Thursday, February 6, 2014

Hayek, Polanyi, Vienna

The following is revised from a presentation a friend and I did on the legacies of Friedrich Hayek and Karl Polanyi. Hayek is said to be the 'forefather' of neoliberal economic thought, while Polanyi is said to have played an equally important role in advancing 'Western' socialist analysis in the 20th Century. What I find most fascinating about these two political economists is that their lives were very closely intertwined. Here is a very brief history:

The story begins in Vienna in the 1920s. Vienna, at the time virtually an autonomous city state, had effectively become a socialist enclave situated within Austria. For this reason, it was colloquially known as "Red Vienna". At the time, one could live an entirely socialist lifestyle there, growing up in collectivized housing units, acquiring free public education, and even no-frill socialist burials from a cooperative funeral home. The socialist utopia was maintained by a progressive taxation system. It was in this Red Vienna that the seeds of both Polanyi and Hayek’s arguments were founded.

There, in the 1920s, Hayek’s version of economic liberalism first met Polanyi’s system of social checks and balances on the market. As Kari Levitt Polanyi and Kenneth McRobbie note, “The opposing views of Hayek and Polanyi on the place of the economy in society were debated in Vienna in the 1920s in an exchange between Hayek’s mentor and patron Ludwig von Mises and socialist economists, including Karl Polanyi.” The circle of socialist thinkers wanted to improve the existing socialist society, while Hayek's mentor - von Mises - wanted to dismantle it.

Born in 1886 in Budapest, Karl Polanyi grew up into a well-educated and politically savvy family. In World War I, Polanyi served as an officer in the Austro-Hungarian army. Following the war, he moved to Vienna with his wife Ilona, where he became the foreign editor of Der Osterreichische Volkswirt (a leading economic weekly in Europe). It was during this time that he first encountered the arguments of Ludwig von Mises and his student, Friedrich Hayek.

Hayek, on the other hand, was born in 1899 (thirteen years after Polanyi). At age fifteen, he lied about his age in order to serve in the Austrian army in World War One. Following this he found himself in Vienna working as a research assistant for von Mises. Together, von Hayek and von Mises formulated a polemical critique of socialism, which stated that because socialist societies had no free markets, they lacked a price mechanism to inform producers and entrepreneurs of the price (demand) consumers were willing to pay for products. In other words, socialism lacked a mechanism for fair price formulation. As far as Hayek and Mises were concerned, without a price mechanism individuals would not be able to meet as equals in market exchange, because all other forms of transmitting information were too complicated.

Polanyi took this argument very seriously. In fact, he held several seminars in his home, during which he and his students formulated an answer to the economic liberals. He would eventually concede that Von Mises and Hayek were correct about the fact that without a pricing mechanism it was impossible for centrally planned economies and individuals to make meaningful economic calculations. The answer, as Polanyi laid out in a provocative article in a prestigious German academic journal (Archiv für Sozialwissenschaft und Sozialpolitik), was that socialism did not really need to involve a centrally planned economy. This was a major departure from the leading Marxist thought at the time. Rather, Polanyi maintained that socialism could be maintained through a series of social and economic institutions that would operate as checks and balances on the market (somewhat like the democratic checks and balances found in modern governments); and therein ensure that the social costs of the market were regulated to protect society from the negative impacts of economic liberalism.
Fast forward to the 1930s: Hayek, by now a well known liberal economist, received an invitation from Lionel Robbins to go to the London School of Economics to counter the then ascendant economic doctrines of John Maynard Keynes and his associates at Cambridge. This decade also saw the coming to power of Hitler in neighboring Germany. This did not bode well for Red Vienna or its socialist community. As a result, Polanyi and his family had to flee, moving, like Hayek, to Great Britain. In England, Polanyi taught at a workers’ educational association.
In the early 1940s, Polanyi was a visiting scholar at Bennington College in Vermont, where he lectured and came up with the main ideas for his book, The Great Transformation. Both Polanyi’s book and Hayek’s The Road to Serfdom were published in the same year (1944): As Fred Block notes “While Polanyi’s work celebrated the New Deal in the United States precisely because it placed limits on the influence of market forces, Hayek’s book insisted that the New Deal reforms placed the United States on a slippery slope that would lead both to economic ruin and a totalitarian regime.” After being turned down three times by various publishers in America on political grounds, Hayek’s book was eventually picked up by the University of Chicago. The institution would play a pivotal role in importing Hayek’s ideas to America. The economics department sponsored an American tour for Hayek in 1945, and later created a special chair for him as Professor of Social and Moral Sciences in 1950. Later, Milton Friedman, also of the University of Chicago, would popularize Hayek’s economic liberalism and win a Nobel prize for his work. Neoliberalism had been born.
Hayek and Polanyi had very similar lives. Their individual stories follow an intertwining path, from the frontlines of World War One, to Red Vienna, to Great Britain, to the United States. And here we are today, discussing and debating these two intellectual schools of thought in the same way they were doing some 80 years ago. While in many ways they advocated exact opposite opinions, both of their famous books were masterpieces in their own right. As Linda McQuaig cleverly writes “The fact that Hayek’s [book] was widely celebrated and became a kind of Bible of our times, while Polanyi’s has been largely ignored in mainstream circles, tells us nothing about the merits of the two books, but a great deal about what the dominant class wanted to hear.”

It is an interesting thought exercise to consider what Polanyi and Hayek would have had to say to each other in a direct exchange. Oddly enough, when we look into the historical record, the link between Hayek and Polanyi is found in Karl Polanyi’s brother, Michael! In a book that traces the history of economic liberal thought from the 1930s to its ascendancy in the 1970s, Richard Cockett tells us of how Michael Polanyi was one of the founding and foremost members of the Mont Pelerin Society! There was Karl’s own brother, alongside Hayek and Friedman, meeting at a hotel in Switzerland’s Mount Pelerin in 1947! Michael Polanyi attended the subsequent meetings and has engaged Hayek’s ideas in many writings, mostly from his own position as a philosopher of science. As Cockett notes, Michael was very concerned about the effects of collectivism and in particular Soviet socialism on the freedom of scientific inquiry, and this made him a natural ally of Hayek in the late 1940s. But what did Michael Polanyi and Friedrich von Hayek have to say about Karl Polanyi? Surely, they were both aware that Karl had just years earlier produced a scathing critique of Mont Pelerin's views. The discussions about these relationships, which we believe must have taken place, perhaps even over lunch in Switzerland’s Hotel du Parc (where the MPS meetings were held) do not appear to have been recorded. Perhaps this is a call for future research?


Kari Levitt Polanyi and Kenneth McRobbie, Karl Polanyi in Vienna: The Contemporary Significance of The Great Transformation, 2006.

Fred Block, "Introduction" to Kari Levitt Polanyi and Kenneth McRobbie, Karl Polanyi in Vienna: The Contemporary Significance of The Great Transformation, 2006.

Friedrich Hayek, The Road to Serfdom, 1944.

Karl Polanyi, The Great Transformation, 1944.

Linda McQuaig, All You Can Eat: Greed, Lust, and the New Capitalism, 2001.

Richard Cockett, Thinking the unthinkable : think-tanks and the economic counter-revolution, 1931-1983, 1994.

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