The Economic Society: Market Results and Human Purposes

Draft paper, presented at: Tenth Annual Conference of the European Society for the History of Economic Thought (ESHET), Porto, 2006

The Economic Society: Market Results and Human Purposes

– Karl Polanyi and Friedrich Hayek

Claus Thomasberger*

Is modern society shaped primarily by man’s will and wishes or is it the result of a development which is not the result of human intentions and, therefore, cannot be changed by conscious design? The answer which liberal economists offered at the beginning of the 20th century is completely different, even contrary, to the answer which we got at the end of the century.

The leading figures of economic liberalism at the end of the 19th and the beginning of the 20th century – the authors of the so-called subjective value theory – based their campaign against the naturalism of post-Ricardian classical theory on the idea of human capacities and abilities. Not only economic value was regarded as a subjective category expressing human desires, needs and wishes. The Economic Society – or Capitalism, if you prefer – as a whole was understood as the result of a historical progress which realized essentially human desires and aspirations. As Leon Walras had stated in his ‘Elements of Pure Economics or the Theory of Social Wealth’:

“The appropriation of scarce things or of social wealth is a phenomenon of human contrivance and not a natural phenomenon. It has its origins in the exercise of the human will and in human behaviour and not in the play of natural forces … it is within our power to determine whether this appropriation shall be carried on in one way rather than in another. Obviously,

* University of Applied Sciences, Berlin, e-mail: C.Thomasberger@fhtw-berlin.de

this power does not reside in each of us individually but in all of us taken collectively. We are dealing here with a human phenomenon that is shaped, not by the separate will of each individual, but by the collective activity of society as a whole. As a matter of fact, human initiative always has exerted and always will exert a modifying influence on the phenomenon of appropriation and distribution of social wealth … in the history of property as in the history of government, the human race has slowly and steadily progressed from initial confusion towards an ultimate, principled order … the appropriation of things by persons ... is a relationship among persons ... the mode of appropriation depends on human decisions, and according as those decisions are good or bad, so will the mode of appropriation be good or bad”.1

From the perspective of neo-liberal reasoning, Walras’ statement looked utopian. Capitalism, we were taught, had to be accepted as reality; it should be considered as given, as a fact.

Some scholars – and Hayek is one of the protagonists of this view – underlined that the ‘constructivist’ idea2 was misleading because in order “to understand our civilisation, one must appreciate that the extended order resulted not from human design or intention but spontaneously”. 3 Others brought out similar results, even if they followed different lines of reasoning. Milton Friedman, for example, did not tire of proving that interventions of society in the market mechanism failed systematically to achieve their objectives. And the methodological device of a purely microeconomic perspective, so en vogue by neo-liberal economists, had not only the consequence that macroeconomic goals, but also any reference to the idea of the ‘will of the people’ – or Rousseau’s ‘volonté générale’ – was excluded from economic research.

Surely, in both epochs, especially during the transitional periods, we find statements which diverged considerably from the general trend. And often we do not find any explicit statement about the role which human will and reason played in the creation and development of capitalism. By the majority of the scholars the assumption was simply taken for granted. It often had the character of the tacit principle which preceded scientific research. But nevertheless it remains true that at the end of the century the lion's share of neo-liberal economist regarded it as obvious that the notion of a society shaped ultimately by human will and wishes was a fictitious construction of a sunken age and – more than that – a ‘fatal conceit’.

1 Walras 1874/d1926/54, §4.36, 76-7.

2 The “rationalist or constructivistic view … demanded a deliberate reconstruction of the whole of society in accordance with principles of reason. This approach derived from the new rationalist philosophy developed above all by René Descartes (but also by Thomas Hobbes in Britain) and gained its greatest influence in the eighteenth century through the philosophers of the French Enlightenment. Voltaire and J.-J. Rousseau were the two most influential figures of the intellectual movement that culminated in the French Revolution and from which the Continental or constructivistic type of liberalism derives. The core of this movement … was … a general mental attitude, a demand for an emancipation from all prejudice and all beliefs which could not be rationally justified, and for an escape from the authority of 'priests and kings'. Its best expression is probably B. de Spinoza's statement that 'he is a free man who lives according to the dictates of reason alone'” (Hayek 1973/82, 120-1).

3 Hayek 1988, 6.

How did this change come about? What is the reason for this complete turnaround between the beginning and the end of the century? Are we able to explain this change? My second thesis is that the main reason for the change was the failure of economic liberalism of the 20th century to make sense of capitalism by referring to human wishes and will. It failed because – assuming a world which was built on ethical ideals alone – it carried his attack of post-Ricardian naturalism to excess. The whole theoretical concept was built on the association of the market results with utilitarian ideals. Not the narrowness of utilitarism as such was the principle weakness, but the promise of a society shaped by human wishes and will alone. Economic liberalism of the 20th century was based on the assumption that capitalism could be understood in terms of a human arrangement. The fatal consequence was that economic liberalism of the 20th century raised expectations which it never could meet. The presuppositions that human freedom would find its only limit in nature and that capitalism – within those limits – could be explained entirely by human will and rationality, included the unattainable promise to overcome all existing inhumanness and injustice. Economic liberalism of the 20th century denied the existence of the realm of society, i.e. a realm which stands ‘between’ the realm of nature and that of the human, between being and consciousness. Ab initio it excluded the idea that outcomes of human action which are not the result of human intention may be relevant for the understanding of capitalism.

The recognition of the failure of economic liberalism of the 20th century, i.e. the recognition of the fact that capitalism was not – at least not entirely – a human arrangement, opened the way for two different and even contrasting options: The first possible approach was to give up the idea of a society shaped by human ideals, wishes, and will altogether and to regard capitalism – for the simple reason that it does not belong to the realm of freedom – as appertaining to the realm of nature. It was this line of reasoning that was taken by the theoretical schools which today we refer to as neo-liberalism. But there is also the possibility of a second research programme. Isn’t it possible that the distinction of two realms – nature versus human – is too simple and that capitalism has to be located in a ‘third realm’? If we recognize this possibility, completely new problem formulations and research hypotheses become possible. Where are the limits of human freedom? Up to what point can human wishes and will be realized? Are we able to remove, to expand, or to spread out these limits?

The reason why I have chosen to have a closer look at the works of Friedrich Hayek and Karl Polanyi is that both realized the failure of economic liberalism of the 20th century relatively early. The fact that both were able to perceive the contradiction clearly was influenced by the particular conditions in Vienna during the first decades of the century – particular as

well from a scientific and as from a political point of view. Both reflected in their studies –from different and even contrasting points of view – the failure of the economic liberalism of their teachers. The interesting question for us, therefore, is: How did both reflect the failure? How did they explain it? And what were the consequences which they drew from that? For sure, concentrating on Hayek and Polanyi gives us an ‘Austrian perspective’ of the failure. But this does not mean that it is not of wider interest. Firstly, I am convinced that the discussions in Austria were never really disconnected from the debates outside the country. There always has been a strong link not only to the theoretical ideas developed in Germany, but also to the Anglo-Saxon world. And secondly, both emigrated at the beginning of the 1930s initially to England, later to North America. Therefore, both lived what we may call a ‘world life’.

III will start with what I have called the economic liberalism of the 20th century. What were its main features? What were its aspirations? Why did it fail?

