Freedom: Polanyi versus Hayek

Both Karl Polanyi and Friedrich Hayek addressed the ‘big’ question of how we can attain freedom in a complex society. Despite sharing similar backgrounds and experiences, they famously arrived at divergent conclusions. Who is right?

No comparative analysis is capable of reconciling their opposed viewpoints or converting partisans of the one or the other (though the latter does occasionally happen). Nor can I claim to be engaged in a dispassionate analysis. I have long considered myself a Polanyian . Yet periodically exposing one’s cherished ideas to their harshest critic helps clarify, through dramatic contrast, what is true and what is good.

Polanyi, Hayek, and my readers all wish to maximize freedom. We might agree that we want people to flourish by having the opportunity to live lengthy and meaningful lives of their own choosing, free from tyranny. But how is this worthy goal to be achieved? There’s the rub.

Freedom, however defined, depends upon finding a feasible and life-enhancing relationship among state, market and community. Why these three? Because, singly or jointly, they constitute the fundamental organizing principles of social life today. To steer a society, its citizens must rely on some combination of state direction, market choice, and community obligation.

Both Polanyi and Hayek recognize this truth in advocating divergent relationships among the three to foster freedom and prosperity. If we juxtapose their empirical assertions and normative justifications regarding each coordinating mechanism, we may gain firmer grounding on the true and the good. At least, that is my hope, in returning to Hayek after many years.

Hayek is the starting point because his is the quintessential liberal view to which Polanyi reacted. Hayek’s ideas are familiar, even if you have not read his work. They are the foundations of the market-fundamentalist version of neoliberalism. Although some contemporaries regarded him as a crank during the Keynesian era, his vindication came with the award of the Nobel Prize for Economic Science in 1974 and the rise of neoliberalism.

To be fair to Hayek, I have drawn most of my summary ideas from The Essential Hayek (2014), which was written by the self-professed acolyte Donald Boudreaux for the big-business think-tank The Fraser Institute.

Hayek’s starting point – and perhaps ending point as well – is the assertion that markets must be as self-regulating as possible. What this entails is secure property rights, the unhindered movement of prices for all commodities, and actors free to earn incomes as they choose and spend them as they please. Hayek assumes, as do liberals in general, that the economy, if left alone, will spontaneously assemble itself into a market system. Each actor will utilize the resources he/she can mobilize – land, labour and money – to produce the highest return; consumers, in turn, will maximize their satisfaction by spending their incomes on goods at the cheapest price. The resulting system, governed by prices, is thus the spontaneous outcome of self-interested behaviour. The market is ‘natural’; but it is also justified owing to its inadvertent capacity to serve the common good through the mechanism of the ‘invisible hand.’

It follows that the state should play a limited role, and any expansion of its reach may lead to disaster. Its task is basically to ensure the ‘rule of law.’ The state must enforce property rights and contracts, prevent violence, theft and fraud, and in general buttress personal freedom by the equal application of impartial laws. These laws prohibit only those actions that adversely affect the rights of others. Even well-intentioned governments that aim only to protect citizens – producers, workers and consumers – from the effects of recessions or other market disruptions launch society onto a slippery slope to economic ruin. One application of regulatory power leads to others, with the growing possibility that the state will seek to control economic life. Perversely, efforts to protect society makes people worse off in the end. And the closer a state approaches economic planning, the higher the probability of tyranny.

Finally, community, according to Hayek, does not exist in a society organized for the greater good through market exchange. Yes, Hayek agrees, we humans need love, connection and identity. These warm sentiments rightly belong, however, only in the intimate sphere of family, lovers and friends. Society, outside this intimate sphere, must be governed, for the good of all, by impersonal laws and market relations. Society, in short, is composed of self-interested strangers. Notions of fairness have their place in the intimate sphere, but not in society. Such sentiments will lead governments to intervene to achieve a more just distribution. But the perverse effect will be to disturb market self-regulation, skew investment and diminish output.

