Justifying Public Intervention without Market Externalities: Karl Polanyi's Theory of

Planning in Capitalism
Author(s): Ernest Sternberg
Source: Public Administration Review , Mar. - Apr., 1993, Vol. 53, No. 2 (Mar. - Apr.,
1993), pp. 100-109
Published by: Wiley on behalf of the American Society for Public Administration

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witout~y Maarke Extemla~lilesKaln
Capitalism
Ernest Sternberg, State University of New York at Buffalo
Should planners and policy analysts rely primarily on
market theory in addressing public issues? Ernest
Sternberg argues that Karl Polanyi's work offers a
formidable alternative. Writing in the 1940s and
1950s, Polanyi rejected the notion that the market was
the sole institutional mechanism for satisfying economic
wants. He posited a much broader perspective on pub-
lic policy, taking social, environmental, and otherfac-
tors into account. Sternberg offers an overview of
Polanyi's thought and its potentialforjustifying and
guiding public sector planning and policy making.
100 Public Administration Review * March/April 1993, Vol. 53, No. 2
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Laissezfaire was planned; planning was not.
Karl Polanyi, The Great Transformation
In a time of the reascendence of laissez faire philoso-
phies, we should reexamine the meanings of public
intervention in societies dominated by the market. We
may gainfully do so by looking to Karl Polanyi, who
wrote a small body of work on the origins and conse-
quences of free markets. His ideas are of ever greater
relevance to those concerned about the applications of
planning-of coherent forethought and intelligence-to
the resolution of urban, economic, and environmental
crises.
Polanyi's work lays the foundations for an especially
intriguing and strong answer to what is now the domi-
nant justification for public planning in capitalism.
According to this idea, planning is warranted upon the
failure of competitive markets, especially in the pres-
ence of negative externalities or public goods, but only
if the benefits of such intervention can be shown to
exceed the costs. Planning intervention is to be justi-
fied in terms of market principles and fulfills a sub-
sidiary function at the fringes of economics proper.
Karl Polanyi would argue quite differently. To him,
the capitalist economy has at its core a self-regulating
market that operates by treating human life and nature,
which are inherently uncommodifiable, as if they were
merely commodities, merely labor and land. This very
effort to treat them as commodities transforms human
life and its natural and built environment. In this pro-
cess, cultures are destroyed, life becomes insecure and
threatening, the environment is razed, and the market
economy itself becomes unstable. Such effects are not
externalities to self-regulating markets but are inherent
to the very possibility of such markets.
 At scattered points in his work, Polanyi explains that com-
modification has such debilitating effects because it tears life
PolanyIs unusual concept of fictional
and nature out of the greater whole in which they are inter-
twined-a whole he occasionally refers to as habitation. The
commodities"provids a strong altrntive
commodification inherent to self-regulating markets fragments
human habitation, thereby bringing economic, social, and
environmental calamity. To protect themselves, market soci- justificationforplanning in market society.
eties turn to planning-including public policy, social legisla-
tion, and concerted social action. In Polanyi's work, therefore, Such concepts of the whole raise the specter of a return to
planning is not a marginal technical corrective to market oper- the organicism that characterized much comprehensive plan-
ations but an urgent moral necessity. ning thought in the first half of the 20th century. A compari-
son of Polanyi's work to Lewis Mumford's suggests that
In words that are terse, passionate, and at points obscure,
Polanyi's ideas need not be burdened by organicism. I con-
Polanyi provides the elements of a sound justification for the
clude by enumerating the reasons why planners, policy ana-
priority of planning within capitalism. The logic by which he
lysts, and public administrators should build on Polanyi's ideas
does so is of resounding significance for planners and policy
analysts.
to justify and practice better planning.

Notably, Polanyi does not treat the market as a myth or as

the creation of a dominant class. He depicts it, rather, as an
The Life and the Work
institutionalized process that can provide prosperity, but can
also degrade human life and its environment. While he is crit- Born in 1886, Polanyi was raised in Budapest in an excep-
ical of capitalism (which he sees as a society dominated by tionally accomplished family and completed what appears to
the market), he also recognizes the allocative efficiency of have been a perfunctory study of law, which he only prac-
market forms of economic organization. His theoretical work ticed briefly. His most substantial professional affiliation in his
is compatible with the defense of the market on the grounds early adult life was journalism. For nearly ten years, he
that it tends to decentralize power and preserve democracy. worked as an editor and columnist for a Viennese financial
Polanyi's work is even consistent with calls to preserve and paper, until the Nazi rise to power and the imminent econom-
strengthen selected markets-those markets that play valuable ic collapse in Austria in 1933, when he and his family emigrat-
roles in society without overpowering human existence. ed to England (Stanfield, 1986).