The equilibrium theorists who developed their basic ideas in the last decades of the 19th century and the following years up to World War I were inspired by a resilient optimism and the ideas of progress, of growing wealth, and of a better world. Utilitarian values played a central role in overcoming the naturalist attitude which had characterized the post-Ricardian classical tradition. It seemed to be within reach to build up a truly human society, a society which was shaped basically by human will and rationality. Jevons in England, Walras in Lausanne, and, if not alone, Menger together with his followers Böhm-Bawerk und Wieser in Vienna, developed the new approach, the subjective value theory, against the background of this confident and hopeful world view. Economic value itself should be grounded in nothing else but human desires, needs and wishes. Walras articulated the core of the idea in terms of a theory of value when he wrote: “Rareté is the cause of value in exchange“.4 And Jevons expressed the same idea when he wrote on the first page of his ’Theory of Political Economy’: “Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely upon utility“. 5

In order to make sense of capitalism by referring to human will and rationality, the latter had to be defined. Utilitarism served this task. The idea that individuals strived for a maxi-

4 Walras d1926/54, §10.101, 145.

5 Jevons 1871/1957, 1.

mum of utility was taken for granted. Therefore, economic theory could be based on a calculus of pleasure and pain. As Jevons stated: “With a sufficiently wide meaning, pleasure and pain include all the forces which drive us to action.” And he added: “I have no hesitation in accepting the Utilitarian theory of morals which does uphold the effect upon the happiness of mankind as the criterion of what is right and wrong”. 6 Starting from utilitarian principles it was not difficult to determine the equilibrium position which allowed for a maximum of satisfaction from the point of view of the single individual. To put it briefly: The maximum was reached whenever the marginal rates of substitution between any two commodities were the same in all their different uses. Therefore, in the context of marginal utility theory the term equilibrium acquired a completely new meaning. It did not only indicate an equilibrium of markets, of supply and demand, of exchange value and prices, but it was defined in terms of (marginal) utility of single actors, i.e. in terms of a purely subjective category.

A new element had to be introduced when the category was applied in order to explain the interactions of different individuals. The utilitarian ideal of ‘the greatest happiness of the greatest number’ (Jeremy Bentham) required a calculus which was not part of the analysis of the rational action of a single actor. The social significance of different needs of different persons had to be weighed. Utilitarism pretended that society could be regarded as a community, as a household, or as a ‘giant’ single actor. But it was (and is) impossible to compare scientifically subjective feelings, desires, and aspirations. In other words: The definition of the maximum of the utility of the society as a whole included something which was unattainable on scientific grounds: the comparison of utility of different persons. It was a task which science could not accomplish.

Yet, to admit this impossibility would have meant to acknowledge that it was unfeasible to make sense of capitalism by referring to human wishes and will. On the one hand, subjective value theory, in order to become science, had to emancipate itself from ethics. But on the other hand, it was unable to do so. Its notions were based on subjective human feelings and aspirations. If it had cut through the link to philosophy, the subjective theory of value would have lost its roots, and its explanation of the origins of capitalism would have collapsed. From the beginnings the impossibility of subjective value theory to dissociate from ethics haunted liberal economic sciences, and the isolation of pure theory of economics became the constantly sought objective of the evolution of the discipline during the 20th century.

The difficulties were already observable in the writings of the founding-fathers of subjective value theory. Jevons, for example, claimed that in his theory he never made an attempt

6 Jevons 1871/1957, 23.

“to compare the amount of feeling in one mind with that in another. I see no means by which such comparison can be accomplished … Every mind is thus inscrutable to every other mind, and no common denominator of feeling seems to be possible”. 7 But only one page later he had no scruples to use categories such as ‘average’ or ‘aggregate’ psychological functions declaring that “the general forms of the laws of Economics are the same in the case of individuals and nations”.8 The same is true for Walras. On the one hand, he defined: “Rareté is personal or subjective … It is only with respect to a given individual that we can declare rareté in terms of effective utility and quantity possessed”.9 On the other hand, he obviously ‘forgot’ these limits when he defined social wealth: “By social wealth I mean all things, material or immaterial, that are scarce, that is to say, on the one hand, useful to us and, on the other hand, only available to us in limited quantity” 10

Yet, the impossibility to compare scientifically subjective feelings, needs, and aspirations and, at the same time, the necessity to do so re-emerged on a second level. The superiority of the modern social arrangement over other forms of social organization, i.e. their closer conformity with material well-being and justice, was, according to Walras, the only possible explanation of the rise of capitalism. The explanation (and defence) of capitalism was that the market mechanism produced a supreme outcome, the maximum of utility, so that human beings – as members of a rational human community – had good reasons to choose this particular order of appropriation. As Walras concluded:

…free competition becomes a principle or a rule of practical significance. … the equations we have developed do show freedom of production to be the superior general rule. Freedom procures, within certain limits, the maximum of utility; and, since the factors which interfere with freedom are obstacles to the attainment of this maximum, they should, without exception, be eliminated as completely as possible. 11

The subjective value theory tried to make sense of capitalism by referring to the superior result. But soon it became clear that there was an open question which could not simply be brushed aside. The theory was not as unambiguous as Walras had hoped. A closer look at the ‘general equilibrium’ showed that rareté or utility were in fact not the only element in the formation of prices and exchange value. Not only Walras was aware of the fact that he was unable to determine one equilibrium, but an indefinite number of maximum positions (equilibriums), depending on the (original) distribution of wealth. After his plea in favour of laisserfaire Walras closed his argument with the following ‘observation of fundamental importance’:

7 Jevons 1871/1957, 14.

8 Jevons 1871/1957, 15.

9 Walras d1926/54, §10.101, 146,.

10 Walras d1926/54, §3.21, 65, emphasis mine.

11 Walras d1926/54, §22. 222, 255-6, emphasis mine.

Though our description of free competition emphasizes the problem of utility, the question of (original) distribution of services remains open, however. And yet, are there not economists who, not content with exaggerating the applicability of laisser-faire, laisser-passer to industry, even extend it to the completely extraneous question of property? Such are the pitfalls into which a science stumbles when treated as literature. Some authors mingle the true and the false indiscriminately in their positive assertions, whereupon others come in who reject the true along with the false no less indiscriminately.12

The old problem of distribution which Ricardo had defined the “principle problem in Political Economy”,13 emerged again. Indeed, Walras had to admit that the equilibrium price system did not depend on (marginal) utility directly, but on purchasing power. And the latter was, even from the perspective of utilitarism, influenced by the distribution of wealth (or property). Under the conditions of a capitalist society it was the distribution of property which determined the social significance of the needs of different persons. It was impossible to deny that the equilibrium system did not depend on utility and scarcity as such, but on private property. And more than that: the unequal distribution of private property was clearly not a natural phenomenon. Without falling back into the naturalism of the classics it could only be explained historically taking into consideration institutional and social elements.

Walras tried to safeguard the idea of a pure economic science by considering the question of the (original) distribution of property an essentially moral or ethical problem which should be excluded from the pure theory of economics. Therefore, he built on the assumption that the human universe could be subdivided into two realms: the realm of nature and the realm of man (or of freedom). Or as Walras said: “We may divide the facts of our universe into two categories: those which result from the play of the blind and ineluctable forces of nature and those which result from the exercise of the human will, a force that is free and cognitive”. And he continued: “Facts of the first category are found in nature, and that is why we call them natural phenomena. Facts of the second category are found in man, and that is why we call them human phenomena”.14 For the reason that natural forces are not at all conscious of their actions, while human will is, Walras used this division in order to distinguish pure natural sciences from moral sciences or ethics.

As the introducing quotation showed, Walras believed that the distribution of wealth could be regarded as a result of human contrivance alone. He held onto the idea of a pure theory which was to be built on the equilibrium between needs and resources as such, i.e. with-

12 Walras d1926/54, §22. 223, 257. Jevons, too, saw the problem. Even if Jevons underlined at the beginning of his presentation only the dependence of value from utility, in the rear parts of his book we find the following reservation: „ so far as is consistent with the inequality of wealth in every community, all commodities are distributed by exchange so as to produce the maximum of benefit” (Jevons 1957/1871, 141-2; emphasis mine).

13 Ricardo, 3.

14 Walras 1874/1926, §1.16-17, 61.

out weighing the different needs and wants of different individuals. He did not realize that some kind of measurement of the social significance of different needs of different persons had to be introduced. In other words, he presupposed that kind of harmony between the needs and values of different people which induced Myrdal later to conclude: “In economics the notion of harmony is expressed by the idea that economic activity can be viewed as the process of housekeeping by a single subject. … The whole theory of value is intended … as the basis for … a theory of social value. The theory of economic liberalism is built upon this communist fiction”.15 Even if logically unsustainable, Walras held onto the idea to escape that difficulty and to safeguard pure theory by regarding the distribution of property as an purely ethical problem, a reality, which could be overcome by improving the social order. Walras’ theory of general equilibrium would have collapsed without the belief that the idea of a society shaped by human wishes and will did work as the point of reference or a theoretical ideal typus.

