A Neo‐Polanyian Theory of Economic Crises

• DOI: http://doi.org/10.1111/ajes.12095
• Published date: 01 March 2015
• Author: Fred Block
• Date: 01 March 2015

A Neo-Polanyian Theory of

Economic Crises

By FRED BLOCK*

ABSTRACT. This article seeks to use Karl Polanyi’s book, The Great

Transformation, first published in 1944, to understand the global

financial crisis that began in 2008. Polanyi’s basic premise was that a

great crisis must result from powerful causes. He argued that the crisis

of the 1930s was a consequence of three distinct processes: deep

imbalances in the global trading system, a crisis within the global

financial mechanism that was supposed to manage those imbalances,

and a failure of adaptation in the world’s leading economy, the United

States. The same processes can be seen at work in the last decade.

Introduction

In The Great Transformation, Karl Polanyi ([1944] 2001) sought to

explain the deep reasons behind the collapse of the global economy in

the 1930s. His line of argument was very different from the long cycle

theory of Nicolai Kondratiev that has been popularized by contempo-

rary theorists such as Immanuel Wallerstein (2004) and Carlota Perez

(2002). Rather than drawing attention to a series of cyclical ups and

downs of 50- or 60- year durations, Polanyi’s focus was on the history

of the gold standard over a little more than a century. He argued that

David Ricardo successfully persuaded England to return to the gold

standard in 1818. This decision in combination with England’s rise as

the world’s dominant economic power helped to organize the global

economy around the gold standard and the idea of a self-regulating

market economy. The deep contradictions in this system of economic

*Professor of Sociology, University of California, Davis. Author with Margaret

Somers, The Power of Market Fundamentalism: Karl Polanyi’s Critique (2014); with

Matthew R. Keller, State of Innovation: The U.S. Government’s Role in Technology

Development (2011). Website: http://sociology.ucdavis.edu/people/fzblock Email:

flblock@ucdavis.edu

American Journal of Economics and Sociology, Vol. 74, No. 2 (March, 2015).

DOI: 10.1111/ajes.12095

V

C2015 American Journal of Economics and Sociology, Inc.

organization ultimately produced the 1929 stock market crash and the

Great Depression of the 1930s.

In a word, Polanyi was not proposing a general theory of periodic

global crises. Nevertheless, many analysts have seen the value of Pola-

nyi’s conceptual framework for making sense of the revival of the free

market utopia that has occurred over the last 40 years (Block and Som-

ers 2014; Blyth 2002; Po lanyi-Levitt 2013). And since the global fin ancial

crisis that reached its zenith in 2008 and 2009 closely resembles the

stock market crash of1929, it makes sense to elaborate a distinctly Pola-

nyian theory of crisis that explains both what happened in the 1930s

and what has happened in our owntime.

Tobesure,itisbesttolabeltheanalysisthatfollowsasneo-

Polanyian because it builds on and stretches Polanyi’s framework in

ways that might well be rejected by other Polanyian scholars. Neverthe-

less, significant elements of this argument are clearly present in The

Great Transformation and other writings of Polanyi’s. The argument has

three core elements, all of which are rooted in Polanlyi’s own work.

A Multidimensional Theory of Crisis

The basic premise of The Great Transformation is that a big crisis, like

the economic crisisof the 1930s, can only be explained by bighistorical

causes. In that sense, Polanyi’s approach is the very opposite of the

argument of Milton Friedman and Anna Schwartz (1963) that the sever-

ity of the U.S. depression in the 1930s, with its consequent effects on

the rest of the world, can be attributed almost entirely to the policy mis-

takes made by the Federal Reserve Board. For Friedman and Schwartz,

a big crisis had a small cause. Polanyi’s view, on the contrary, is that

when elites make disastrous decisions, as, for example, those made by

Europe’s leaders in precipitating World War I, it is unlikely to be a result

of small causes. In a word, political and economic elites are generally

pretty good at muddling through difficult periods by pragmatically

adjusting policies. So when muddling through does not suffice and cri-

ses escalate in unexpected ways, this indicates that the social and eco-

nomic system faces very deep contradictions that can only be

overcome by quite dramatic political and economic changes that are

opposed by very powerfulinterests.

The American Journal of Economics and Sociology362