Theo Papadopoulos

Department of Social and Policy Sciences

University of Bath

Karl Polanyi’s Revenge: is the democratic re-embedding of the

market(s) possible?

Institute for Public Policy Research

13 October 2010

London

Contents • The crisis that got away (…or how to create a crisis and then take

advantage of it)

• Karl Polanyi and understanding crises in market societies

• States and markets: modes of (re)embeddedness, continuities and changes

• Concluding reflections: challenges for (critical) social policy post-crisis

Part 1

The crisis that got away

(…or how to create a crisis and then take

advantage of it)

Why had nobody noticed that the credit

crunch was on its way?

The Queen

at a visit in London School of Economics,

November 2008

The belief that markets tend towards equilibrium has given rise to policies which seek to give financial markets free rein. I call this policies market fundamentalism and I contend that market fundamentalism is no better than Marxist dogma.

Both ideologies cloak themselves in scientific guise in order to make themselves more acceptable but the theories they invoke do not stand up to the test of reality. […] all we have to do is renounce the doctrine […]

There is a heavy price to pay:

Economists have to accept a reduction in their status.

The belief that markets tend towards equilibrium has given rise to policies which seek to give financial markets free rein. I call this policies market fundamentalism and I contend that market fundamentalism is no better than Marxist dogma.

Both ideologies cloak themselves in scientific guise in order to make themselves more acceptable but the theories they invoke do not stand up to the test of reality. […] all we have to do is renounce the doctrine […]

There is a heavy price to pay:

Economists have to accept a reduction in their status.

George Soros (2008)

There has been

“a very fundamental shock to the „efficient market hypothesis‟ which has been in the DNA of the FSA and securities and banking regulators throughout the world”. [Thus]“the idea that more complete markets were good and more liquid markets are definitionally good” [is no longer trusted. This crisis] “requires a very major reconstruct of the global financial regulatory system, [not] a minor adjustment.”

Adair Turner,

Chairman of the Financial Services Authority

Quoted by Gillian Tett in Does the world need a global ‘Tobin tax’?,

Financial Times, August 27 2009

The Roots of the Financial Crisis

Loose macroeconomic policies in the USA

• (1) Low interest rates – In the aftermath of the stock market bubble of 1999-2000, the Federal Reserve moved

aggressively to cut interest rates. During 2002-2004, the Federal Funds Rate dropped to 1%-2%, helping to inflate the housing bubble of 2001-6. When the Federal Funds rate rose to about 5% in 2006-2007, the housing bubble burst.

• (2) Dramatic fall in personal savings: – While personal savings as a percentage of disposable income was 9-10% during

the 1970s and 1980s, it fell to around 2% in the early 2000s. By 2006-7, personal savings had collapsed to 0.4%. A savings ratio close to zero is historically unprecedented for a mature capitalist economy

• (3) large trade and fiscal deficits

Source: Lapavitsas, C. (2009) 'The Roots of the Global Financial Crisis.' Development Viewpoint (28)

The Roots of the Financial Crisis

Transformation of Finance – including (re/de) regulation of banking and financial sectors (the great financialization of market societies) A financial bubble develops (2001-2007), as a combination of the two major trends in the US commercial banking sector:

- ‘financial expropriation: Systematic extracting of profits out of wages and salaries, (i.e. growing individual dependence on private finance [as] is apparent in housing, including subprime mortgages, but it can also be seen in education, health, pensions and insurance.

- adoption by commercial banks of the practices of investment banking. (including securitisation of mortgage loans)

- During 2004-2006, almost 80% of all subprime mortgages were securitised. As a result, subprime-mortgage-backed securities ended up in the portfolios of major financial institutions throughout the world.

- The adoption of investment banking functions meant that commercial banks became heavily reliant on borrowing liquidity in open financial markets.

• Source: Lapavitsas, C. (2009) 'The Roots of the Global Financial Crisis.' Development Viewpoint (28)

Turning the financial crisis into sovereign debt crisis

• European banks faced a pressing need for liquidity after 2007. Banks also had to deal with the excesses of the preceding bubble. The ECB provided extraordinary volumes of liquidity, allowing banks to repair balance sheets by reducing lending, but thus intensified the recession. By 2009 bank lending was in retreat in the eurozone

• Peripheral and core states arrived in financial markets in 2009 seeking extra funds of nearly one trillion euro because of the crisis. Public revenue had collapsed as the recession deepened, while public expenditure had risen to rescue finance and perhaps to maintain demand.

• vii. Thus, states appeared in financial markets at the „worst moment‟. With banks reluctant to lend, yields rose for all public debt. Financial capital was able to engage in speculative attacks on public debt of peripheral states, while the ECB watched. In short, European finance was rescued, only to turn and bite its rescuer.

• Lapavitsas et al (2010)

Turning the financial crisis into sovereign debt crisis

• […] the sovereign debt problem has not been caused by the high cost of a welfare state; it has been caused by deregulated financial markets that allowed governments to borrow huge sums against future revenue from public sector enterprises without showing the liabilities on government balance sheets.

• The public debt had been pushed up sharply in the last two years by the trillions that governments run by free market policymakers pumped into distressed banks to prevent their collapse from proprietary speculation in deregulated markets.

• Recent figures from the German Bundesbank showed that in 2008 and 2009, some 53% of Germany‟s new public debt was used to rescue distressed financial institutions. The total new public debt rose by €183 billion in those two years; the costs involved in supporting distressed financial institutions amounted to €98 billion.