Polanyi suggests a conception of planning in capitalism He lived there precariously as a lecturer for the Workers
that many practitioners and theoreticians have in effect held, Education Association, an extramural university program, and
but have not been able to explicitly defend. The sources of occasionally toured the United States to lecture. In the United
their intellectual discomfort were not hard to find. States during the bombing of London, he obtained an appoint-
Discussions of planning long occurred in the shadow of the ment as a visiting scholar at Bennington College, Vermont,
titanic conflict between markets and Marxism. The implicit where he worked from 1941 to 1943 on his single most impor-
values that guided many planners found no comfort in either tant and famous work. Written and published during the
camp. At the same time, the classical traditions of comprehen- height of World War II (with a 1957 reprint, the edition cited
sive planning-such as Lewis Mumford's (1961) work-which here), The Great Transformation is an ambitious work. It is
might have served as a guide, foundered on mystical organi- also exhortatory and difficult, ranging in its topics from the
cism or inadequate theoretical clarity. English poor laws to the economy of the Trobrianders, from
classical economics to the rise of fascism, with discussions
This article begins with notes on Polanyi's life and work. It
along the way of international finance and Christian ethics.
proceeds by summarizing his concept of the self-regulating
market, how it arose in the 19th century, and how it engen- The book sought to engage the pivotal question in the
dered protective responses like regulatory legislation and city social sciences-the one that occupied Weber, Marx, and
planning. Because classical economics could not explain the Durkheim: the rise and nature of capitalism. It also sought to
widespread rise of intervention in response to markets, more explain the collapse of the laissez faire market economy in the
advanced theories of the market arose to justify planning 1930s, and to attribute to this collapse the origins of the
under conditions of market failure. depression and world war that followed. What was most
remarkable about the book was that to an extent it succeeded.
I argue that Polanyi's unusual concept of "fictional com-
It was primarily in this work, too, that Polanyi dispersed the
modities" provides a strong alternative justification for plan-
seeds of a theory of planning within market economies.
ning in a market society. According to this idea, self-regulat-
ing markets have to treat labor and land as if they consisted of After the war, he became a visiting professor of economics
discrete, tradable units. Because labor is integrated into at Columbia University, although he maintained his home in
broader human life and community, and land is integrated Ontario, Canada, because his wife could not obtain a U.S. resi-
into its environment through multiple interdependencies, thisdency visa. After retiring from Columbia in 1953, he worked
commodification has the effect of transforming labor and land, for years on a Columbia University project on the institutional
causing human suffering and environmental degradation. origins of market economies. The work appeared in 1957 in
Commodification has such effects in part because it detaches Trade and Ma rket in the Early Empires, a volume edited jointly
life and environment from a greater whole, habitation, which with Conrad Arensberg and Harry Pearson. In this volume,
integrates both. Polanyi and the other contributors disputed the received

Karl Polanyis Theomy of Planning in Capitalism 101

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 he defined as the set of arrangements by which the society
unaware of the institutional origins of provided goods and services to its members (Polanyi,
Arensberg, and Pearson, 1957, chap. 8). In contrast to con-
ventional economics, Polanyi argued that societies have strik-
economizing behavior, the classical traditions of ingly different institutional arrangements for running their
economies. In all cultures preceding capitalism, these
economics identified the economy, a universal arrangements were embedded in the broader culture.
Economic activity (understood as activity to produce or dis-
concept, with its marketform, wbicb is historically tribute goods and services, not necessarily as individual
acquisitive activity) acquired its meaning in the context of
exceptional. Polanyi referred to this confusion mutual obligation, power exerted by chiefs, codes of honor,
ceremony, magic rites, custom, and law. Markets had long
been one of these institutionalized economic arrangements in
of the economy with its marketform as the some cultures, but for most of history, these market operations
were restricted to the exchange of local produce or to the
economisticfallacy. trade of products brought from long distances. These markets
rarely aroused competition among producers, were subsidiary
to customs and laws, and dealt in the sale of ordinary tradable
notion that acquisitive individualism-the supposedly natural commodities (Polanyi, 1957, p. 4).
propensity to truck and barter-was universal or natural.
They presented extensive historical and ethnographic evi- Throughout much of history, then, markets were one insti-
tutionalized process (among other institutionalized processes)
dence that, in fact, economies varied among cultures and were
embedded in culture. They showed that markets were atypi-culturally embedded in society for meeting economic wants-
wants for goods and services. The market differed from other
cal in economic history and that economies in which markets
kinds of economic institutions, however, because producers,
dominate society were historically unprecedented. This vol-
ume became one of the founding statements of the substan- sellers, and buyers tried to economize. Since the market emit-
ted
tivist school of economic anthropology (in opposition to the prices, these market participants could use a calculus to
compare the costs and benefits of transactions. Following
formalist school, which contended that market principles were
universal) (Dalton, 1968). Adam Smith's founding of economics, however, this new dis-
cipline would embark on a fallacious confusion of two con-
Settling in Canada, Polanyi launched his final project, the
cepts: economy and economizing.
journal Co-Existence, the first issue of which was published in
the year of his death, 1964. In the decade that followed, heEach society had to have an economy to survive. Only
continued to be well known in economic anthropology and members of societies having markets could economize-could
The Great Transformation was occasionally read by socialattribute
sci- a cost-benefit logic to their own motives and indeed
entists, but otherwise he remained an obscure figure. carry out a calculus of cost and benefits in the production of
goods and services. They could do so only because their
Since the 1980s, however, there has been a resurgence of actions gained meaning in the context of the market institu-
interest in his writings. His work now increasingly influences
tion. Within this institution, when it was operating correctly,
leading social theorists, inspires books of essays (Mendell human
and action could take on the formal characteristics of econ-
Salee, 1991; Polanyi-Levitt, 1990), and serves as the theme of
omizing that economists conventionally attribute to human
international conferences.' As befits an original thinker, he is
behavior. Unaware of the institutional origins of economizing
now variously described as a substantivist anthropologist, behavior, the classical traditions of economics identified the
comparative economist, Christian socialist, utopian socialist,
economy, a universal concept, with its market form, which is
post-Marxist, postmodern economist, institutionalist, holistic
historically exceptional. Polanyi referred to this confusion of
social scientist, theoretician of mixed economies, and visionary
the economy with its market form as the economistic fallacy
of a third way between Marxist and classical economics.2
(see Stanfield, 1986, pp. 41-47). (As we shall see, it is an
Whatever else he may be, he is also a theorist of planning.
extension of this fallacy to seek to apply the economizing cal-
culus to realms of contemporary society where the market
does not operate.)
The Self-Regulating Market and the Polanyi went on to argue that in capitalism, for the first
Protective Response time in history, markets were no longer just a means of institu-
tionalizing an economic process, but the dominant force in
Karl Polanyi's work rarely discussed planning explicitly, but
social life. Capitalism differed from previous examples of
rather constructed a view of capitalism within which planning
markets in society in that markets no longer just exchanged
had a crucial place. To understand, we have to turn to
goods made for sale, but also traded human labor and land, as
Polanyi's view of markets.
if these, too, were commodities. To become tradable as com-
Polanyi aimed his work at the idea long perpetrated by modities, human activity and nature had to be stripped of the
conventional economics that human beings have a naturalprotection of tradition, custom, law, and mutual obligation, to
inclination for personal gain and that this inclination, when set
be lefit to the mercies of the free market. Able to allocate land
free, was manifested in competitive markets. Polanyi agreed, and labor, and freed of social restraint, the market became-in
of course, that every society had to have an economy-which a Polanyian phrase-self-regulating. The market became an

