Polanyi Revisited

Economic globalization is a reliable political boogeyman, and not without reason. But maybe we can do globalization better.

*About a year ago I wrote a piece for the Kenyon Observer on neoliberalism, free trade, and the 20th century Hungarian political economist Karl Polanyi, linked here. I think the piece holds up fairly well–I highlighted the centrality (and, I believe, inescapability) of Polanyi’s concept of economic embeddedness. That said, I think some of my wording could have been a bit more precise, and both my analysis and recommendations better grounded in current research. Polanyi’s thinking largely holds up, but it’s worth noting the different expressions of embeddedness and backlashes against attempts to establish an independent sphere. For these reasons I’ve decided to return to the topic here.

“Globalization” is one of the more troublesome words in the modern political-economic lexicon. On one hand, it encompasses specific phenomena like global or supranational governance, free trade, capital flows across national borders, and migration. On the other, it has broader social and cultural connotations: the sharing of ideas, the blurring (and re-shaping) of borders and identities, and the “shrinking” of the world through new technologies. Put another way, globalization is an umbrella term that can mean many things, which makes it easy to utilize as a political cudgel, and difficult to understand. At the same time, it’s not just a symbolic issue–globalization is a very real phenomenon, and given the discontents of liberal democratic political and economic systems in recent years, it’s necessary to evaluate and better understand “globalization,” both as a symbolic and practically consequential phenomenon. In looking closely at different aspects of economic globalization, particularly free trade and the free movement of capital across national borders, it might be possible to realize a better kind of globalization through better domestic welfare and improved coordination between nations.

Karl Polanyi, a Hungarian political economist who wrote around the middle of the 20th century, remains one of the sharpest analysts of globalization, and looking both to his work and that of modern political economists is a good way to start to understand a thorny issue. Polanyi’s best known work is The Great Transformation, which traces the economic history of England from the medieval period to the time of writing, as well as the economies of pre-state societies. Polanyi argues that economic practices before the industrial revolution were fundamentally rooted in the societies in which they originated. Rather than “free markets,” the exchange of goods and services in pre-industrial societies was subordinate to society, culture, and politics. In Polanyi’s words, the economy is necessarily “embedded” in society. When actors in a political system attempt to “dis-embed” the market from the society (as happened during the course of the industrial revolution), Polanyi claims, they will have to commodify labor, capital, and the environment, all categories that Polanyi asserts are actually “false commodities,” or commodities that exist prior to markets. This separation and commodification, he argues, is a process that can never really be completed–either societies will re-embed their economies (perhaps even under the pretense of making the independent sphere more efficient, as in the case of the introduction of central banking in the 19th century) or there will be a massive and catastrophic backlash. Writing as he did in the early 1940s, one can imagine what catastrophes might have been on Polanyi’s mind.

While Polanyi never actually uses the term “globalization” in The Great Transformation, there is a clear similarity between the practices that he asserts resulted in the combined backlash of the Great Depression and two world wars, and the phenomena of free trade, free capital flows, and deindustrialization today. The pre-World War I international banking system, relentless Wall Street speculation during the 1920s, and even political liberalism itself, as products of the so-called “self-regulating market,” led to the bloodshed and despair of the first half of the 20th century. Today, some politicians decry the free movement of people, goods, and capital as upsetting the proper economic and social balance of the societies from which they originate. As has become brutally evident in the United States, the ascendancy of such politicians can be a catastrophe of its own sort. Indeed, intellectuals seeking to understand the rise of populism around the world often point to globalization as a key cause. There is some connection, at least prima facie, between the global nature of the 2008 recession and the particular situation of the housing bubble in the US. The free flow of capital across national borders and the international influence of the New York Stock Exchange point to global financialization as a plausible contributing factor to the crisis. Finally, entrenched interests concerned with profit and not the well-being of the planet are often the movers and shakers behind trade agreements with few environmental protections, playing a role in the devastation of the global climate. It’s easy to establish a link between these crises and the emergence and strengthening of populism on both the left and the right.

But as with any attractive grand theory, it’s fair to be skeptical. To what extent is the “independent sphere,” or a global “free” market, disentangled from society and politics, responsible for the crises of our time? Turning to the contemporary literature on political economy, a nuanced picture emerges. International trade, along with the free movement of capital and immigration, is one of the principle components of globalization. Empirical analyses suggest that trade between nations does provide a widespread economic benefit to citizens. At the same time, however, trade can be catastrophic for certain sectors of domestic industry. Prices for goods or labor might be undercut by foreign firms. In other words, trade has wide but small benefits for the general public, and potentially significant costs for certain sectors of the economy. For example, the North American Free Trade Agreement made many goods cheaper in the United States, but cost jobs in the manufacturing sector. Corn became cheaper in Mexico, but the influx of cheap corn from the US destroyed the domestic Mexican corn industry. It’s not clear to what extent this might impact inequality directly, but the political consequences are clear, particularly the ways in which anti-trade rhetoric became a feature of Donald Trump’s campaign speeches in the 2016 presidential election. In this respect, at least, it seems that there is something to Polanyi’s thesis.