Henry C.K. Liu (2010)

Part 2

Karl Polanyi

and understanding crises in market

societies

Key Polanyian insights

• The Formal and Substantive Meanings of "Economic“ –economy as an instituted process

• The embeddedness of the economy in society

• The concept of fictitious commodities: land, labour, and money

• Reciprocity, redistribution, the household, and the market as alternative modes of exchange

• The double movement (socio-political reaction to commodification)

See also: John Adams (1994) Economy as Instituted Process: Change, Transformation,

and Progress, Journal of Economic Issues, Vol. 28

Market (dis)embeddedness -1

• Karl Polanyi wrote extensively on the market as a socially instituted process and regarded the attempt to establish it as the dominant institution in society as a „stark utopia‟. For Polanyi, the economic domain is inseparable from the socio-political domain; the latter regulating the rules of conduct between actors in the former.

• In his magnum opus, The Great Transformation, he argued that traditionally, markets were embedded in a rich web of social relations that did not allow the „market rationale‟ to dominate society. The market had to compete against other institutions of social exchange.

• In early capitalism, however, the fiction of a self-adjusting market became politically hegemonic, in spite of the fact that strong state action was required to establish and consolidate its supremacy.

Market (dis)embeddedness - 2 Market societies, in Polanyi‟s terminology, are societies where market exchange

became the dominant rationale behind the vast majority social institutions and transactions. The market appears to be simultaneously disembedded from the rest of society and its hegemonic principle.

As a result, the market has emerged as a formidable disciplinary mechanism in contemporary societies. There are no consolations or leniency for failing in the market place.

Ultimately […] the control of the economic system by the market is of overwhelming

consequence to the whole organisation of society: it means no less than running of society as an adjunct to the market. Instead of the economy being embedded in social relations, social relations are embedded in the economy.

K.Polanyi, The Great Transformation

The political construction of market societies is based on the fallacy that the economic and political spheres of life can be institutionally separated (Polanyi, 2001: 74).

The simple observation that the market is an instituted process rather than a natural equilibrium takes on great significance because it makes accountable men and women who exercise power behind the protection of the market myth. That simple observation eliminates their protection.

When the market is understood as an instituted process, those who institute it can be held responsible.[…] If the instituted market produces results that run counter to the public interest, those results do not have to be accepted as immutable. What has been instituted in one way can be reinstituted in another way.

William M. Dugger (1989)

William M. Dugger (1989) Instituted Process and Enabling Myth: The Two Faces of the Market JOURNAL OF

ECONOMIC ISSUES Vol. XXIII No. 2 June, pp.607-615

For Polanyi, the domination of the market economy has always been a politically constructed project organised by states and its ability to exercise political and territorial coercion (Block 2001,Meiskins-Wood 2004). Power struggles change the role of the state through time and space, crystallising into different modes of governance, i.e. different practices of socio-economic regulation.

• Given the above, can a market economy ever be totally dis-embedded?

• In an attempt to new re-conceptualisation of embeddedness Block (2001) argues that economies are in reality „always embedded‟ – it is the mode of embeddedness/regulation that varies in space and time (see here the links with the Varieties of Capitalism and Historical Institutionalism literatures).

• Still, both the old and new interpretations are limited by their rather unclear analytical understanding of embeddedness.

Market embeddedness – limitations of

the traditional Polanyian framework

Part 3

States and markets:

modes of (re)embeddedness, continuities and

changes

Dimensions of embeddedness (EMB)

• Relational dimension: EMB is a relation between social agents within a given set of

instituted rules/parameters that constitute a „field‟ (in the sense that Bourdieu uses the term) of social action for these agents. Power asymmetries are observable as differences in the volume and capacity to mobilize power resources as a social agent.

• Structural/instituting dimension: EMB is also the simultaneous reproduction/alteration of the very institutions – the field - within which the relation between the social agents takes place. When exploring this dimension, analysis 'captures' the instituting capacity of social agents as well as their instituted power. Power asymmetries are observable as differences in their capacity to maintain or reconstruct the rules/parameters of the field; to use a metaphor, the capacity of social agents to change and/or 'the rules of the game'.

• Discursive/symbolic dimension: EMB is also the simultaneous reproduction/alteration of the social categories within which the power-relation and the corresponding field(s) are understood and given meaning. When exploring this dimension, analysis 'captures' the power of social agents to discursively construct the categories used to understand the social world. Power asymmetries are observable as differences in the discursive capacity to maintain or alter categories of social meaning within which the other two dimensions are understood and 'recognised' by the social agents.

Market embeddedness – a power-

theoretical neo-Polanyian framework

Social policy an the embeddedness of market

economies, post WWII & before the crisis

A periodisation of market

(re)embeddedness • Welfare statism (post WWII until 1970s)

• Pro-market (neo-liberla) statism (1980-

1990)

• Social-liberal governance (state & welfare

transformation) (1990-2007)

• Beyond the state - Towards a market

polity in the UK and EU?

Concluding reflections: challenges for

(critical) social policy post-crisis

• Expand its focus: from the governance/regulation of re-distribution to, among others, the governance (and democratisation) of investments

• Contribute to the debates and the framing of institutional innovations that will happen in the coming years

• Resist (and expose) the rise of the new paternalism (examples from OECD indicate the seeds of a new paternalistic consensus compatible with managerialism and more authoritarian forms of capitalism)

• Respond to the new „consensus‟ normatively and organisationally.

Thank you