The Great Transformation

1. The Self-Regulating Market: A Destructive Utopia

Our thesis is that the idea of a self-adjusting market implied a stark Utopia.

A unique civilization. Nineteenth-century civilization, unprecedented in history, rested on four pillars: the balance-of-power system, the international gold standard, the self-regulating market, and the liberal state. Of these, the self-regulating market was the "fount and matrix," giving rise to a specific civilization. This system, driven by the expectation of maximum money gains, entrusted the entire production and distribution of goods to market prices alone, assuming markets for all elements of industry.

Inherent self-destruction. Such a market, if allowed to function without external interference, would inevitably annihilate the human and natural substance of society, physically destroying people and transforming their environment into a wilderness. Society, in self-preservation, was compelled to take protective measures. However, these interventions, while necessary, impaired the market's self-regulation, disorganized industrial life, and ultimately endangered society in a different way, leading to the system's collapse.

The great transformation. The breakdown of this unique institutional mechanism, particularly the gold standard, triggered a "great transformation" in the 1930s. This global upheaval saw the rise of new economic and political systems—fascism, socialism, and the New Deal—all fundamentally rejecting the utopian ideal of a self-regulating market and its underlying principles.

2. Historically, Economies Were Embedded in Social Relations

The outstanding discovery of recent historical and anthropological research is that man’s economy, as a rule, is submerged in his social relationships.

Challenging Adam Smith. Contrary to Adam Smith's influential notion of man's "propensity to barter, truck and exchange," historical and anthropological evidence shows that before the 19th century, no economy was primarily controlled by markets. Economic activity was always embedded within broader social relations, subordinated to politics, religion, and custom, rather than operating as an autonomous sphere.

Noneconomic motives. Human beings in pre-market societies acted to safeguard their social standing, claims, and assets, valuing material goods only as they served these ends. Production and distribution were ensured by noneconomic motives, primarily:

• Reciprocity: Mutual give-and-take within social structures like family and kinship, often facilitated by symmetrical social patterns.
• Redistribution: Central collection and subsequent distribution of goods and services by a chief, temple, or lord, often linked to territorial organization and political power.
• Householding (Oeconomia): Production for one's own use within a closed group (family, village, manor), without the motive of gain.

Markets as external features. Markets, though present since the Stone Age, were typically external phenomena, serving long-distance trade between different communities, not internal economic organization. Local markets were minor and highly regulated, designed to protect the community from market forces, not to expand.

3. The Fictitious Commodities: Labor, Land, and Money

The commodity description of labor, land, and money is entirely fictitious.

The market's fatal fiction. A self-regulating market economy requires that all elements of industry—goods, labor, land, and money—be organized as commodities produced for sale. However, labor, land, and money are not true commodities; they are not produced for sale.

• Labor: Human activity, inseparable from life itself, not produced for market.
• Land: Nature, not produced by man.
• Money: A token of purchasing power, not produced but created by banking or state finance.

Demolition of society. Treating these "fictitious commodities" as if they were produced for sale leads to the "demolition of society."

• Labor: Exposing human beings to the market's whims destroys their physical, psychological, and moral well-being, leading to social dislocation, vice, and starvation.
• Land: Subordinating nature to the market defiles landscapes, pollutes rivers, and destroys the capacity to produce food and raw materials.
• Money: Market administration of purchasing power causes periodic crises, liquidating businesses and destroying capital through shortages and surpluses.

Organizing principle of society. Despite their fictitious nature, the assumption that labor, land, and money are commodities became the organizing principle of 19th-century society. This meant that no arrangement or behavior could be allowed if it prevented the market mechanism from functioning according to this fiction, thereby subordinating the very substance of society to market laws.

4. The "Double Movement": Market Expansion and Societal Protection

Social history in the nineteenth century was thus the result of a double movement: the extension of the market organization in respect to genuine commodities was accompanied by its restriction in respect to fictitious ones.

Two opposing forces. The dynamic of modern society for a century (1815-1914) was characterized by a "double movement." On one side was the relentless expansion of the market system, driven by economic liberalism, aiming to establish self-regulating markets for all goods, labor, land, and money. On the other side was a powerful countermovement of social protection.

Protecting man, nature, and production. This countermovement sought to conserve human beings, nature, and productive organization from the destructive implications of treating labor, land, and money as mere commodities. It manifested through:

• Factory legislation and social laws: To protect industrial workers.
• Land laws and agrarian tariffs: To safeguard natural resources and rural culture.
• Central banking and monetary management: To shield productive enterprises from price level fluctuations.

Class roles in the movement. Different social classes played distinct roles:

• Middle classes: Primarily championed market expansion, believing in the beneficence of profits.
• Landed aristocracy and peasantry: Often defended traditional social structures and national resources.
• Working classes: Became representatives of common human interests, seeking protection from market ravages.