102 Public Adminiration Review * March/April 1993, Vol. 53, No. 2

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autonomous mechanism in society. To Polanyi, the outstand- Polanyi stressed, however, that these were the effects of
ing feature of modem capitalism was that this autonomous pure and unrestrained markets, the very kind that laissez faire
force, the self-regulating market, was the dominant power advocates supported. In practice, market economies did not
directing human life. turn out to be so destructive. The reason constituted one of
the basic tenets of Polanyi's thought: in the face of the market
According to Polanyi, this system had its origins in 19th
whirlwind, societies, even those in the grip of laissez faire ide-
century England. Land laws were reformed to allow for the
ology, inevitably sought to protect themselves. The rise of the
freer use and exchange of agricultural land, leading to the dis-
self-regulating market was historically accompanied, therefore,
possession of country residents once protected through cus-
by attempts to restrict it through protective legislation, the rise
tom. Poor laws that initially protected the dispossessed were
of social movements like trade unions, and various kinds of
abolished so the poor would have to fend for themselves as a
planning and public policy. The rise of the market engen-
pauperized industrial working class. A gold standard was
dered social self-protection to conserve human values, nature,
established so that the money supply could operate without
and the productive organization of capitalism itself (p. 132).
intervention. Land and labor (along with capital, a subject
that Polanyi covered but I do not discuss here)-the factors of He illustrates again with 19th century England. As soon as
production-were now allocated autonomously by the market. the self-regulating market was established, English society
For the first time in history, society was under the thrall of a sought to protect itself. Parliament mandated the periodic
self-regulating market. cleaning of bakehouses, required the testing of cables and
anchors, acted to permit town authorities to take over
This new economy was brought into being under the influ-
"neglected ornamental spaces," and began to intervene in fac-
ence of early 19th century activists for utilitarian social reform.
tory conditions, education, transportation, and numerous other
Jeremy Bentham, William Townsend, and other better and
matters (pp. 153-154). Polanyi might have added (but did
lesser known advocates of laissez faire were social activists
not) incidents from the early history of town planning: hous-
with a crusading passion. Despite the alleged naturalness of
ing codes and building regulations, early attempts at moral
markets, these activists and their allies in the English
reform of the industrial classes, grandiose schemes to relocate
Parliament fashioned a complex of laws and administrative
or re-adorn the industrial city, and the building of integrated
instruments to make this unprecedented system work. "The
water and sewer systems.
road to the free market," Polanyi wrote (1957, p. 140), "was
opened and kept open by an enormous increase in continu- Remarkably, this widespread protective movement
ous, centrally organized and controlled interventionism." New occurred in the absence of interventionist philosophies or
laws and administrative organs were needed both to establish even the deliberately organized intention to extend the work-
the system and keep watch over it. Paradoxically, a laissez ings of the state (p. 141). The utilitarian philosophy of 19th
faire economy that was supposedly inherent to human charac- century economic liberals completely failed to anticipate this
ter "was the product of deliberate state action" (1957, p. 141). social self-protection. It is in this context that we should
understand Polanyi's terse statement, given in the epigraph,
To Polanyi, this autonomously regulated economic system
"Laissezfaire was planned; planning was not" (p. 141).
was inherently destructive. Left unchecked, Polanyi held, the
self-regulating market would become a "satanic mill," destroy- According to Polanyi, planning arose in the absence of a
ing communities, their natural and built surroundings, and clearly articulated rationale. It arose as a purely pragmatic
even the economy itself. To illustrate this effect, Polanyi response to the destructive consequences of autonomous mar-
repeatedly recited in The Great Transformation the debilitating kets (p. 141). Supporters of unfettered markets blamed such
effects of laissez faire upon human life. Without the protec- intervention on shortsightedness in response to problems that
tion that culture, law, and mutual obligation can provide, the market itself would have solved better. Indeed, the very
human beings would perish "as the victims of acute social dis- fact of intervention, from then on, enabled the defenders of
location through vice, perversion, crime, and starvation." Andthe free market "to argue that the incomplete application of its
as morality would be destroyed so would the human environ-principles was the reason for every and any difficulty laid to
ment: its charge" (p. 143). Neither the pragmatic supporters of
Nature would be reduced to its elements, neigh- intervention, nor their ideological opponents, could provide a
borhoods and landscapes defiled, rivers polluted, theoretical rationale for the widespread and unanticipated rise
of policies to restrain markets.
military safety jeopardized, the power to produce
food and raw materials destroyed (p. 73).

