Karl Polanyi in Beijing, or There and Back Again

In this post we’ll finally talk about the Third Plenum, but first a little anecdote.

An important landmark on the road towards a labour market was the remarkable change in government policies that took place in the mid-1990s: A reform of the state sector that had as its centrepiece a programme of mass redundancies which was intended to eliminate or reduce surplus labour in the state sector. This policy was forced on the government by the falling profits and rising losses of the state-owned enterprises (SOEs), which threatened to curb economic growth and government revenues. The 1999 urban survey, analysed in Chapter 6, showed that the incidence of job loss was widespread: 19 per cent of households and 11 per cent of workers had experienced a retrenchment. This remarkable shake-up meant that suddenly there were millions of unemployed urban-hukou workers searching for jobs in competitive conditions. As though in a deliberate experiment, a labour market had been created by decree!

In a book entitled “Towards a Labour Market in China” two academics announce their astonishment that labour markets were created, rather natural. I hope you now realise that this is very silly. The problem with economists is they expect man’s propensity to “truck, barter and exchange” to do a lot of leg work. Polanyi’s point, in its most sanitised form, is that this isn’t true. All economics needs supporting by institutions which have nothing to do with truck, barter or exchange.

Polanyi’s point is more complex than that. I want to discuss his thought first as The Great Transformation is a rich book which deserves discussion. He argued that redistribution and reciprocity were just as important to economics as exchange. I think modern literature has borne him out.

Adherents of New Institutional Economics, of which both David Cameron and I are fans, have criticised Polanyi. The argument is that he over diagnoses. What he sees as reciprocal or redistributive relationships, they claim are actually coasian “side deals.” I think this is economic imperialism. You can think of them as side deals but nobody receiving unemployment payments thinks of it as a side deal to stop them rioting and nobody who gets disability support thinks they’re getting a bung to keep them off the conscience of hand-wringing liberals. Or perhaps they do. But what they hope they’re receiving is something which attests to their worth as a human being.

A man is lost after visiting a new town. He walks up to a stranger and asks him the way to the station. “Right that way” says the man pointing towards the post office, “would you post this for me on the way?” He asks handing over a letter with a smile. “Of course!” says the man, as he walks away, opens the letter and pockets the £20 inside.

A useful concept is that of a low trust society, Francis Fukuyama has written that a lack of trust acts as a tax on all economic activity, it’s a deadweight loss that makes every transaction more difficult. The self-regulating market has few processes for creating high trust societies. Societies dominated by large intrusive states are similarly burdened. Alex has written lots about the UK’s transition to a low trust society and its economic damage. Jamie has written about the idea of China as a low trust society. Here three decades of communist rule (an over emphasis on redistribution) has been followed by the destruction of those institutions and the elevation of exchange. It’s resulted in situations like this:

On the morning of Sept. 4, in the riverside boomtown of Wuhan, Mr. Li, an 88-year-old man, fell in the street and injured his nose. People passed him by, but no one raised a hand to help as he lay on the ground, suffocating on his own blood.

This week, China’s netizens have expressed an outpouring of sympathy — for the bystanders. This is nothing new here. In recent years, there have been several high-profile cases of elderly men and women who have collapsed or suffered accidents in public spaces who then sue the good Samaritans who have tried to help them. These cases have created a genuine and widespread fear that helping a person in need will lead to personal financial loss.

Inequality of market outcomes can drive a decline in trust and make economies perform poorly. This effect isn’t a big as Polanyi would have predicted because it’s pretty hard to smash reciprocal relationships, but its there.

What I’ve documented is that there are lots of way to conduct economic activity and that there are a variety of capitalisms, sometimes all in the same country. More than that, I hope that thinking about Karl Polanyi can give you a deeper  understanding of the necessary and inevitable institutions that surround society and the economy.

Moving on to the specifics, Polanyi argued that a countermovement was inevitable, necessary and would be led by a class. I don’t think this has been the case in China.

1) Polanyi placed class at the centre of his analysis. In China, class power has been weakened by the CCP. From the 1950s the state not only became the solitary organiser of production but it also chose to intervene into every aspect of its citizens lives. The brutality of the CCP in stepping away and demanding a market function has been stronger than Polanyi could imagine. For example, institutions which demand workers are paid on time have been slow to form because workers are weak.