This interplay of market expansion and societal self-protection created deep-seated institutional strains, eventually leading to the collapse of the 19th-century order.

5. Speenhamland: A Failed Attempt to Shield Labor from the Market

The Speenhamland episode revealed to the people of the leading country of the century the true nature of the social adventure on which they were embarking.

Preventing a labor market. From 1795 to 1834, the Speenhamland Law in England, an "allowance system," provided subsidies to wages based on the price of bread, ensuring a minimum income regardless of earnings. This measure, though intended to protect the poor and prevent social dislocation, effectively prevented the formation of a competitive labor market. It was a desperate attempt by the rural gentry to maintain traditional social order amidst the nascent Industrial Revolution.

Disastrous consequences. The "right to live" proved to be a "death trap."

• Laborers lost incentive to work, as their income was guaranteed.
• Wages were driven down below subsistence level, subsidized by public funds.
• Productivity declined, and the rural population became increasingly pauperized and demoralized.
• Employers benefited from cheap labor, shifting the burden onto ratepayers.

Catalyst for capitalism. The utter failure of Speenhamland, which created "snug misery of degradation," convinced contemporaries that a functioning capitalist order required the abolition of the "right to live." Its repeal in 1834, through the New Poor Law, was a brutal but decisive step in establishing a free labor market, marking the true "birthday of the modern working class" and the beginning of industrial capitalism as a social system.

6. Laissez-Faire Was Planned; Protectionism Was a Spontaneous Response

The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.

The paradox of liberalism. Economic liberalism, often presented as a natural evolution, was in fact a deliberate, state-enforced project. Laissez-faire was not a spontaneous outcome but required extensive governmental intervention to establish and maintain its core tenets: a competitive labor market, an automatic gold standard, and international free trade. The Benthamites, for instance, vastly expanded state administration to dismantle old regulations and create the conditions for free markets.

Spontaneous counter-movement. Conversely, the protective countermovement against laissez-faire was largely spontaneous and undirected. It emerged at countless disconnected points, driven by pragmatic responses to the market's destructive effects on human beings, nature, and productive organizations.

• Diverse interventions: Laws on food quality, factory conditions, public health, municipal services, and social insurance were enacted by diverse groups, often staunch liberals, without a unified "collectivist" ideology.
• Shifting solutions: Solutions to problems like workmen's compensation evolved from individualistic to "collectivistic" forms, not due to ideological shifts, but to the evolving nature of the problems themselves.
• Universal trend: Similar anti-liberal measures appeared across different countries (England, Germany, France, Austria) at comparable stages of industrial development, suggesting objective societal needs rather than a "collectivist conspiracy."

Liberals' inconsistency. Even radical economic liberals, when faced with market failures (e.g., monopolies, trade union power), paradoxically called for state intervention to preserve the "free competitive market," demonstrating that laissez-faire itself was subordinate to the self-regulating market ideal.

7. The Gold Standard: The Fragile Core of 19th-Century World Economy

Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe.

The linchpin. The international gold standard was the central institution of 19th-century world economy, symbolizing its unique organization. It was an attempt to extend the domestic market system to the international field, ensuring stable foreign exchanges and facilitating global trade and capital flows. Its maintenance was considered axiomatic, a "faith of the age," essential for peace and prosperity.

Inherent contradictions. However, the gold standard contained a fundamental flaw: it required domestic economies to adjust to international price levels through deflation whenever the currency was threatened. This meant:

• Sacrifice of domestic stability: Deflation caused widespread business liquidation, unemployment, and social misery.
• Incompatibility with industrial production: Commodity money (gold) could not expand rapidly enough to meet the needs of growing industrial transactions, leading to price falls.

Central banking as a buffer. To mitigate these destructive effects, central banking emerged as a protective measure. Central banks managed credit, cushioned the impact of gold withdrawals, and spread the burden of deflation, thereby reducing the automatism of the gold standard to a mere pretense. This drew monetary policy into the political sphere, creating new tensions.

The final collapse. The gold standard's inherent instability, exacerbated by the protective measures taken to sustain it, ultimately led to its collapse in the 1930s. This event, triggered by the Wall Street slump and subsequent abandonment of gold by major powers, signaled the final failure of market economy and ushered in a world revolution.

8. Beyond Economic Exploitation: The Peril of Cultural Disintegration

Not economic exploitation, as often assumed, but the disintegration of the cultural environment of the victim is then the cause of the degradation.

Social calamity as cultural phenomenon. The "Inferno of early capitalism" was not merely an economic phenomenon measurable by wages or population figures. It was primarily a cultural catastrophe, a "social dislocation of stupendous proportions," akin to the devastating effects of culture contact on native tribes. The degradation of the working classes stemmed from the destruction of their traditional cultural environment.

The "cultural vacuum." When a market economy is imposed on a differently organized community, its basic institutions are violently disrupted.