If society could not protect itself, the laissez faire economy

would bring about
the exploitation of the physical strength of the
worker, the destruction of family life, the devasta-
tion of neighborhoods, the denudation of forests,
the pollution of rivers, the deterioration of craft
standards, the disruption of folkways, and the
general degradation of existence including hous-
ing and arts, as well as the innumerable forms of
private and public life that do not affect profits (p.
133).
Market Externalities as the
Justification for Intervention
After a hundred years of theoretical elaboration, neoclassi-
cal economics has developed theoretical formulas through
which it recognizes that markets can fail and that intervention
may be needed to correct the failure. In modem welfare eco-
nomics and the microeconomic theory of public policy, proba-
bly the most important category of market failure is the exter-
nality (Cowen, 1988, p. 1). Planners and public administrators
have increasingly turned to the economic theory of extemali-

Karl Polanyi's Theory of Planning in Capitalism 103

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ties to justify and set limits to their own public roles (Moore,
1978; Sorensen and Day, 1981). Mainstream economists now agree
This economics observes that, in their pursuit of production
and consumption, economic agents sometimes have harmful that, under specified conditions,
side effects on the well-being of others whom they do not
compensate for these effects. In the stock example, a factory externalities warrantpublic intervention.
emitting noxious smoke ordinarily does not recompense near-
by residents for the harm it inflicts on them. By affecting oth-
ers' well-being without the effect being reflected in market Once we have exhausted these steps, we may be justified in
transactions, the factory is generating a "negative externality."
advocating public intervention, but only if the proposed inter-
Airplane noise, water pollution, traffic congestion, fire hazards,
vention passes another hurdle: that the benefits of intervention
spread of contagious disease, soil erosion, and nuisances that will be greater than the costs.5
neighbors impose on each other can all be similarly under-
stood as bad externalities. While accepting many of these criticisms, mainstream
economists have defended externalities as a rationale for inter-
Alternatively, when a company conducts basic research, the vention; after all, to assert the possibility of market solutions
knowledge that results from the research can increase the to externalities does not prove that markets do in fact solve
well-being of those who did not pay the research costs. This such problems and, for major categories of pollution prob-
effect is a positive externality or "public good."3 lems, no market solutions can even be proposed. Both the
Because the economic agent that generates the positive mainstream defenders and libertarian attackers of the theory of
externality is not fully recompensed for improvements it market failure agree on the fundamental assumption. They
makes in others' well-being, the agent supplies less than agree that externalities are to be understood according to cri-
would be desirable for society, resulting in lesser aggregate teria of individual utility.
welfare than is technologically feasible. Because the agent It is for that reason that Milton Friedman (1962) can put
that emits smoke does not fully pay the social costs of pollu- even a further hurdle before the decision to intervene. It
tion, the agent is apt to pollute excessively, again reducing reflects his belief that the market is a realm in which one can
aggregate welfare. Notably, then, externalities are defined with exercise innate economic individualism. To him, the market
reference to the utilities of the individual economizers who permits voluntary exchanges among individuals expressing
produce or consume the externality. free individual choices. Intervention in markets is, by con-
Mainstream economists now agree that, under specified trast, inherently coercive. Hence, to Friedman, public inter-
conditions, externalities warrant public intervention, say to vention is only warranted if the benefits of this coercion (say,
control air pollution or provide incentives for corporate R&D. a mandate to reduce factory smoke) should exceed the disad-
However, since externality is defined in terms of the utilities of vantages of lost freedom (reduced freedom of action for the
individual economizers, economists oriented toward libertarianfactory).
politics have been able put forward a series of arguments According to these economic ideas of the latter 20th centu-
tending to restrict the scope of public intervention. ry, therefore, intervention is sometimes justified, but market
According to their arguments, effects that appear to be principles determine when that may be. Principles of self-
externalities often turn out, upon closer examination, not to interested economic individualism become the sine qua non
be that, because the means can be found to compensate vic- of all actions in society, even where operating markets are
tims for the harm inflicted on them and to either make freedemonstrably flawed.
riders pay for the public good or exclude them from its bene- Karl Polanyi did not explicitly respond to these recent
fits. Many kinds of side effects, especially those exerted byarguments on the limits of planning. He would have readily
neighbors upon each other, can be resolved through pay- seen, however, that they were based on the economistic falla-
ments among affected parties, so intervention is not called for.cy: the mistaken assumption that individuals innately behave
To the extent that economic agents are mobile, the parties as economizing actors and hold values that can be legitimately
aggrieved by negative externalities in a locality (or wishing toexpressed in utilitarian terms, even where market institutions
benefit from public goods in a locality) can respond through do a not operate. Polanyi sought to refute this very fallacy
market mechanism-that of migrations among localities. through his historical and ethnographic studies of markets.
Through the formation of associations, individuals can create So, we can return to Polanyi to find the elements of a more
optimally sized groupings or "clubs" for allocating certain pub-substantive justification of planning in market societies.
lic goods, thereby outweighing the benefits lost from exclud-
ing individuals who could have consumed the good at no
additional cost.4
The Fictional Commodities:
Combining these and other restrictions, critics of the con-
cept of externality make the more general case that, beforePolanyi's Justification of Planning
intervening in free markets, we should conduct empirical Polanyi's most far-reaching contribution to planning
research to determine whether suspected market externalitiesthought is the insight that the destructive effects of markets are
are truly that. If markets have indeed failed, we should inves-not external to market transactions. On the contrary, these
tigate whether there are possibilities for market reforms, likedebilitating consequences (and the protective reaction they
the creation of tradable contracts in air-polluting emissions. engender) are inherent to very operations of the self-regulat-

