The market economy was made to serve us; we weren’t made to serve the market economy.

Karl Polanyi recounts in his book, The Great Transformation, the great change in Europe from the preindustrial world “to the era of industrialization, and the shifts in ideas, ideologies, and social and economic policies accompanying it.” (Joseph E. Stiglitz – Foreword page vii) One such shift that Polanyi describes was the move from a more traditional based economic system which were regulated to the self-regulating markets system. Polanyi asserts that, ”the change from regulated to self-regulating markets at the end of the eighteenth century represented a complete transformation in the structure of society.” (74) In order to understand this transformation and the implications it has for society we first need to understand what constitutes a self-regulating market.

Self-Regulating Markets

Polanyi characterizes self-regulating markets in the following way: “A market economy is an economic system controlled, regulated, and directed by market prices; order in the production and distribution of goods is entrusted to this self-regulating mechanism.” (71)

Self-regulation entails that all things that are produced are for sale on the market and all income comes from such sales. Polanyi points out some further assumptions in regard to the state and its policy. He states: “Nothing must be allowed to inhibit the formation of markets, nor must incomes be permitted to the formed otherwise than through sales. Neither must there be any interference with the adjustment of prices to changed market conditions – whether the prices are those of goods, labor, land, or money. Hence there must not only be markets for all elements of industry, but no measure or policy must be countenanced that would influence the action of these markets. Neither price, no supply, nor demand must be fixed or regulated; only such policies and measures are in order which help to ensure the self-regulation of the market by creating conditions which make the market the only organizing power in the economic sphere.” (72) This principle of no government interventions in the market economy (besides the policies that assures this self-regulation) is one of Polanyi’s main points of attack. He believes that self-regulating markets never work and that they have severe consequences for people.

Traditional Economic systems vs. Self-Regulating Markets

Polanyi contrasts the self-regulating markets with the previous economic systems. He juxtaposes how labor, land and money function in traditional economic systems with how they function in a self-regulating market system.  

According to Polanyi, the mercantile and national market system, labor and land never became the objects of commerce. He states: “That mercantilism, however emphatically it insisted on commercialization as a national policy, thought of markets in a way exactly contrary to market economy, is best shown by its vast extension of state intervention in industry. [….] But they were all equally averse to the idea of commercializing labor and land – the precondition of market economy.” (73)

Through this contrast he shows what social implications the self-regulating market has. In the traditional economic systems the economic order had been a function of the social order. However, when in the nineteenth-century the economic activity was isolated from the political sphere something completely new had occurred: society was subordinated to the economy.  

The Creation of Fictitious Commodities and its Social Consequences

According to Polanyi self-regulating markets are built on the notion that labor, land and money are commodities. Polanyi critiques the commodification of labor, land and money by arguing persuasively that these are indeed fictitious commodities.

“A market economy must comprise all elements of industry, including labor, land, and money. [….] But labor and land are no other than the human beings themselves of which every society consists and the natural surroundings in which it exists. To include them in the market mechanism means to subordinate the substance of society itself to the laws of the market.” (74-75)

Polanyi defines commodities as “objects produced for sale on the market; markets, again, are empirically defined as actual contacts between buyers and sellers. Accordingly, every element of industry is regarded as having been produced for sale, as then and then only will it be subject to the supply-and-demand mechanism interaction with price.” (75) Based on this definition of what constitutes a commodity, Polanyi argues that labor, land and money are not commodities. He explains: “Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance. None of them is produced for sale. The commodity description of labor, land and money is entirely fictitious.” (75-76) The consequences reducing labor, land and money to commodities lead to what Polanyi terms the “satanic mill.” He concludes that what the self-regulating market postulates about labor, land and money cannot be upheld. “To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount and use of purchasing power, would result in the demolition of society.” (76) Treating people (labor) as commodity and subordinating it to the self-regulating markets has a de-humanizing effect. Polanyi describes this horrific effect by stating: “In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to that tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation.” (76) The problem with this form of organizing the market economy is that it makes human society merely “an accessory of the economic system.” (79)

Jesus and the Self-Regulating Markets

Polanyi’s argument reminds me of an argument between the Pharisees and Jesus in the Gospel of Mark (Mark 2:23-28). The Pharisees are upset that his disciples have broken the Sabbath law by picking heads of grain. Jesus’ response to the Pharisees reveals that they have forgotten (misunderstood) God’s purpose for the Sabbath. Jesus says “The Sabbath was made for man, not man for the Sabbath.” Mark 2:27 This means that God made the Sabbath to serve people and for their benefit. However, among the Pharisees the reverse had become true - people served the Sabbath.

Polanyi’s critique of the self-regulating market is built on a similar premise as Jesus’ critique of the Pharisee’s understanding of the Sabbath law. The market economy was made to serve us; we weren’t made to serve the market economy. However, when we turn people (labor) and land into commodities and subordinating them to the economic system that is exactly what happens.

Thus Polanyi argues for regulation of the market which ensures that the market serves people and does not destroy people. For policy makers this seems to be a good guiding question. Does our policy make the economy serve people or does our policy make people serve the economy?