III

It was Friedrich Wieser, more than anyone else, who discussed in detail the relationship of the formation of exchange value and prices as an interplay between two elements. A relevant part of his book ‘Natural Value’, originally published in 1889, was dedicated to what he called ‘The Antinomy of Exchange Value’. Here we read:

The estimation of goods simply according to their marginal utility “is disturbed … by the present order of society, by the existence of private property, and by the differences between rich and poor ... Exchange value, even when considered as perfect, is, if we may so call it, a caricature of natural value; it disturbs its economic symmetry, magnifying the small and reducing the great”.16

“Value in use measures utility; exchange value measures a combination of utility and purchasing power. … As a consequence of it, production is ordered not only according to simple want, but also according to wealth. Instead of things which would have the greatest utility, those things are produced for which the most will be paid. The greater the differences in wealth, the more striking will be the anomalies of production. It will furnish luxuries for the wanton and the glutton, while it is deaf to the wants of the miserable and the poor. It is therefore the distribution of wealth which decides how production is set to work, and induces con-

15 Myrdal 1930/58, 194.

16 Wieser 1889/93, 43.

sumption of the most uneconomic kind: a consumption which wastes upon unnecessary and culpable enjoyment what might have served to heal the wounds of poverty”. 17

The book was an important contribution to the value theory because Wieser attempted to take the subjective approach seriously and define a notion of value which was based exclusively on utility. The dichotomy of ‘nature’ and ‘human’ demanded keeping out the disturbing influences of private property and of the difference between rich and poor. The category ‘natural value’ expressed the idea of a world where nature was the only limit to human freedom and autonomy.

“That value which arises from the social relation between amount of goods and utility, or value as it would exist in the communist state, we shall henceforth call ‘Natural Value.’… Natural value shall be that which would be recognised by a completely organic and most highly rational community”. 18

In this ideal world, prices were grounded in utility, and nothing besides utility. The notion ‘natural value’ expressed the core idea which was underlying all kinds of economic liberalism of the 20th century notwithstanding their differences. Like other protagonists of the subjective value theory, he tried to describe capitalism directly and exclusively in terms of human relations. The important point was that utility seemed to be a suitable starting point so as to describe capitalism as being anchored ultimately in human values and aspirations. Wieser’s position came close to the view of Walras. He merely tried to express explicitly what was at the origin of subjective value theory. Pure theory should be independent of the distribution of property. The notion ‘natural value’ fulfilled this criterion. Like Walras, Wieser did not consider property a reality which economic theory had to take into consideration. Like Walras, he regarded the unequal distribution as a historical reality. Economic theory could – and had to –abstract from everything which was not natural.

The existing distribution of property belonged to the sphere of ethics and to the political discourse. Here Wieser used the ideal of subjective value theory as a ‘rule of practical significance’ or as a yardstick. ”Exchange value can have no severer criticism than that which exposes its divergences from the natural measurement“. 19 The existing order of society was, according to Wieser, an obstacle to the realization of the maximum of utility. A ‘natural’ sys-

17 Wieser 1889/93, 41. Cfr Böhm-Bawerk, E. 1886, 37-39.

18 Wieser 1889/93, 43. Carl Menger used a very similar idea in the second edition of his ‚Principles’ when he wrote: In “a true social economy that is in an economy whose purpose would be the highest welfare (the fullest satisfaction of needs) for all the members of society, which would be attainable in given economic situations, political leaders should be strongly concerned in taking into account social wants” [„in einer wahren Volkswirtschaft, d.h. in einer solchen, deren Ziel die höchste bei der jeweiligen gegebenen ökonomischen Sachlage erreichbare wirtschaftliche Wohlfahrt (die möglichst vollständige Befriedigung der Bedürfnisse) aller Mitglieder des Volkes wäre, würden die Leiter derselben das größte Interesse an der Feststellung des Volksbedarfes ... haben“] (Menger, 1923, 49).

19 Wieser 1889/93, 44

tem would have to be grounded in value in use and utility alone. If capitalism was unable to take into consideration the subjective needs and aspirations of single persons, the social order had to be changed. The ideas of economic planning (Bauer, Neurath, Rathenau), oversight, and functional democracy (Polanyi, Cole) were based on this understanding. In any case, human will and reason pointed in the direction of the elimination of injustice and unequal distribution of property. Wieser’s conclusion was more cautious than that of Neurath or Bauer. He deduced that government intervention and especially a system of progressive taxation would best answer that purpose. And more than that: Wieser was convinced to have succeeded in setting up a scientific foundation for a programme of social reform and progressive taxation. 20 Wieser was not a radical socialist. But in order to be (or to become) a truly human arrangement not only competition should prevail, but also social justice had to be introduced. Wieser recognized that the divergence between exchange value and natural value demanded intervention by the society as a whole (or the state agencies) into the market mechanism.

The antinomy of exchange value does not necessitate a complete overturn of the free economic order of society; it merely requires that it be supplemented by suitable interference on the part of governments.21

Recognizing the necessity of social reform, Wieser accepted the existence of a ‘third realm’, i.e. a realm of social phenomena which were located between nature and human freedom. But he acknowledged these occurrences only as an historical reality, linked to a particular epoch of capitalism. In theory they had no role to play. Wieser (like Walras, Jevons, Menger, BöhmBawerk and other protagonists of economic liberalism of the 20th century) did not see that the theoretical ideal itself – the idea of a ‘completely organic and most highly rational community’ – was unreasonable. He did not realize that equal distribution – however defined – would not meet the claim. And he did not recognize that any society had to weigh the different needs of different people and that, in order to get rid of the influence of private property, he had to introduce some alternative measure of the social significance of the different needs, wants and values of different individuals. Myrdal saw the weakness of Wieser’s approach when he criticized: “Even in a communist state individuals would differ in their views on what they consider to be socially useful, i.e. on the proper conduct of the nation’s economic affairs. … The whole argument amounts to the assertion that society must be conceived as a single subject. This, however, is precisely what cannot be conceived. If we tried, we would be attempting to

20 Wieser 1914/24, 301-2.

21 Wieser 1889/93, 40.

abstract from the essential fact that social activity is the result of the intentions of several individuals”. 22 We will come back to this aspect.

Summing up: Economic liberalism of the 20th century was able to make sense of capitalism only if the distribution of wealth and similar occurrences were excluded from theory. But the social order existing at the beginning of the 20th century in Europe – with all the privileges of the property classes – obviously was in conflict with basic human principles. From the acknowledgement of an antinomy between capitalist conditions and the utilitarian ideal resulted a claim for social reform. The task of economic sciences was not to explain the antinomy, but to offer a yardstick in order to eliminate the unequal distribution in reality. The utility theory provided a case not only for laissez-faire, but also for social reform and for intervention into the property system. Therefore, it was not astonishing that progressive liberals, if they were prepared to stick to their convictions, became socialists or at least social reformers.

IV

There is a further and particular motive why I have quoted for some length several paragraphs of Wieser’s book ‘Natural Value’. The reason is that Friedrich Wieser played a key role in the formation of both Friedrich Hayek and Karl Polanyi. Notwithstanding the difference of age (Polanyi was born in 1886, Hayek in 1899) there were certain important similarities concerning the initial stages of their formation in economic theory. Both became interested in Austrian Economics directly after World War I when Böhm-Bawerk and Wieser were the main figures within the field of the Austrian School of Economics. Hayek attended the University of Vienna earning doctorates in 1921 and 1923. And Polanyi, having finished university studies in Hungary, immigrated to Vienna and studied Austrian Economics in a privately organized seminar together with a group of socialist students. In that seminar, not only socialist theories of reification and self-estrangement were debated, but also the marginal theories of value. Most notably, Böhm-Bawerk and Wieser played a key role in their discussions. As we know from Felix Schafer,23 the relationship between ‘purchasing-power economy’ and ‘exchange economy’ – two notions which are directly linked to the question of natural value and exchange value – were at the centre of the debates within the seminar for years.