104 Public Administmtion Review * March/April 1993, Vol. 53, No. 2

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ing market. His argument rests on an element of his thought,
his treatment of "fictional commodities,"' that is infrequently T0 treat buman life as commodifed labor i5 to try
commented upon in the secondary literature on Polanyi, even
though it is central to The Great Transformation.
to reduce something irreducib/e, thereby indtting
In Polanyi's view, the unprecedented market society that
arose in 19th century England, and thereafter spread to much
social catastrophe.
of the world, displaced traditions and customs to become an
autonomous, self-regulating force. For the economy to
become self-regulating, labor and land had to be traded just by as
market forces from one place to another or one occupation
cloth and wine were. Like ordinary goods, labor and land had to another, employed in ways that are injurious, or even left
to clear the market. To do so, human activity and the natural unemployed, his life is changed.
environment had to be treated as if they were commodities.
The market in labor changes not only the individual but
To Polanyi, human labor and nature can never be true the family, traditions, and community in which he is an inte-
commodities in the sense that a manufactured object cangral be. part. The destructive implications of this commodification
Polanyi explains why they are uncommodifiable not in any are not negative externalities to the operation of markets, but
single passage but in dispersed parts of The Great are rather inherent to the very possibility of such markets.
Transformation. Indeed, he gives two explanations: the first
To illustrate this idea, Polanyi mainly referred to societies
explicit but inadequate; the second broader, stated less clearly,
undergoing wrenching dislocations because of the imposition
but more powerful.
of the free market. As the market economy penetrated their
Polanyi gives the first explanation simply by way of defini- lives, traditional peoples throughout the world saw the mean-
tion. He writes (1957, p. 72) that commodities are "empirical- ingful contexts of their previous economic activity melt away.
ly defined as objects produced for sale on the market." Labor As traditional sources of kinship support, clan solidarity, vil-
and land are, however, "obviously not commodities; the pos- lage community, and famine relief were undermined, native
tulate that anything that is bought and sold must have been people in Africa, the Pacific Islands, South Asian villages, and
produced for sale is emphatically untrue with regard to them" the Americas sank into cultural desolation, turning into
(p. 72, emphasis in original). This reasoning by definition marginal peasants and slum dwellers. To Polanyi, the proto-
seems weak because it does not yet tell us what is so destruc-typical case occurred not in the Third World but in 19th centu-
tive about treating such things as if they were commodities. ry England, when the free market turned the cottagers of the
English countryside into urban paupers and shiftless migrants
Polanyi's second explanation of the uncommodifiability of
(pp. 157-161). Labor markets could not absorb them into the
human life (labor) and nature (land) is more difficult and dif-
urban proletariat without transforming their lives. This trans-
fuse, but much more substantial. Let us consider this answer
formation was not an externality, but a condition for (and
with respect to labor and land, each in turn.
intrinsic product of) the operations of the market economy.
"Labor," Polanyi writes, "is only another name for human
Polanyi took his examples from cases in which the market
activity which goes with life itself, which in turn is not pro-
economy devastated traditional cultures. He did not extend
duced for sale but for entirely different reasons, nor can that
his discussion to labor markets in advanced industrial society.
activity be detached from the rest of life, be stored or mobi-
By the logic of the argument, since labor is inherently
lized" (p. 72). Labor, then, is not detachable from the rest of
changed in the process of being treated as a tradeable unit,
human life; it is part of life, which has to be understood and
the transformative effects of the commodification of labor con-
treated as an integral whole.
tinue even after a market society has become established.
To treat human life as commodified labor is to try to Dislocation, insecurity, unemployment, and working condi-
reduce something irreducible, thereby inviting social catastro-tions continue to be issues of passionate concern even in
phe: industrial cultures, where workers themselves have come to
To allow the market mechanism to be the sole share the values of the capitalist workplace.
director of the fate of human beings...would result Alongside his argument that unrestrained labor markets
in the demolition of society. For the alleged com- transform life, Polanyi offers a parallel discussion of how the
modity 'labor power' cannot be shoved about, self-regulating market debases the physical environment. Just
used indiscriminately, or even left unused, with- as labor is not produced but is rather detached from whole
out affecting also the human individual who hap- human lives, "land is only another name for nature, which is
pens to be the bearer of this peculiar commodity not produced by man" (p. 72). Again, then, he makes the
(p. 73). lesser point that land is not produced. He also makes the
When markets allocate labor they cause consequences for more profound argument that the treatment of land as a com-
life, consequences that are fundamentally different from those modity inevitably dislocates it from an integral natural whole.
of trading real commodities. For example, the market for "What we call land," he writes, "is an element of nature inex-
automobiles may well cause negative externalities, like air pol- tricably interwoven with man's institutions. To isolate it and
lution and traffic congestion, without transforming the car. But form a market out of it was perhaps the weirdest of all under-
in the market for labor, the very fact that someone adapts his takings of our ancestors" (p. 178).
life to the market mechanism implies a transformation of that If the self-regulating market was to operate, it had to treat
person's life. When he is torn away from tradition, reallocated land as a factor of production. "Yet," Polanyi wrote, "to sepa-