2) Polanyi relied too heavily on formal institutions. The system of guanxi instituted by working people has created an odd, but powerful, informal countermovement and illustrates that, when possible, society will always attempt to insulate itself from the market. This is different to the process Polanyi describes, but not too radically so to invalidate his work. Similarly, capitalists rebelled against the market in the UK and demanded cosy cartels and regulation to keep out competitors. In China tight but more informal state-society institutions are more the norm. Again, probably because of the historic role of the Party in the state and production.

3) Polanyi has also been proven half-right concerning land. He insisted that a countermovement was inevitable; however, this essay has shown that if class interests prove too weak this may not, in fact, be true. Although the tide may finally be turning. He was ultimately correct when he argued that commodifying land would lead to “annihilating the… natural substance of society.” Pigou taxes are one way you can embed the economy in society, but without the necessary institutions or a class to push for them they won’t happen. This is a problem for mainstream economics, just because a solution exists economically doesn’t mean it will be implemented politically.

I’m still concerned that China will implode but I’m more confident that it  could muddle through. It seems that unembedded markets work much better than Polanyi thought. Before I concede that the big man was wrong, I want to propose a theory. Unembedded relations work quite well for manufacturing, but not services. Manufacturing exhibits unconditional convergence in productivity. This means that even in basketcase countries the manufacturing sector’s productivity will converge on the production possibility frontier.

When Polanyi wrote The Great Transformation, England was a dozen times richer than the poorest countries, today the richest counties are 100 times wealthier. Now it is possible to trash your environment and annihilate the human and natural substance of society and get 10 times the return you used to. So long as China could find replacements for the broken men and shattered earth to pour in as commodities to its satanic mills it would get a good return and the unembedded economy would hum along nicely. Well, nicely according to the headline figures. That trend isn’t sustainable, but as we’ll see in a second it looks like it won’t be sustained thanks to The Third Plenum. Food for thought. But it’s only a theory for now.

I’ll repeat that the one thing Polanyi isn’t is an advocate of state planning. The Great Transformation offers, an account of the deleterious effects of statist intervention, as well as an attack on market liberalism. He saw the state as necessary to guarantee justice, regulation and recognition and the market as an important sphere of exchange. But neither state nor market can be relied upon to be the sole method of ordering the economic life of society. It lots of ways China has attempted to swing from one to the other extreme and getting a bit of the worst of both. Its clear that a market society is superior to a state society, but there are lots of ways to get the balance wrong.

Polanyi was not a pessimist. He argued that there has never been a stark choice between capitalism and communism — between the callousness of the market and the clumsiness of the plan — he demonstrates that, in fact, many different worlds are possible. Amid a vast, growing, and contradictory literature on China’s rise, there have been both fears of its ascendant power, and assurances of its imminent collapse. Neither account truly satisfies; this is because China is an economy in flux. Chinese society is faced with a balancing act, it obviously still desires economic growth, but it must weigh this interest against what it has witnessed in the last thirty years. Its productive organisation has achieved

The Third Plenum made its announcements last month to much head scratching. But there’s some meat to the proposals, even if nobody’s sure whether the market’s move from “fundamental” to “decisive” is good news or not. A clear pattern emerges though to confront the problems discussed in the last week’s post. There are institutional solutions to market problems, a double movement is evident.

Farmers will be granted more property rights and it will be more likely they’ll be enforced. A real-estate property tax will be introduced to create a formal system of managing land use in urban areas. The government will accelerate the reform of the household registration system which will facilitate urbanisation and bring more of China’s migrant workers back within the formal institutions of the state. Together these reforms create institutions to support land and labour. Perhaps more importantly the Chinese state is giving the judiciary more independence from local government. Jamie has pointed out this might just mean more central control,  but its through this process of institutional evolution and bargaining that we get anywhere. The developments all make sense in Polanyian terms and all focus on creating rules and institutions which better manage the market and state.

The Chinese are often characterised as passive and obedient, but they have a long history of rebellion1989 saw the outbreak of a movement which actively tried to challenge the ruling class. The militant strike waves seen in China illustrate that internal stability is not guaranteed. In China the market has been planned, and it has been startlingly successful, but the reactions have been spontaneous and they aren’t happy with the status quo.

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Coda: These posts have been a collaboration. The other author is me, but me aged 21, the same age I was when I started this blog. If any of you remember him then four and a half years and several hundreds of thousands of words later he and I would like to say “thanks for reading.” I’ll probably have the weekend off blogging, but I’ll be back on Monday.

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