• Loss of self-respect and standards: Traditional crafts decay, social conditions are destroyed, and people lose their sense of purpose and identity.
• Forced commodification: Making labor and land into commodities liquidates every cultural institution in an organic society, leading to a "cultural vacuum."
• Examples: The transformation of the Kaffir into "human refuse" or the decimation of American Indians after forced land allotment, despite potential economic "benefits," illustrate this profound degradation.

India's famines. The famines in 19th-century India were not primarily due to exploitation by Lancashire or crop failures, but to the demolition of the Indian village community by the free marketing of grain. Local stores for famine prevention were swept away, and people could not afford grain at market prices, leading to mass starvation.

9. Nationalism and Autarchy: Political Responses to Market Failure

The autarchy movement of the 1920s was essentially prophetic: it pointed to the need for adjustment to the fact of a vanishing order.

Fear of interdependence. The Great War exposed the perils of global interdependence, leading nations to prioritize self-sufficiency. The "re-agrarianization" of Central Europe and the rise of autarchy were not romantic aberrations but logical responses to the unreliability of the world market and the need for food and raw material security.

Political leverage of agrarian interests. In the 1920s, agrarian protectionism became a necessity for many European countries. Peasants, often a modest class, gained disproportionate political influence by defending the market system against the perceived threat of working-class policies. Their ability to maintain "law and order" in a high-strung market society made them politically indispensable.

The new nationalism. The international gold standard, while promoting global economic integration, paradoxically fostered a new, more jealous nationalism. National token currencies, safeguarded by absolute sovereignty, became the economic expression of national identity. This "national liberalism" combined protectionism and imperialism abroad with monopolistic conservatism at home.

Germany's strategic autarchy. Germany, after World War I, deliberately pursued economic autarchy, cutting loose from international capital, commodity, and currency systems. This was a strategic move to lessen external control and prepare for repudiating political obligations, anticipating the final dissolution of 19th-century economy and gaining a head start on her opponents.

10. Fascism: A Degenerative Solution to Market Society's Deadlock

Fascism, like socialism, was rooted in a market society that refused to function.

A worldwide phenomenon. Fascism was not a local anomaly but a global political possibility, an "almost instantaneous emotional reaction in every industrial community since the 1930s." It emerged as a response to the institutional deadlock of liberal capitalism, offering a "reform" by eradicating democratic institutions in both the industrial and political spheres.

Symptoms of the fascist phase. Countries approaching fascism exhibited:

• Spread of irrationalistic philosophies and racialist aesthetics.
• Anticapitalistic demagogy and heterodox currency views.
• Criticism of the party system and disparagement of democratic regimes.
• Fascist movements often gained power not through popular revolution but through "sham rebellion" with tacit approval from authorities.

The market's paralysis. The "fascist situation" arose when the tremendous industrial and political organizations of labor and other democratic forces melted away, unable to resolve the market system's paralysis. The fear was not of Bolshevism itself, but of the working class's potential to disregard market rules (e.g., property rights, wage flexibility) in an emergency, which would fatally disrupt the economic regime.

Sacrificing freedom for function. Fascism offered an escape from this deadlock by revitalizing the economic system at the cost of all democratic liberties. It involved a "reeducation" designed to denaturalize the individual, denying the brotherhood of man and enforcing mass conversion through scientific methods of torture. This represented a profound rejection of the postulate of freedom.

11. Reimagining Freedom in a Complex, Post-Market Society

The passing of market-economy can become the beginning of an era of unprecedented freedom.

Beyond market utopianism. The collapse of 19th-century market society forces us to confront the reality that industrialism must be subordinated to human nature. The utopian ideal of a self-regulating market, based on the false premise of economic self-interest as man's primary motive, is now a memory. The future lies in a new, non-marketing basis for industrial civilization.

Disestablishing fictitious commodities. This new era involves removing labor, land, and money from the market mechanism:

• Labor: Wage contracts will cease to be purely private; basic wages, factory conditions, and hours will be determined outside the market, with trade unions and public bodies playing a crucial role.
• Land: Land will be incorporated into institutions like homesteads, cooperatives, and public preserves, with essentials removed from market jurisdiction.
• Money: Control of money will be removed from the market, with governments directing investments and regulating savings through "functional finance."

New freedoms and safeguards. The end of market society does not mean the absence of markets, but their subordination to democratic society. This transformation can lead to an era of unprecedented freedom, extending beyond the political sphere into the intimate organization of society.

• Increased civic liberties: New safeguards are needed to protect personal liberty, including the right to nonconformity and a job under approved conditions, enforceable against all authorities.
• Economic collaboration: International economic cooperation between governments will replace anarchistic sovereignty, allowing nations to shape domestic institutions freely.
• Acceptance of reality: True freedom requires accepting the reality of society, including power and compulsion, and striving to remove all removable injustice and unfreedom within that reality, rather than clinging to an illusionary idea of freedom.

Last updated: October 7, 2025