect society from the harmful effects of unregulated markets.

Fourth, certain ideologies, which relate to land, labour and money, and the profit motive are required for efficient functioning of markets. In particular, both poverty, and a certain amount of callousness and indifference to poverty are required for efficient functioning of markets. Poverty is, in a sense, to be clarified, a creation of the market economy. The sanctification of property rights is another essential feature of markets. Thus, the existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.

Fifth, markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by GFC 2008. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, the Second World War, had finally killed the market system and a new method for organising economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about 30 years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism.

Sixth, market economies require imposition by violence — either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. There are a number of strategies commonly used to portray an economic disaster as progress and development. Without this propaganda, markets could not survive, as the forces of resistance to markets would be too strong.

This last point clarifies something which may puzzle readers. According to all we hear, capitalism has created tremendous wealth and unprecedented progress. In fact, notwithstanding capitalist propaganda to the contrary, this growth has been extremely costly. We have sold planet Earth, and are celebrating the proceeds without taking into reckoning the costs. Understanding Polanyi’s analysis is essential to reversing the damage.

My full article, which provides further details of this brief sketch,  can be downloaded from the link below:

The Rise and Fall of the Market Economy,” Review of Islamic Economics, Vol. 14, No. 2, 2010, pp. 123–155


A collection of short essays of mine on diverse topics on LinkedIn

A quick guide/index of my writings, lecture, video talks: AZPROJECTS


  1. Bruce E. Woych said:

    This is one of the best summations I have ever seen on this great work. Now…if we can only get the current “Global” perspective to take it to task and apply it to the contemporary world economy interlaced with localized and regional variations that are involved and being homogenized into colonialized financial markets, we might see the Great Transformation in 21st Century formation (and deformation).

  2. Pavlos said:

    Markets are presented in textbooks and in conventional wisdom as optimizers. Given plausible assumptions about supply and demand curves, markets determine the optimum clearing price. Or so the theory goes.

    In practice markets are very expensive optimizers. A bureaucrat can easily set the optimal price and quantity under such ideal conditions, and bureaucrats inside firms do the majority of the world’s price and quantity setting because they’re cheaper (than markets).

    What markets actually do is threefold:

    – Markets connect the many needs of consumers and capabilities of suppliers in a network that central planning (both the Soviet and Harvard kind) cannot achieve. Bazaars did that. But traditional non-market societies with a high degree of interdependence also connected the needs and capabilities of people, often better.

    – Markets (and money) allow for transfers of goods without personal interdependency. Whereas in traditional societies every economic transfer comes with loyalty, favor, moral indebtedness, etc. money is the innovation that settles accounts immediately and makes economy possible without human relations. As such is is offensive, literally.

    – Markets allow for unfair trades and unequal outcomes. Yes, unfair. In a traditional society based on role sharing and economic reciprocity the price of goods is adjusted over time for equality of outcome: The value of fish vs. teaching is set so that the fisher and scholar both live agreeably in the long run. Markets introduce the fiction of the individually fair trade, while in fact allowing long-term imbalances to develop.

    Markets aren’t optimizers. They’re a means to connect needs and settle trades without human connection.

  3. davetaylor1 said:

    Excellent summary and comments. However, Pavlos, I suggest money only appears to settle accounts immediately. It only does so when the money has already been earned, and the indebtedness (to society, not money lenders) created by credit or free riding remains until it has been earned with loyality, favor and moral gratitude etc.

  4. This post was re-blogged on Real World Economics Review, and generated a lot of additional discussion — please see:

    Please also see: The Methodology of Polanyi’s Great Transformation on RWER Blog. Polanyi considered the three spheres — social, political and economic — to be closely inter-linked. These cannot be studied in isolation, as per current practice. Polanyi provides an integrated methodology.

  5. davidm58 said:

    Thank you Pavlos for the concise summary. My interest in Polanyi was generated from reading Peter Pogany’s book “Rethinking the World.” Pogany also adopts an integrated methodology and looks at the socioeconomic sphere with a systems view. He sees what Polanyi called the early market economy Global System 1, followed by a chaotic transition (1915 – 1945) which led to our current Global System 2 of mixed economy/minimum reserve banking/weak multilateralism. After another chaotic transition, he sees a coming Global System 3 as comprised of 2 level economy/maximum reserve banking/strong multilateralism.

  6. If Polanyi seems inaccessible, one might like to check out Michael Hudson. Hudson has delved into many aspects of economics in history, including going back to ancient Mesopotamia where he discovers the origin of private property. He also has several volumes that discuss the development of economic practice and thought over the last two hundred years. Another resource is David Graeber’s Debt: The First 5000 Years. Graeber owes a debt to Hudson, but he also brings forth detailed anthropological evidence of quite different ways of handling consumable goods within the community. I found that having read these and certain other authors helped prepare me to understand Polanyi.

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