When advancing the case for ‘free markets ‘ classical liberals are often chided for failing to recognise the wisdom of Karl Polanyi. In The Great Transformation Polanyi claimed that the pursuit of a ‘free market’ system is chimerical. Historically such an economy did not emerge spontaneously but was the result of social engineering by a nineteenth century state heady on the ideology of Adam Smith. Prior to this period it is alleged that markets and the pursuit of personal gain barely existed and that the responsiveness of people to price signals and incentives is merely a construct of modern economics. According to Polanyi, the result of the great social experiment with markets in the 19th century was a period of social dislocation which resulted in a widespread movement to regulate capitalism and build the welfare state. The market economy, therefore, is neither free in its origins and neither can it be left free to function without intervention of the state. Rather, markets should be recognised as ‘embedded’ in a nexus of social norms and institutions which emphasise solidarity and not as autonomous, freely operating structures in which the state misguidedly ‘intervenes’.
Notwithstanding Polanyi’s enduring popularity on the left his supposed insights are either historically inaccurate or based on a crude misrepresentation of classical liberalism. First, the vast majority of modern historical research on the origins of markets ably summarised by Hejeebu and McCloskey contradicts Polanyi’s central claims. The historical record reveals ample evidence of profit-seeking behaviour for centuries prior to the alleged ‘creation’ of economic man by 19th century liberalism. In the case of Britain, for example, complex labour and agricultural markets thrived under the fragmented legal structure of medieval England. To the extent that the 18th and 19th century British state engaged in deliberate attempts to further the development of markets, therefore, this did not represent a sudden and deliberate ‘transformation’ of the social structure, but was the culmination of hundreds of years of incremental change. More recently, twentieth century evidence confirms that responsiveness to price signals and incentives is evident even in social systems explicitly committed to the eradiaction of such behaviour – at the height of the Cultural Revolution in Maoist China, black markets were still in operation.
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Mark Pennington is the author of Robust Political Economy: Classical Liberalism and the Future of Public Policy