22 Myrdal 1930/58, 153-4; emphasis by Myrdal.

23 Cfr. Schafer 1963-65, 39-41.

An interesting point is that in the early 1920s, not only Polanyi, but also Hayek took up a left-wing position. During his years at the university, Hayek was fascinated by Wieser because of his sympathy with (what he called) ‘a mild Fabian socialism’. In a speech given in the late seventies Hayek described his convictions and his relationship to Wieser in the following way:

I was personally a pupil of … Friedrich von Wieser. I was attracted by him, I admit, because unlike most of the other members of the Austrian school, he had a good deal of sympathy with a mild Fabian socialism to which I was inclined as a young man. He in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice. 24

We do not have to go into the details here. What is important in order to understand the development of Polanyi’s and Hayek’s ideas is that both realized the importance of what Wieser had called the ‘antinomy of exchange value’. They knew that the inequality of the distribution of private property was a focal point because it was in contradiction to the way in which liberal theory had tried to make sense of capitalism. The existing distribution of property was in conflict with the idea of a society shaped by man’s ideals. Utilitarianism and the idea of a society which met the expectations of the subjective theory of value called for a redistribution of property. Both were aware of the political dimension of the antinomy. And both – at least up to the beginning of the 1920s – held left-wing ideas and were attracted by socialist proposals.

Polanyi adhered to this view throughout his life. But Hayek, at the beginning of the 1920s, crossed the divide, changed fronts and adopted a strong liberal, anti-socialist standpoint. It is difficult to determine exactly why. One important aspect was the political situation in Vienna after World War I. The optimism and the idea of progress which had dominated before the war had vanished – at least from the bourgeois point of view. Not only the empire had been destroyed but it also became apparent that the pre-war society had definitely collapsed. The social climate had changed completely. The contest between ‘social’ and ‘economic’ priorities had become the political question of the day. As Mises put it in 1922 at the beginning of his book ‘Gemeinswirtschaft’: “Socialism … expresses the thoughts and feelings of all; it has set its seal upon our time. When history comes to tell our story it will write above the chapter ‘The Epoch of Socialism.’”25 And more than that: The question of the distribution of wealth and private property was no longer a theoretical question. The socialist municipal administration of ‘Red Vienna’ provided modern public housing for the working classes

24 Hayek 1979, 13.

25 Mises 1922/36, Introduction.

which was financed by property taxes. Hyperinflation attacked property from another front. Polanyi was an admirer of the municipal programs while Hayek mourned the loss of the old social order.

VThere may have been theoretical reasons, too. Mises had opened in 1920 the so-called debate on ‘Socialist Accountancy’ attacking Otto Neurath (1919), Otto Bauer (1919) and the idea of central planning as illusionary and impractical schemes:

Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be – in our sense of the term – no economy whatsoever. … it would be impossible to speak of rational production any more. There would be no means of determining what was rational, and hence it is obvious that production could never be directed by economic considerations”.

26

Mises’ understood very well that Neurath and Bauer – even if in a more radical way than Wieser – had expressed nothing else than the ideal on which the economic liberalism of the 20th century was based: the maximum satisfaction of needs. 27 The latter drew on the insight that the market result was far from being optimal in order to argue for ‘planning’ as the superior social arrangement compared to the existing system of private property. The point of reference they used came close to the optimum which Wieser had described in terms of natural value.

Mises recognized that Neurath and Bauer were right when they insisted on the insight that capitalism was not an optimal solution. He accepted the “inadequacy of the monetary calculation of value” which had “its mainspring … in the fact that in this system it is exchange value and not subjective use value on which the calculation is based”. 28 His defence of capitalism was that he pointed to the misleading character of the ideal. In other words: His defence was mainly negative: 1) The ideal (and only alternative to the system of market prices) was a calculation in use value. 2) It could be demonstrated that a rational calculation in use value was impossible. 3) Therefore, exchange value was a necessary and indispensable instrument for calculation, no matter, if diverging from the ‘natural’ measurement or not. The attacks on cap-

26 Mises 1920, 14.

27 It was certainly not by chance that the main figures of the ‘Socialist Calculation Debate’ – not only Ludwig Mises and Joseph Schumpeter, but also Otto Neurath, Otto Bauer, Rudolf Hilferding und Nicolai Bukharin – had been participants in Böhm-Bawerk’s famous Privatseminar before the war.

28 Mises 1920, 10.

italism brought forward by Neurath, Bauer and others were understandable, but illusionary Capitalism, according to Mises, had to be regarded not as an optimal solution, but as the only possible rational economic arrangement. Human beings should not strive for unachievable ideals.

Mises was aware of the implications of Wieser’s ‘antinomy of the exchange value’. The interpretation which regarded the divergence between social reality and the ideal of subjective value theory as a temporary or historical fact undermined the legitimacy not only of the existing order, but of capitalism as such. He countered by striving for an interpretation which demonstrated that it was impossible to overcome the gap. This defence was not so difficult at all. He merely had to refer to the illusory and misleading character of Wieser’s ‘completely organic and most highly rational community’. He could ground his argument on the fact that economic calculation in terms of utility or use value was definitively impossible.

Valuation can only take place in terms of units, yet it is impossible that there should ever be a unit of subjective use value for goods. Marginal utility does not posit any unit of value, since it is obvious that the value of two units of a given stock is necessarily greater than, but less than double, the value of a single unit. Judgments of value do not measure; they merely establish grades and scales.29

If Mises would have been consistent he would have criticised the subjective value theory as such. But he did not want to go that far. Rather he looked for an argument which allowed adherence to the subjective value theory and critique of Wieser’s interpretation of the gap at the same time. And he found this argument pointing to the limits of the human mind on the one hand and the complexity of the modern social arrangement on the other:

In the narrow confines of a closed household economy, it is possible throughout to review the process of production from beginning to end, and to judge all the time whether one or another mode of procedure yields more consumable goods. This, however, is no longer possible in the incomparably more involved circumstances of our own social economy. ... The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location. 30

Mises argued that the theoretical ideal remained true for Robinson or for a closed household economy where the relations between the persons were transparent and immediate. But under the more complicated conditions of a modern economy it was impossible to overcome the divergence between social reality and the ideal of subjective value theory. In other words: in a complex society the pretence to implementing the ideal was illusory and misleading.

29 Mises 1920, 8-9.

30 Mises 1920, 12-3.

According to Mises, the order of private property and price-determining markets was a social reality between nature und human freedom which could be explained, a ‘third realm’, which was neither particular nor universal. It was something between politics and pure theory. Mises tried to demonstrate that it was an illusion to strive for a reform of the property system, but at the same time he wanted to maintain the theoretical foundation where property had not found a place. From a point of view of pure theory Mises’ case against planning was neither fish nor fowl. But obviously it had a strong influence on the debates in Vienna insofar as it paved the way for a defence of capitalism.