Another important component of globalization is global financialization. Capital movement across national borders has become increasingly easy since the emergence of economic neoliberalism in the 1970s and the demise of the Bretton-Woods global economic order. This tends to get somewhat less attention than trade, but it also deserves examination. Today, multinational firms are well-positioned to influence governments to reduce corporate tax rates by threatening to take their business to nations with lower rates, a global “race to the bottom” that interferes with governments’ ability to raise revenue. In addition, the increasing movement of capital through global financial markets ties national economies ever closer together, potentially exacerbating financial crises. If governments are unable to rein in the behavior of corporations because corporations can credibly threaten to pick up and leave, and if increasingly integrated financial markets are tied to economic crises, democratic accountability erodes and it becomes quite difficult to smooth out the boom-and-bust effects of the business cycle through public policy. This, too, seems to conform with the Polanyian thesis, which asserts that attempts to establish an independent economic sphere that transcends the delineations of each particular society can have disastrous consequences.

However, it’s not clear that such disastrous effects will always be on the political-economic horizon for any capitalist democracy. While Western European democracies are experiencing trials of their own, particularly with respect to immigration and sovereignty within the European Union, economic globalization has not generated the same visceral backlash as it has in the United States, despite the fact that they are intensely engaged in international trade and frequently have lower corporate tax rates than in the US. More generous welfare states, higher union density, and economies that are overall more coordinated by the tripartism between government, labor, and business seem to allow for competitive and globalized market economies that are less vulnerable to political backlash. In many ways, the coordinated economies of Germany, the Netherlands, and the Nordic countries are embedded within society, but at the same time they are participants in the global market. Perhaps in the coming years they might not remain so coordinated and economically equal, but at least for the time being it seems that they have found a solution to the Polanyian problem without needing to leave the market behind entirely.

It’s unlikely that the United States could transition to such a coordinated economy anytime soon; the structure of its market system is firmly entrenched (for the worse, it seems). By no means, however, is the US doomed. Practical policies at the domestic level that expand the welfare state, as well as higher marginal income taxes and, perhaps, new forms of taxes–such as consumption taxes on carbon–would go a long way towards ameliorating the problem of trade. A policy that looks like Denmark’s “flexicurity” system, which provides payment for retraining programs in the wake of deindustrialization could rectify some of the consequences of global trade. At the international level, better coordination between national economies on issues like the corporate tax rate might help end multinational corporations’ undue influence on national governments. In recent days, US Treasury Secretary Janet Yellen has proposed cooperation between finance ministers of the Organization for Economic Cooperation and Development (OECD) to establish a “global minimum” corporate tax rate. Ending the “race to the bottom” in terms of corporate tax rates, and mitigating the problem of global tax haven countries would be a significant step, to say the least. There are reasonable critiques of a global minimum rate, and it needs to be further developed, but at least as a starting point it’s worthy of examination and discussion.

It would not be easy or even plausible to restore the specific terms of old arrangements like the Bretton-Woods system, which was characterized by firm controls on the ability of corporations to move capital across borders. The global economy is too interconnected for that, and such interconnectedness has been a driver of global growth and prosperity. While that growth and prosperity has concentrated among the wealthiest members of developed countries, this alone is not evidence that wealth and growth cannot be distributed more equitably, both within and between nations. Revanchism and autarky is not the best path forward. Instead, thoughtful and practical economic policy, at both the domestic level and through global coordination, makes the most sense. To be sure, there are tradeoffs involved, but such is the nature of politics.

Sources consulted:

Rodrik, Dani. “Populism and the Economics of Globalization,” Journal of International Business Policy (2018).

Burgoon, Brian. “Globalization and Backlash: Polanyi’s Revenge?” Review of International Political Economy 16 no. 2 (May 2009).

Burgoon, Brian. “Inequality and Anti-Globalization Backlash by Political Parties,” European Union Politics 14 no. 3 (2012).

Hall, Peter A. and David Soskice. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford University Press, 2011).

Stein, Jeff. “Yellen pushes global minimum tax as White House eyes new spending plan.” The Washington Post, March 15, 2021.

Kenyon College '21 Political Science major; co-Editor in Chief of The Kenyon Observer

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