Karl Polanyi's Theory of Planning in Capitalism 105

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 for the effects of transactions on conditions of drainage, ero-
sion, or wildlife characterizing the region-unless environ-
The very logic of the self-regulating
mental statutes and planning mandate such an accounting.
City real estate markets inherently operate in the absence of a
market requires it to treat land and labor as
broader design for preserving the integrity of urban form,
unless some protective process occurs through government
discrete, tradable, context-free units. It extracts actions, community movements, or the exercise of the profes-
sional values of architects and designers. The deterioration of
themfrom their integral relationships, thereby the natural and urban environment is not a technical byprod-
uct-a negative externality-but inherent to the operation of
the land market.6
destroying this integrality.
For labor and land, therefore, Polanyi provides us with a
rate land from man and organized society in such a way as to powerful explanation of why they cannot become true com-
satisfy the requirements of a real-estate market was a vital part modities. Labor is integral to whole human lives and commu-
of the utopian concept of a market economy" (p. 178). This nity interrelationships; land is bound by interdependencies
attempted commodification treats land as a collection of trad- with the natural and built environment. For each, its meaning,
able parcels filled with discrete, tradable rights to its use. It character, and efficacy is bound up in interrelationships with a
tears land out of its broader institutional and natural context, larger living realm. To tear this human or natural object out of
giving it only a narrow economic function, even though it has its integral relationships is to transform the object (say, the
many vital functions: human being) or the relationships (the community, the land-
It invests man's life with stability; it is the site of scape) of which it is an integral part, or both.
his habitation; it is a condition of his physical The very logic of the self-regulating market requires it to
safety; it is the landscape and the seasons (p. treat land and labor as discrete, tradable, context-free units. It
178). extracts them from their integral relationships, thereby destroy-
Where Polanyi uses examples to illustrate this idea, they ing this integrality. The outcomes are Polanyian litanies of
seem off the point to a contemporary reader. His chapter in social and environmental calamity-unless society protects
itself. It is an outstanding feature of Polanyi's thought that this
The Great Transformation entitled "Market and Nature" stress-
conception of noncommodifiability emerges not from a pious
es the roles of agrarian classes and nationalist interests in pro-
humanistic wish, but from a plausible, historically grounded
tecting the bounty of agricultural land in the years preceding
examination of the market economy. His analysis tells us that
the world wars. In contradistinction to supporters of free
planning, policy, and design are often not only justified, but
trade in agricultural goods, he asserts that land has more than
urgently required to protect and reconstruct the integrity of
the function of producing goods for sale. It also has multiple
human life and its environment.
roles in assuring food supplies and defense materials for
nations under the threat of war. He points out only in passing
that the market allocation of land might also lead a country to
Habitation and the
suffer from the denudation of forests, from ero-
sions and dust bowls, all of which, ultimately, Problem of Organicism
depend upon the factor of land, yet none of
Polanyi is not content to let us conclude with separate dis-
which respond to the supply-and-demand mecha-
cussions of the commodification of human life and nature.
nism of the market (p. 184).
The very fact that we feel bound to make that distinction,
Polanyi does not say more about environmental crises. Polanyi might say, reflects the requisite of the market.
Nevertheless, the greater theoretical vision is acute. Just as "Traditionally, land and labor are not separated; labor forms
nations sometimes bring about calamity when they allow their part of life, land remains part of nature, life and nature form
agricultural production to be dictated by world markets, com- an articulate whole" (p. 178).
munities sometimes invite environmental catastrophe when
At times, Polanyi uses a word that expresses this integral
they treat land and resources as if they were isolated entities
relationship between human life and the environment: "habita-
tradable on markets.
tion," a word that eliminates the distinction between the social
Land, wildlife, and vegetation are, after all, bound up in and the environmental (p. 249). It is this word that may help
ecological and territorial interrelationships. Urban lands and us answer a question that Polanyi does not expressly address:
built structures are integral parts of the built environment. ToIf something is only fictionally a commodity then what is it in
treat the land as if it were a commodity inherently tears it fact? Polanyi's answer should be: realms of habitation.
away from these integral relationships, thereby transforming Though Polanyi does not clearly say so, one can extend his
nature and the city. ideas to suggest that planning in capitalism should aim to
rebuild and reconstitute human habitation.
The point, then, is not that the laissez-faire land economy
can generate specific consequences like stream pollution or Such ideas of the origin and role of planning have impor-
undesirable juxtapositions of urban land uses. The fundamen- tant precedents in planning thought. A far better known but
tal point, rather, is that land markets necessarily treat integral equally iconoclastic theoretician of planning, Lewis Mumford,
parts of the environment as if they were commodities. presented ideas remarkably similar to those of Polanyi.
Markets in rural land necessarily operate without accounting Mumford traced the origin of modern planning to degrading