Polanyi takes the opposite stance at every turn. The notion of a self-regulating market is a myth, he claims. Markets are instituted (created) and maintained through the power of the state and the institutions it enforces. People are not naturally self-interested actors; throughout history and even today, the actions of persons are more often guided by social obligation than material gain. Moreover, the closer a society approaches the self-regulating ideal, the more ecological and social disruption is unleashed upon society. It is this disruptiveness that leads to a countermovement of societal protection (not some left-wing conspiracy). Yet regulation, though inevitable, disrupts the market mechanism, breeding economic recessions and depressions. Hence, the market ensnares society in a double bind: self-regulation is an impossible dream, yet attempts to achieve It instigate protective measures that periodically imperil economic stability and precipitate fascism.

As for the alternative, Polanyi was circumspect in his later years. State and community clearly, for him, play the coordinating roles. In the 1920s and 1930s, he advocated a form of participatory planning in which markets played a minor part, if any. Socialism was, for Polanyi, a form of community at the societal level, like a family writ large. However, from the time of The Great Transformation (1944) onwards, Polanyi was more engaged in the question of how to achieve freedom in a complex society than in the specific features of socialism. Freedom would require recognizing the inherent conflict between democracy and the market and doing what was necessary to safeguard and extend democracy. It would require people to realize that markets and the selfish motivations that support them are constructed, not natural. Consequently, we (society) have the obligation to reconstruct our institutions to realize equal freedom and solidarity values. We would need to dispense with market society, but that does not rule out a society with markets – as long as labour, land and money are decommodified.

These two world views are remarkably discordant. How shall we live?

Two conclusions are clear, at least to me.

  • Hayek’s world view is exceedingly bleak when compared to that of Polanyi. The former, in contrast to the latter, counsels us not to question or intervene to correct inherited inequalities and injustices. The former, in contrast to the latter, advises us to hold fast to the notion of society as a cold collection of self-interested individuals. The former, in contrast to the latter, envisions a limited role for democracy in a world where the market is sovereign. The former, in contrast to the latter, sees labour and land as mere commodities to be deployed for personal gain. Do we, most of us, want to live this way and bear the dire consequences?
  • Of course, if markets are natural features of human societies, inextricably linked to basic human nature, then we have no choice. We must live with the sovereign market. But how persuasive is this basic liberal assumption? Polanyi and his colleagues spent much of their intellectual lives exploring, in comparative and historical studies, alternative economic arrangements in the form of redistribution and reciprocity. As for human motivations, they range widely from individual self-interest to social obligations. Polanyi’s main point is that the market institution highlights personal gain; change the institutional nexus (extend democracy to the economic sphere) and other, solidarity-based motivations will be seen as primary. We are not the slaves of some innate predisposition.

Of course, the selection of a world view to organize reality is only partly an intellectual exercise, even for intellectuals. We are all subject to influence by inherited ideas, the sway of constructed ideological hegemony, and our deepest yearnings for a better world. No one can definitively resolve the dispute between Hayek and Polanyi. Yet, in thinking about how to live, I at least embrace the boundless optimism of Polanyi over the constricted vision of Hayek.


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About Richard

I am a Professor Emeritus of Political Science at the University of Toronto. I am currently interested in understanding how the humanistic tradition of the left can be adapted to fit the realities of the 21st century. I am particularly concerned with how we can deal equitably with the deadly challenge of climate change and live with globalization. My most recent academic research has focused on the Left’s experience in the Global South and on counter-hegemonic globalization. Africa has been the major site of my field work; I have also travelled widely in Latin America and Asia. My most recent books include Reinventing the Left in the Global South: The Politics of the Possible (2014), a revised and expanded edition of Civilizing Globalization: A Survival Guide (co-editor and co-author, 2014), and Social Democracy in the Global Periphery: Origins, Challenges, Prospects (co-author, 2007).

1 thought on “Freedom: Polanyi versus Hayek

  1. Joel Benard

    Richard, thank you for this insightful summary of two important thinkers, their contrasting world views and terms of engagement.


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