Polanyi answered Mises in 1922 in an article published in the ‘Archiv für Sozialwissenschaften’, defending the feasibility of a socialist economy based on the principles of guild socialism and functional democracy. 31 In the same year Mises published an extended version of his line of reasoning in the book ‘Die Gemeinwirtschaft’. From that point in time Hayek and Polanyi traversed different paths. Hayek commented on Mises’ book later in the following way: “To none of us young men who read the book when it appeared, the world was ever the same again”. 32 Hayek on the one hand joined Mises’ Privatseminar. Mises became Hayek’s mentor and patron. And more than that, for the next five years, Mises became Hayek’s superior in a newly founded government office and, after that, the vice president of an institute of business cycle research which Mises and Hayek had created together. Polanyi on the other hand did not work only as a journalist for ‘Der Österreichische Volkswirt’,33 but he also gave lectures, worked, studied and published papers and articles for discussions with socialist students and scholars. His contributions to the Debate about Socialist Accountancy were only a beginning. Other writings followed, like Neuere Erwägungen zu unserer Theorie und Praxis (Some Reflections Concerning Our Theory and Practice), Über die Freiheit (On Freedom) and Zur Sozialisierungsfrage (Contribution to the Question of Socialisation). 34

Throughout his life, Polanyi adhered to socialist convictions. In Vienna he held a position on the fringes of Austro-Marxism, even if he never was a supporter of the idea of central planning. He was convinced that socialism was above all not an economic, but rather a social and human achievement and that social reform should not strive for economic ends, but for human aims and values. The questions of freedom, ‘Übersicht’ (oversight, transparency), democracy and the relationship between capitalism and human interaction (relations between persons) were at the heart of his studies. As well as in his articles for ‘Der Österreichische

31 Polanyi 1922/2005. A second article followed 1923. Cfr. Polanyi 1923/79.

32 Hayek 1956/92.

33 The most important articles have been published in Vol. I and Vol. II of the ‘Chronik der großen Transformation’; cfr. Polanyi 2003 und Polanyi 2004.

34 The papers have been published in Vol. III of the ‘Chronik der großen Transformation’; cfr. Polanyi 2005.

Volkswirt’ as in his ‘socialist’ writings, he focused on the tensions between the self-regulation of the economic sphere and political developments which had a direct influence on the economy. Polanyi held onto this position when he, fleeing the fascist attacks, arrived in England. The discussions within the Christian Left and his teachings for the Workers’ Educational Association (WEA) and the Extra-Mural Delegacies of the Universities of Oxford and London gave him the possibility to extend his studies to economic history.

VI

Hayek’s work and publications during the 1920s and early 1930s were primarily in monetary and trade cycle theory. In 1931 he was invited by Lionel Robbins for a series of lectures at the London School of Economics and subsequently he accepted the Tooke Chair of Economics and Statistics at the L.S.E.35 That same year he presented his main treatise on monetary cycle theory in the book ‘Prices and Production’.

In the mid-1930s, Hayek returned to the question of social reform and planning, publishing the book‚ “Collectivist Economic Planning” which contained – among other papers – the translation of Mises’ original article on the debate about ‘Socialist Accountancy’. 36 Hayek himself contributed an introduction and a final chapter titled ‘The State of the Debate’. Reviewing other contributions which had been published in the meantime Hayek recognized that Mises’ answer was no longer adequate. Referring to a somewhat ambiguous interpretation of the ‘third realm,’ Mises had demonstrated that calculation in use value was impossible, but his position was insufficient in order to defend capitalism against modified proposals which aimed at interventions into the property system and at the same time accepted the use of the price system as if in a market economy. If the market system had to be defended, the argument had to be refined. Hayek tried to do this in a series of talks and articles which started with a lecture delivered before the London Economic Club – later published as ‘Economics and Knowledge’.37

Following Mises’ line of reasoning Hayek made a further move. If the order of private property and price-determining markets were not a temporary and historical occurrence, and if

35 We should not forget, that the London School of Economics, too, had been founded 1895 by Fabian Socialist (S.J. Webb and B. Potter Webb). Only when Robbins succeeded Allyn Young to the chair of the L.S.E. in 1929 he tried to build it up as a bulwark against Cambridge and the Keynesian influence.

36 Hayek 1935 (ed.).

37 Hayek 1936.

the pretence to implement the ideal of subjective value theory was illusory and misleading, then economic theory had to be redrafted. And Mises had given the indication where to start from. The principal problem, according to Mises, was the complexity of the modern social and economic order, the lack of transparency and the limits of information and knowledge which were available to the single actors. And Mises had recognized that it was a problem which was relevant for all modern societies where the division of labour played a key role. If this was the case, the problem of information and knowledge was a crucial issue which economic theory had to deal with. Or in Hayek’s words:

The problem of the Division of Knowledge which is quite analogous to, and at least as important as, the problem of the division of labour … seems to me to be the really central problem of economics as a social science. The problem which we pretend to solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs, etc., and which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals. 38

The central idea behind the article ‘Economics and Knowledge’ was to redefine the notion ‘equilibrium’ in order to eliminate the utilitarian bias. Mises’ contributions to the socialist calculation debate served as starting point. If Mises was correct, the communication of information was the primary function of the price system. The traditional interpretation of equilibrium failed to recognize what it was dealing with. Hayek recognized that the interpretation of equilibrium in terms of marginal utility was tautological, i.e. without scientific content. The crucial point was, according to Hayek, that utilitarian calculus pretended a complete knowledge of needs, wants, and wishes of the individuals. But this was – outside the limits of a family or a small community – a utopian assumption. As a consequence, he defined equilibrium in terms of coherence of a plan of an individual and substituted this notion for the utilitarian interpretation of maximising utility. Concerning society as a whole, he redefined equilibrium in terms of compatibility of the plans of the individuals concerned.

But this was only the first step. In order to make ‘scientific’ the assumptions regarding individual behaviour he had to objectify them. “Actions of a person can be said to be in equilibrium in so far as they can be understood as part of one plan.”39 The same was true for the term ‘data’: ‘Data’, according to Hayek, did not refer to the subjective needs, desires and wishes of a persons any more. Hayek used the term ‘data’ in order to describe observable facts “known to the persons whose behaviour we try to explain”.

38 Hayek 1936, 49, Hayek’s emphasis.

39 Hayek 1936, 36, emphasis mine.

40 Hayek 1936, 39.

40 Not the needs and desires

of different people had to be compared, but only ‘data’. By objectifying the utilitarian calculus the problem of comparing needs was transformed in the other problem of providing information about economic facts. Mises had used the problem of information and knowledge with the aim of demonstrating the divergence of theory from social reality. Hayek was more drastic. He put the issue into the centre of economic theory itself. In Hayek’s approach, information and knowledge did not play a peripheral or secondary role, but rather they were at the core of economics as science.

How the combination of fragments of knowledge existing in different minds can bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess. To show that in this sense the spontaneous actions of individuals will under conditions which we can define bring about a distribution of resources which can be understood as if it were made according to a single plan, although nobody has planned it, seems to me indeed an answer to the problem which has sometimes been metaphorically described as that of the ‘social mind’. 41

The whole paper was written in a rather technical style and it had more the character of a research programme than of an elaborated study. But it maintained the essence of nearly all his later works and enquiries. The decisive point was that the stress on ‘the economy of knowledge’ excluded, per definition, the utilitarian calculus from the research agenda. Equilibrium was no longer analysed – as in the writings of his teachers – in terms of utility, but simply of observable magnitudes. Knowledge was equated with the information about ‘data’. Hayek’s attack could hardly be more fundamental. It was directed against the foundation on which economic liberalism of the 20th century was erected. The significance of the paper was the statement that utilitarism and the ideal as expressed in Wieser’s ‘natural value’ approach was at the heart of all misunderstandings up to the ideas of socialism and central planning. The confusing dimension was that Hayek did not say that openly. He treated his teachers ‘with respect’. His plea for (what he called) the “subjective interpretation of the term ‘datum’”42 was an ambiguous move that covered the fundamental break of his approach with the tradition of economic liberalism of the 20th century. Hayek’s definition of economic theory not only made concern about the ‘antinomy of the exchange value’ look irrelevant, but it also demolished the link between economics and utilitarianism. Hayek, moreover, took an even more extremist position than Robbins who in his ‘The Significance of Economic Sciences’

41 Hayek 1936, 52.

42 “Datum means of course something given, but the question which is left open, and which in the social sciences is capable of two different answers, is to whom the facts are supposed to be given. … There seems to be no possible doubt that these two concepts of “data”, on the one hand in the sense of the objective real facts, as the observing economist is supposed to know them, and on the other in the subjective sense, as things known to the persons whose behaviour we try to explain, are really fundamentally different and ought to be kept carefully apart” (Hayek 1936, 39).

had argued for an interpretation which accepted that “equilibrium is just equilibrium”, and that “there were no economic ends”. 43 Hayek was more radical when he denied the reality of social ends as well. He anticipated protagonists of neo-liberalism such as Milton Friedman by excluding any social end – such as the ‘protection of particular industries’ (Robbins’ example) or ‘full employment’ (Keynes) – from the research programme. 44 In Hayek’s approach, the economic sphere was regarded as self-regulating and independent of human wishes and will. Economic ‘explanation’, according to Hayek, merely meant explaining by what process the economic actors acquired the knowledge which was necessary for achieving equilibrium.