106 Public Adminittion Review * March/April 1993, Vol. 53, No. 2

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conditions of the industrial city, framed his work with a broad
argument about human life integrated into organic wholes, Polanyi S... text allows us to buildfrom
saw uncontrolled forces transforming and destroying this cul-
tural whole, and considered these trends to be the rationale
his ideas a conception ofplanning that would seek
for planning (Mumford, 1961; for a review of other works, see
Hill, 1985). Through Mumford's work, ideas resembling
Polanyi's are already absorbed in a planning tradition-even if out the integralfeatures... in landscapes,
it is a neglected tradition. But the similarity also raises a trou-
bling problem that may extend to Polanyi's work. ecosystems, urban form, community, technology,
The problem is that Mumford was an organicist. He held
that the world is an organic whole and that economic individ- work, and industry.
ualism, reflecting a mechanical organization of society, tends
tion with integral characteristics. To Polanyi, the self-regulat-
to destroy this whole, undermining a human and environmen-
ing market could even destroy itself (cause economic depres-
tal harmony (Marx, 1990). To Mumford, planning is justified
sion) when money is treated as if it were another commodity.
to reassert human control over the mechanical rampage
Therefore, while Polanyi recognizes habitation as a whole, his
destroying organic culture.
work also allows us to coherently discuss segments of this
In response to such ideas, critics could rightly observe dangers,
whole, each with integral characteristics of its own. More
such as the worship of national and native folkways, the diminu-clearly in Polanyi than in Mumford, human habitation consists
tion of enlightenment values of personal dignity and responsibili-
of multiple domains, each with integral features.
ty, the elitism of those who see themselves as initiates into the
Although Polanyi does not explicitly send us in this direc-
social whole, and concomitant threats to personal freedoms. The
tion, his text in effect allows us to build from his ideas a con-
critics may be justified in saying that such argument substitutes an
ception of planning that would seek out the integral fea-
organic fallacy, which would hold that an organic whole takes
tures-the meaningful, technical, ecological, and
precedence over individual actions, for the economistic fallacy,
morphological interrelationships-in landscapes, ecosystems,
which believes in innate economic individualism. Carried to an
urban form, community, technology, work, and industry.
extreme, organic thinking sets up a diametrical opposite in which
Polanyi's work allows us to segment habitation into separate
all planning is legitimate, and there are no critical intellectual tools
domains, and to investigate their integral features, even if we
for selecting and justifying specific planning efforts.
do not fully consider how these realms fit into the whole of
Mumford was only one among the early 20th century social habitation. In planning for a coastal ecosystem, urban down-
thinkers who put forward organicist arguments for planning intown, or community economy, we might be inspired by con-
response to the implicit atomism in the laissez faire economy. cepts of habitation but need not necessarily plead to such an
Another among them was Rexford Tugwell, whose crude organi- encompassing theme to justify planning. Rather, we could jus-
cism, which he expressed with terms like "collective mind," was tify planning in response to the interdependencies inherent to
a staple of early planning theory (Friedmann, 1987, pp. 106-112).the particular environmental, urban, or industrial realm in
More subtle and elegant than Tugwell, Mumford portrayed question.
organicism and mechanism as grand antagonists in a historical
Also unlike organicists, Polanyi speaks of market forces
drama. Many still read Mumford for the sweep of his prose,
and the cultures they transform with historical and ethno-
without being unduly disturbed by the underlying theory. Yet,
graphic rigor. He does not treat habitation and self-regulating
his organicist convictions, like Tugwell's, may have helped dis-
markets only as opposed warring forces. Rather, he tells us
credit much early comprehensive planning thought and con-
how self-regulating markets transform life and nature. Doing
tributed to the neglect of Mumford's work.
so, Polanyi's work provides an original critical perspective on
Polanyi's idea of habitation presents features in common market society.
with Mumford's organic concepts. Concepts of habitation to
Arguably, therefore, Polanyi succeeded where comprehen-
Polanyi and the organic whole to Mumford express the reinte-
sive planning traditions did not. Indeed, comprehensive plan-
gration of culture, built artifacts, and natural surroundings.
ning theory is so thoroughly neglected in contemporary plan-
Polanyi, too, sometimes uses the word "organic" to refer to
ning thought as to appear to be intellectually defunct.
human culture or to the whole composed of society and the
Through Polanyi, we could revisit comprehensive traditions in
environment (as on p. 178), but his use of the word can usual-
planning and reinterpret them without organicism, thereby set-
ly be understood as being figurative.
ting planning and its justifications on firmer theoretical foun-
By justifying planning in part through a conception of the dations. It is through Polanyi, then, that we can set the stage
social and environmental whole-of habitation-is Polanyi for a carefully articulated answer to those wishing to reestab-
throwing us back to the days of comprehensive organicism inlish the unhampered force of markets in society.
planning thought? There is no unequivocal answer, since
Polanyi's writing on this matter is too meager. One can at
most say that Polanyi can be interpreted without organicism.
Conclusion: Justifying
Unlike vulgar organicists, Polanyi spends much of The
Great Transformation on separate discussions of the integral
and Practicing Planning
characteristics of human life (labor) and nature (land). He In response to neoclassical economics, Karl Polanyi's work
gives us additional passages on the market itself as an institu- tells us that we cannot properly found planning practice on

