Michael Polanyi's Economics.

• Author: ROBERTS, PAUL CRAIG

People familiar with Michael Polanyi are impressed by his intellectual powers, the range of his mind, and his ability to get to the heart of issues, often long before anyone else. These attributes also apply to his work in economics. In Full Employment and Free Trade, published in 1945 by Cambridge University Press, Polanyi synthesized Keynesian economics and the monetary school of economics later associated with Milton Friedman. In constructing that synthesis, Polanyi preceded the best minds in the economics profession by at least two decades, perhaps three.

That achievement was remarkable, especially for the time. It was widely believed then that John Maynard Keynes's General Theory of Employment, Interest and Money had established the irrelevancy of monetary economics. As Friedman later put it, monetary policy was "twice damned" and was considered a useless remedy for unemployment. Moreover, Keynesians also thought that their theory established that full employment was not the natural state of a free economy.

Amid this confusion stood Polanyi, talking in the same breath about full employment and free trade (by which he meant a free market, as opposed to a planned economy)--conditions considered to be mutually incompatible--and setting out in detail a monetarist explanation of Keynes's theory. Not only did money matter; Polanyi showed that money was all that mattered.

Lack of training as an economist allowed Polanyi to avoid pitfalls that confused economists. It also left him unaware of the magnitude of his achievement. He saw himself as a Keynesian, but in fact he achieved, in the early years of Keynesianism, before the monetarist critique, an integration of the two approaches that other economists did not create until the 1970s.

Needless to say, Polanyi got no credit for his achievement. He was too far ahead of his time and too far outside his bailiwick. Had he possessed an economics chair and graduate students, he might have been in contention as the most important economist of his time, eclipsing both Keynes and Friedman by his early synthesis. Economics and public policy would have been spared the long and pointless Keynesian odyssey toward big government.

Keep in mind that in 1945 economists still did not know that the Federal Reserve had caused the Great Depression by allowing the supply of money to shrink by nearly a third. That story was to be told later by Friedman and Anna J. Schwartz. In England the unemployment problem had begun earlier, when the British government tried to reestablish the pre-World War I parity of the pound with gold and the dollar. That policy required a deflation that deprived the economy of a sufficient supply of money to maintain full employment. When the government abandoned its attempt to return to the pound's prewar parity, Britain started to recover. But at the time there was a jumble of voices. Some were Marxists bent on overthrowing the capitalist order. Keynes spoke in a more reassuring voice.

Unemployment of workers and other resources, Keynes said, reflected an insufficiency of total, or aggregate, demand. As a solution...