By doing so Hayek recognized that the market system was not a natural phenomenon. At the same time he excluded it from the realm of human freedom. Hayek considered the order of appropriation a) a phenomenon which had to be explained theoretically, b) a realm which had to be distinguished from the realm of nature and the realm of human freedom because it dealt with human facts which preceded consciousness, intention and will, and c) a phenomenon which was intrinsically tied to the progress of the division of labour and of human civilisation. The idea that advancement of society was connected with increasing human selfgovernment and autonomy which had dominated western thinking for centuries was sacrificed.

VII

In his most famous book ‘The Road to Serfdom’, published in 1944, he made explicit some of the implications of the approach developed in the 1930s, but using a less technical language and dealing with topics of public interest. It was mainly an attempt to prove that not the ideals of social justice, greater equality, and security, but the method of socialism, “the abolition of private enterprise, of private ownership of the means of production, and the creation of a system of ‘planned economy’ in which the entrepreneur working for profit is replaced by a central planning body”, 45 was dangerous and misleading medicine. The fundamental problem examined was still the same: how to make sense of capitalism without referring to human wishes and will? Stressing the importance of the division of knowledge between individuals and the function of the price mechanism as a system of communication which enabled the

43 Robbins 1932/235, 145, emphasis mine.

44 It was, and still is, typical for neo-liberal reasoning that ‘price-stability’ – a purely nominal notion – is the only exception.

45 Hayek 1944, 32.

entrepreneurs to regulate their activities and to take into consideration the behaviour of the other actors, Hayek tried to show the limits of any kind of planning: “it would be impossible for any mind to comprehend the infinite variety of different needs of different people which compete for the available resources and to attach a definite weight to each”. 46 And he continued:

It is the essence of the economic problem that the making of an economic plan involves the choice between conflicting or competing ends – different needs of different people But which ends do so conflict, which will have to be sacrificed if we want to achieve certain others, in short, which are the alternatives between which we must choose, can only be known to those who know all the facts; and only they, the experts, are in a position to decide which of the different ends are to be given preference.47

His main argument against planning was not the ‘quantity’ of information, but the criticism which Myrdal had expressed more than a decade earlier against Wieser and other protagonists of the subjective theory of value, 48 i.e. the difficulty – or better the impossibility – to weigh the needs and values of different individuals and to define the “precise goal toward which all activity is to be directed”.49 His contention was simply that a democratic government, even if there was consensus that there should be some common goal, would never be able to find agreement on the concrete ends the plan was supposed to serve. The cry for an economic dictator would inevitably be the outcome of the idea of planning. According to Hayek, planning and democracy were incompatible. If planning got the upper hand, democracy would be destroyed. The whole line of reasoning was a further argument against the ends-means-scheme which Robbins had proposed in his essay mentioned above. Without criticising, for example, Keynes’ employment policy proposal directly, Hayek excluded the possibility that there were common objectives or aims in principle

The advantage of the market from this point of view was simply that it provided a mechanism of distributing the resources which functioned without a consensus about objectives. Hayek’s main argument was that planning presupposed a deliberate solution of the ‘economic problem’ while the market did not. A conscious, rational and fair decision was, according to Hayek, impossible. 50 It was unattainable to compare the needs of different people because we do not have any common standard which could be used as a rational basis for the comparison.

46 Hayek 1944, 58; emphasis mine.

47 Hayek 1944, 65.

48 The difference, too, is significant here: Myrdal had criticised subjective value theory, but Hayek applied the same argument in order to discuss different forms of social organization!

49 Hayek 1944, 61.

50 Hayek not even tried to justify the exiting inequality, to explain distribution, or to find good reasons for the concentration of property in the hands of a few. He simply acknowledged that in a market society, under ‘the

There can be no doubt that planning necessarily involves deliberate discrimination between particular needs of different people, and allowing one man to do what another must be prevented from doing. It must lay down by a legal rule how well off particular people shall be and what different people are to be allowed to have and do. 51

In a society which is consciously directed, the way in which people will react will be very different from what it is when they are nobody’s conscious choice. Inequality is undoubtedly more readily borne, and affects the dignity of the person much less, if it is determined by impersonal forces than when it is due to design. 52

The superiority of the market system over other social arrangements was, according to Hayek, due to the fact that it was an objective and self-regulating mechanism. The ‘decision’ was taken by demand and supply, by an impersonal mechanism which did not rely on a deliberate choice. Nobody could be blamed for the ‘decisions’ taken by the market. The economic actors simply had to accept the given situation. The whole idea of a society shaped by human wishes and will played only a negative role.

If we have a closer look at Hayek’s line of reasoning we realize that the case for the market mechanism was, essentially, grounded in the fact that Hayek used different yardsticks in order to pronounce a judgment. He admitted that neither planning nor the market mechanism provided a rational solution of the economic problem. But he used this yardstick only in order to criticize planning. Planning claimed to be rational. The market mechanism did not have this pretence. Hayek could only argue that the market system should not be criticized for something which it did not pretend to be. Or as he wrote in a later work: “an order arising from the separate decisions of many individuals ... cannot be determined by a common scale of the relative importance of different ends”.53 But if he would have taken that criterion seriously, it would have been impossible to criticize planning for being as irrational as the market.

In any case, the line of reasoning followed the logic which he had already developed in the second half of the 1930s. Hayek was well aware of the fact that the order of appropriation and the market mechanism made up a ‘third realm’ between nature and human freedom. He adhered to his conviction that the ‘third realm’ itself could not be considered merely an accidental or temporary or historical reality, but it had to be regarded as a universal fact which could not be overcome intentionally by reforming the social order. Theory had to find a place for it. But what should such a theory look like?

Hayek started from the insight that in the 20th century, intervention by central authorities which were inspired by ‘good intentions’ produced results very different from – and even Rule of Law’, the distribution was unequal. Or as he said: “It cannot be denied that the Rule of Law produces economic inequality” (Hayek 1944, 79).

51 Hayek 1944, 78-9; emphasis mine.

52 Hayek 1944, 106-7.

53 Hayek 1988, 79.

contrary to – their objectives. Having a look at the history of the century it was obvious that liberalism of the 20th century had promised too much. Could that recognition be used as a foundation for building an adequate theory?