Karl Polanyi's Theory of Planning in Capitalism 107

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principles of externalities and cost and benefit. These princi- who concludes The Great Transformation with a substantial
ples subscribe to the economistic fallacy that human beings argument on freedom in a complex society, where markets
universally behave according to an innate calculus of gain and will exist but not dominate human life. We should note a cru-
loss-the conception of human behavior that Amitai Etzioni cial implication of his thought.
has criticized at length in his recent work (1988).7 Such econ-
Defenders of unhampered markets portray the market as a
omizing behavior is in fact exceptional in history; it can occurrealm of free individual choice, a position that logically fol-
only in the context of institutionalized market processes. lows from views of innately acquisitive individualism. In
Where it has become the dominant force in society, the Polanyi's economics, the operation of the self-regulating mar-
self-regulating market transforms natural and human realms toket itself is inherently coercive, because of the transformative
make them tradable on the market. Our very capacity for act-power that commodification has over culture and human life.
ing as economizers of labor and land depends on this com- Markets are, therefore, not a privileged realm of free choice.
modification. But the effort to treat human life and nature asLike other institutions, markets are conducive both to freedom
commodities transforms them, disintegrating cultures, cities, and to constraint and coercion. Human beings can no more
and landscapes. Planning is justified where it can reconstitute be free of institutionalized constraints than they can be free of
human habitation. physical surroundings. The market, therefore, does not offer a
morally prior perspective from which to assess the justice of
Practitioners of planning and policy analysis should be public policies. Planning raises moral questions not because it
drawn to this argument for several reasons. First, the argu- introduces constraint where there was none, but because it
ment is empirically well substantiated in historical and ethno-shifts the balances of constraint in society.
graphic research. By contrast to conventional microeco-
nomics, Polanyi's economics is built on a plausible view of Sixth, when drawing on Polanyi, planners and policy ana-
human conduct. Having far less following than conventional lysts need not restrict their arguments to those terms that
economics does, Polanyi's ideas have to be refined and their microeconomics sets for them. Policy analysts can draw,
implications have to be researched. rather, on a repertoire of justifications by observing that
uncontrolled markets degrade human habitation. Polanyi's
Second, Polanyi's logic corresponds to many policy ana- work can serve as a theoretical bulwark against technical
lysts' and planners' own conceptions of their work. They macroeconomic contrivances. They are, after all, based on the
have long believed that planning ought to alleviate and assumption that the domains of habitation can be treated as
restrain the destructive effects of unchecked markets anddiscretepro- units and that these units can be exchanged through
vide designs to reconstruct the interrelationships inherent to economizing behavior.
innate
regional economies and the natural and built environment.
Without relying on a well-developed theoretical source, histo- In answering the economistic fallacy, however, Polanyi also
rians of planning have also situated the rise of urban planningverges upon the contrary fallacy that the human world is an
organic whole. Arguably, his work does not fall into this trap,
as a response to the calamitous effects of industrialized market
society (Benevolo, 1967; Hall, 1988). In response to the lais-because he can be understood to say that human habitation is
sez faire onslaught on planning, Polanyi's work offers substan-composed of multiple domains, some with integral features
tial theoretical recourse. warranting a planning response (such as natural environment,
urban built form, and the security of family and community
Third, his work allows us to overcome a long-standing life), but others composed of discrete items meriting allocation
dilemma, one that has motivated endless and often fruitless by markets (the production of ordinary goods and services).
discussions between urban planners and architects and Planners need to learn how to protect and rebuild the integral
between environmental policy analysts and those who enter features of human habitation that unchecked markets would
the field from backgrounds in biology and natural resources.tear apart, but also to know how to recognize where markets
This is the problem of the relationships of physical planninghave an appropriate role.
to subjects more closely associated with public policy analysis.
Polanyi's concept of habitation suggests that the object of It is in keeping with Polanyi's ideas that planning should
planning can be simultaneously social and physical and can indeed be justified-but so should markets.
be both an activity and a place. It is an idea that sets out theHaving taken inspiration from Polanyi, we have, however,
hope of a reintegration of planning thought. only started a difficult journey. He does not extend the ideas
Fourth, Polanyi helps us build a theory of planning that in The Great Transformation to tell us how to understand the
does not reject markets. He writes (1957, p. 252) that even continuing effects of commodification in modern industrial
when markets cease to be instruments of self-regulation, societies. He treats planning as a broadly encompassing term
paired against markets, so he tells us little about planning as a
"These continue, in various fashions, to ensure the freedom of
discipline and professional practice. The ideas that Polanyi
the consumer, to indicate the shifting of demand, to influence
producers' income, and to serve as an instrument of accoun- left us require worlds of theoretical and practical elaboration.
tancy...." Planners drawing on Polanyi would welcome mar-
kets that fulfill appropriate roles in society. They could
engage in fruitful dialogue with defenders of the market, on Ernest Sternberg, assistant professor of planning and
the understanding that the relations between markets and design at the State University of New York at Buffalo, worked
planning shift and change. for eight years in regional economic development planning
before entering academic life. He is the author of Photonic
Fifth, Polanyi provides potentially powerful answers to Technology and Industrial Policy: U.S. Responses to
those who suggest that planning infringes on human freedom.Technological Change (State University of New York Press,
The question of human liberties indeed preoccupies Polanyi, 1992).

108 Public Administration Review * March/April 1993, Vol. 53, No. 2

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 Notes

My thanks go to John Forester, Eve C. Holberg, and Edward W. Wilson for 6. Forms of environmental protection, urban design, or labor protection
wonderfully detailed comments and to John Friedmann, Theodore J. Lowi, can also arise when resources, like large parcels of land and large work
and Magda Cordell McHale for their good counsel. forces, are controlled by oligopolistic corporations. A discussion of the
implications of oligopoly would take us beyond the scope of this arti-
1. A series of conferences has been organized by the Karl Polanyi Institute of cle. It is one of the strengths of Polanyi's thought that it takes microe-
Political Economy in Concordia University. conomics on its word that perfectly competitive markets are plausible.
2. Some of these characterizations appear in the articles included in Mendell It is in those pure markets that Polanyi finds inherently destructive char-
and Salee (1991) and Polanyi-Levitt (1990). acteristics.
3. These are, of course, only bare-bones definitions. One can dip into the 7. Etzioni's important book (1988) draws on a wealth of evidence to argue
mainstream economic literature on externalities through introductory treat- that morality should be given full recognition in economic thought; it can-
ments like Mishan (1982) and Samuelson and Nordhaus (1989). not reasonably be collapsed into self-interest to fit the one-dimensional
4. For readings representing each of these critiques of the concept of exter- assumptions of microeconomics. Though he refers to Polanyi's work,
nality, with references to the rest of this literature, see the collection edit- Etzioni tends to treat self-interest and morality as universally valid princi-
ed by Cowen (1988). ples of motivation. He especially seems to take this position in calling for
5. Such points are made by several authors in Cowen (1988). Moore (1978) a discipline of socio-economics that will develop an empirically verifiable
explicitly extends such lessons to planners. There is also an additional cri- framework of propositions about economic behavior-propositions that
necessarily have to be ahistorical. Polanyi's work, by contrast, seeks to
terion for intervention, the principle that there should be no "government
failure" that would impede the ability to correct the market failure. I do
explain the historical and institutional conditions that make self-interested
not discuss this argument because Polanyi has no implicit response to it. economizing possible.

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Karl Polany's Theory of Planning in Capitalism 109

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