VIII

Hayek felt that the key idea of economic liberalism of the 20th century, the pretence to regard the market mechanism as a rational construct based exclusively on human wishes and will, had generated results which were contrary to the objectives of their originators. The disasters of the 20th century had demonstrated that the freedom to shape society by human will could produce results utterly different from the intentions. Hayek’s central question was: Could he make use of this insight in order to argue for the superiority of the market in terms of an unintended and spontaneous arrangement? Hayek developed a series of different, but interconnected lines of reasoning arguing against the ‘pretence of reason and knowledge’, against ‘constructivism’ (including Aristotle, Descartes, Voltaire, and Rousseau), and against categories such as ‘social justice’, ‘social action’, and ‘social wholes’. But the key idea of his later work was what we may call a theory of cultural evolution. He engaged in providing evidence that our present social arrangement, western culture and the system of moral values were not a result of human wishes and will, but the outcome of a spontaneous development and, therefore, could not be changed by conscious design without endangering cultural progress. And he recognized explicitly the existence of a ‘third realm’:

what was really required was a threefold division which inserted between the phenomena which were natural in the sense that they were wholly independent of human action, and those which were artificial or conventional in the sense that they were the product of human design, a distinct middle category comprising all those unintended patterns and regularities which we find to exist in human society and which it is the task of social theory to explain. 54 Hayek recognized that the existence of a ‘third realm’ was in contradiction to the idea of a free society shaped by human wishes and will. But notwithstanding the fact that he was in contrast to the founding fathers of subjective value theory, he took it for granted that capitalism could be equated with progress, social advancement and human freedom. The fact that freedom was reduced to the freedom of the owner did not really concern him. Hayek gave up most of the high aspirations of a better and more human world which had characterized the

54 Hayek 1967, 97.

economic liberalism of the 20th century. It is difficult to say if this vision was inspired more fundamentally by the experiences in ‘Red Vienna’, by the social upheavals which followed or by fascism and Nazism. But in any case, it was characterized by a profound fear of social freedom. Interventions into the existing order of appropriation was seen as a threat. On the one hand Hayek expressed a profound resignation concerning the possibilities of a better world, on the other hand he joined the long row of conservative thinkers who used the economic system so as to defend the existing order of appropriation.

The claim that there was no alternative to the adaptation to the laws of the market system was a result not of scientific insight, but of this resigned attitude. Even if we accept that the ideals of economic liberalism of the 20th century are misleading, that the order of appropriation is a part of the ‘third realm’, and that it is beyond human possibilities to shape a society by human wishes and will alone, it does not follow that we merely have to conform to that. The market mechanism may prove less self-regulating than Hayek believed. And human ends are not per se dangerous. There is no reason to give up the hope that a better world is possible.

Karl Polanyi, like Friedrich Hayek, did not focus mainly on the lack of the justice and on the distribution of wealth and property. He regarded the unequal distribution merely as the manifestation of a much wider and deeper problem of modern civilization: the separation of the economy from the rest of society. He understood capitalism in terms of a deviation from a truly human social order. The self-regulating characteristics of the market mechanism and the domination of the economy over the society were Polanyi’s fundamental concern because it endangered the society’s existence. “To allow the market mechanism to be sole director of the fate of human beings and their natural environment … would result in a demolition of society”. 55

Polanyi was convinced that ‘the economy’ was basically a relationship between human beings, even if it was true that under modern conditions the market system developed a life of its own. He recognized that in the modern world economic value, prices, capital, labor, power, state and other social institutions became self-regulating. Capitalism existed, it followed its own laws, moved and developed independent of human will and wishes – as if it were a natural phenomenon. But at the same time, value, prices, capital etc. were essentially – as the Austrian theo-

55 Polanyi 1944, 73.

ry espoused – a relationship between human beings. They were not natural, but artificial or manmade. The same was true for power, law etc. Polanyi was inspired by Marx’ theory of reification and alienation because it offered an explanation of this ‘spectral world’. 56 He accepted the idea that human freedom should be the only and ultimate foundation of social life. He regarded the occurrence of reified entities as the side-effects and ‘the unintentional results of human action’. And he was convinced that reification could be reduced and freedom could be enlarged if we were able to limit or control the ‘unintentional results’ by deepening democratic decision-making. As Karl Popper remarked later in ‘The Open Society and its Enemies’: “I owe the suggestion that it was Marx who first conceived social theory as the study of the unwanted social repercussions of nearly all our actions to K. Polanyi who emphasized this aspect of Marxism in private discussions (1924)”.57 Both Polanyi and Hayek regarded the market mechanism as an impersonal, self-regulating system. But in opposition to Hayek, Polanyi considered self-regulation, the ‘impersonal forces’ of the market and its anonymous solution to the ‘economic problem’ not as an advantage, but rather as an offence of human freedom and dignity. He saw the fact that the system of private property excluded a deliberate and conscious choice not a sign of superiority, but of alienation and self-estrangement.

Polanyi was attracted by the idea of a society shaped by human will and wishes. Social freedom was the essential reality and, at the same time, the ultimate value he adhered to. Unlike Wieser he did not concentrate on the issue of distribution. The distribution of property was, according to Polanyi, merely a manifestation of the more profound and fundamental problem of reification and self-estrangement. He followed Marx insofar as he considered the order of appropriation and the market mechanism and other objectivations, i.e. the ‘third realm’, a historical reality, linked to and limited by the market society.

Between the realm of nature, where necessity reigns and that of the human, where freedom reigns, stands ‘up to now’, as Engels says, the realm of history. Or, according to Marx, between being and consciousness stands the world of ‘social being’ [preliminary translation]. 58

And up to the 1930s he hoped for a better future which should have allowed the deconstruction of the objective and reified institutions realizing the idea of a truly human society. In that period, Polanyi’s focus was on the question of how to overcome the objective institutions and increase the realm of human freedom. Objective institutions came about, according to Po-

56 For a more detailed interpretation of Polanyi’s understanding of ‘reification’ and ‘alienation’, see Thomasberger 2005.

57 Popper 1945/50, 668.

58 „Zwischen dem Reiche der Natur, wo die Notwendigkeit herrscht, und dem des Menschlichen, wo die Freiheit herrscht, steht „bis jetzt“ wie Engels sagt, ‚das Reich der Geschichte’. Oder, nach Marx, zwischen Sein und Bewußtsein steht die Welt des ‚gesellschaftlichen Seins’“. (Polanyi 2005/Freedom, 141).

lanyi, because of a lack of democracy, of direct human relationships, and of community. He knew that central planning was not an alternative. Therefore, he became interested in guild socialism, functional democracy, and the question of how to create oversight or transparency (Übersicht).59 Oversight – in a certain way the corresponding category to Hayek’s ‘knowledge’ – became a key idea of Polanyi’s during the 1920s. “The problem of oversight … is without doubt a central subject of the socialist theory” he stated at the beginning of the article ‘Some Reflections Concerning Our Theory and Practice’. The important point was that ‘oversight’ – on the contrary to ‘knowledge’ – included not only ‘external’ oversight about supply and demand, the instruments of production, the number of workers, factories, mines, or arable land, but also ‘internal’ oversight, i.e. the understanding of needs, of suffering, of the burden of work etc. of other human beings. Polanyi was aware of the fact that “needs and consumption are completely different”.60 He would have agreed with Hayek when the latter stated that no central agency could ever be able to compare the needs of different people in a rational and just way. It was true that needs, desires and aspirations could neither be observed from the outside nor planned. But his conclusion was opposite to that of Hayek. If the comparison of needs from the outside was unfeasible and if rational central planning was impossible, he searched for a third solution. If not only the market system, but also statistics (planning) did not dispose of an organ in order to create internal oversight, democracy – not only parliamentarian democracy, but functional democracy – was the alternative. Therefore, true freedom and democracy were inseparable.

From the point of view of our subject, Karl Polanyi’s book “The Great Transformation” is especially interesting. It was published in 1944, i.e. the same year as Hayek’s “The Road to Serfdom”, and it contains an interpretation of the economic history of the 19th and the first decades of the 20th century which is in direct contrast to Hayek’s theory of cultural evolution without falling back into the illusions of the earlier liberal thinking. What Hayek called cultural evolution Polanyi described using the term double movement:

Social history in the nineteenth century was thus the result of a double movement: the extension of the market organization in respect to genuine commodities was accompanied by its

59 Cfr. Cole 1918, Cole 1920.

60 Polanyi 1925/2005, 117.

restriction in respect to fictitious ones. While on the one hand markets spread all over the face of the globe and the amount of goods involved grew to unbelievable proportions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labour, land, and money. … Society protected itself against the perils inherent in a self-regulating market system – this was the one comprehensive feature in the history of the age.61

The idea of a double movement itself was not introduced by Polanyi, but he adopted it from earlier liberal thinkers. He was aware of the fact that the idea on which Hayek’s theory of cultural evolution was erected was not new at all, but could at least be traced back to the 19th century. Liberal thinkers such as Spencer and Sumner had given an interpretation of the social development in terms of a double movement long before Hayek. It was not the notion in itself, but the interpretation which made the difference. The first important aspect was that Polanyi used the term double movement only in the context of the transformation of European countries during the 19th century up to World War I. He did not generalize it. He did not even use the category in order to analyse the period between the wars or later epochs or countries outside Europe (not even the USA). The second aspect is the substance of the interpretation. The liberal interpretation was based on the idea that the extension of markets was the result of a spontaneous, unplanned, and natural development, while intervention into the market mechanism was regarded as the outcome of purposeful and deliberate action on the parts of socialists, ‘collectivist’ reformers, or other opponents of the liberal principles. Discussing the liberal interpretation of the notion double movement Polanyi was able to anticipate largely the line of reasoning which Hayek would use in later years. Polanyi’s key argument was that, at least during the 19th century, this division was not sustained by the facts:

Just as cotton manufactures – the leading free trade industry – were created by the help of protective tariffs, export bounties, and indirect wage subsidies, laissez-faire itself was enforced by the state. The thirties and forties saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being endowed with a central bureaucracy able to fulfil the tasks set by the adherents of liberalism … laissez fair was not a method to achieve a thing, it was the thing to be achieved … While laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not.62 The countermove against economic liberalism and laissez-faire possessed all the unmistakable characteristics of a spontaneous reaction. 63

61 Polanyi 1944, 76. The origin of Polanyi’s notion ‘fictitious commodities’ can be traced back to Wieser, too. Indeed, it was Wieser and not Marx, who distinguished the real from the fictitious commodities labour, land, and money. Cfr. Wieser 1914/224, 127.

62 Polanyi 1944, 139.

63 Polanyi 1944, 149.

Certainly, it was true that capitalism was not the result of human intentions. “Capitalism arrived unannounced … it came as a complete surprise”. 64 But this did not mean that it was a spontaneous process, lacking deliberate human action or intervention. Without the idea of putting the principle of economic liberalism into practice the transformation of European societies during the 19th century would have taken a different path. Polanyi’s key thesis was that in exploring social change the presumption that spontaneous evolution and planned order, unintended facts and human choice, nature and human will could be unequivocally separated was misleading.

In order to understand ‘The Great Transformation’ it is important to be aware of the fact that parallel to Hayek’s resumption of the debate, i.e. in the middle of the 1930s Polanyi’s thinking had changed slightly, but significantly. Polanyi did not consider the ‘third realm’ merely as a temporary or historical fact any more. He recognized the world of reification as an unavoidable dimension of social reality and acknowledged that society could never be transformed into a perfect community.

Society is necessarily imperfect. No society can be the realisation of community. Power and value are inherent in society; political and economic coercion belong to any and every form of human co-operation. It is part of the ineluctable alternative of human existence that we can choose only between different kinds of power, and different uses to which to put it, but we cannot choose not to originate power …The same necessity holds good in the sphere of value. Whatever our needs, we cannot help valuing some goods more than others. … The measure of true freedom is the measure in which we are free to choose where choice is possible. Where and when it is not, to take our share in the common evil. There is no contracting out of society.65

But the fundamental difference between the views of Hayek and Polanyi remained. While Hayek used the ‘third realm’ as a methodical device in order to exclude human intentions, human aims and ends not only from the analyses, but also from the agenda of economic policy, Polanyi was much more cautious. The first difference was that Polanyi spoke out clearly who was to blame for the utopian expectations which dominated during the 20th century – not Aristotle, Descartes, Voltaire, Rousseau or other ‘constructivists’ as Hayek sustained – but economic liberalism (including the protagonists of the Austrian School of Economics).

Liberal economy gave a false direction to our ideals. It seemed to approximate the fulfilment of intrinsically utopian expectations. No society is possible in which power and compulsion are absent, nor a world in which force has no function. It was an illusion to assume a society shaped by man's will and wish alone. Yet this was the result of a market-view of society which equated economics with contractual relationships, and contractual relations with free-

64 Polanyi 1944, 89.

65 Polanyi 1937-8/2005, 271-2; emphasis by K. Polanyi

dom … Power and economic value are a paradigm of social reality. They do not spring from human volition.66

The second difference was that Polanyi did not accept the idea that the consequence of the failure of the project of economic liberalism of the 20th century was to reject the idea of a society formed by human intentions. He agreed that the ideal of economic liberalism of the 20th century as expressed in Wieser’s ‘natural value’ was utopian because it aimed at a society shaped by human will and wishes alone. But the triumph over Ricardo’s naturalism was at the same time an important step forward in direction of human freedom and autonomy. He did not regard the idea of a human society simply as a ‘pretence of knowledge’. Even recognizing the failure of the utopian endeavour at the beginning of the century, there was, according to Polanyi, no reason to give up the idea of a better, more human, and more free society. We simply do not know how far human freedom and self-determination can go. Even if we accept that society cannot be reduced to human wishes and will, that unintended consequences of human action such as economic value, power etc. exist, and that it is out of human reach to eliminate them completely, we can strive for reducing their impact as far as possible. That is exactly what he expressed in the last chapter of “The Great Transformation”, titled ‘Freedom in a Complex Society’, when he proposed to resign ourselves to the reality of society “and uphold the claim to freedom, in spite of it”.67

There is no doubt, the great project of the 20th century, a society shaped by human will alone, has failed. There is no way back. History has pronounced its judgment. But does that mean that Hayek was right when he stressed that the aspiration of creating a more just, a more rational, and a more human society was a dangerous and ‘fatal conceit’? When he suggested that the disasters of the 20th century were brought about by these ambitions? And when he concluded that the only consequence could be to accept the reality of capitalism? Or was Hayek’s view on the fringes of neo-liberalism nothing else than a counter reaction which fell into the opposite extreme and which, at the end, turned out to be no less utopian than the original project? Was the claim that capitalism should be regarded as a spontaneous order driven by the fear of freedom and by the worry that a real democratic society would endanger private

66 Polanyi 1944, 257-8.

67 Polanyi 1944, 258A.

property? Did Hayek use the criticism of the utopian ideas of the generation of his teachers merely as a pretence in order to make sense and defend the existing injustices?

Indeed, I am convinced that today both interpretations – the idea of a society shaped by human will on the one hand and the notion of an evolution of the social order which is not a result of human intentions on the other hand – echo the debates of an epoch which has come to an end. Both have the character of utopian visions of modern western societies. Both are inspired by the intention to make sense of capitalism. And both – referring to opposite extremes – miss the real issue. Certainly, we have to recognize that the idea of a society shaped by human will alone was utopian. But resignation to the reality of capitalism is not equivalent to a realistic view of the modern world. In our days the true question is no longer if society is shaped by human wishes and will alone or if it is the outcome of a spontaneous evolution where human intentions do not play a role. We know that the distribution of property can be influenced deliberately by society as a whole, even if it is not determined by human will alone. The real issue at the beginning of the 21st century is: Up to what point human wishes and will can be realized? Where are the limits of human freedom? How much can human reason help in order to create a society which comes closer to our ideals? The fundamental failure of economic liberalism is that it asked obsolete questions escaping into utopian extremes. It is this point where Polanyi’s contributions are important today. Not that he gave us a ready answer. And not that he told us how far human freedom may bring us. What Polanyi offered was simply a change of perspective, but a change which allows for a way out of the deadlock into which liberal thinking is locked. Polanyi’s view is different from what liberalism announced at the beginning and at the end of the century. The issue of how far human freedom can be enlarged was a question which was posed neither by Walras, Jevons, Wieser nor by Hayek. Polanyi’s approach helps ask the key questions which have been eliminated from the research programme of political economy by the dominating liberal points of view. Even if we recognize that a society shaped by human will is utopian, there is no reason to accept capitalism and strive simply for a smoother working of the market mechanism. That human action produces results which are not in line with the intentions can never be excluded completely. And it is true that human freedom is not unlimited. But it is our task to analyse how human freedom can be defended, deepened, and enlarged.

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