Money Theory as a Foundational Component in Polanyi’s The Great Transformation

Abstract

In Karl Polanyi’s The Great Transformation (TGT) there are two central narratives: first, he discusses how nineteenth-century society attempted to consciously construct a self- regulating market economy, and, second, how this contradictory epoch created the need for intellectual content that could justify the emerging order via “scientific” legitimacy. Polanyi criticized both, yet what receives little attention is the extent to which his monetary analysis is rooted in what is now known as modern money theory (MMT). The purpose of this article is to elucidate these connections, particularly in their shared rejection of metallism and embrace of economic anthropology to create an alternative framework depicting how “taxes-drive-money,” the mechanism that regulates the value of money and the process by which it is created, and the overlap between their political economies. Thus, we conclude that there is a significant and underappreciated connection between Polanyi and MMT’s respective monetary theories.

Keywords:

• Modern Money Theory
• Polanyi
• political economy

JEL Classification Codes:

• B52
• E12
• P16

Notes

1 The authors are not asserting that Polanyi was inspired by MMT.

2 Metallism asserts that the origin of money is found in barter economies and was invented to overcome the indivisibility problem and facilitate exchange through the reduction of transaction costs associated with the determination of relative prices after market players experienced a double coincidence of wants. The next logical question was then what would individuals be able to form a consensus on for the form that this medium should take, which metallism argues was the intrinsic value brought by gold or other precious metals embodied within a coin. To be sure it is ultimately this intrinsic value that led them to become the generally accepted medium of exchange (Menger 1892, 242). However, as the story goes, mischievous governments eventually discovered coin debasement and began readily practicing it, which was followed by the introduction of paper money convertible into debased coins. Once this occurred, governments abandoned coinage altogether for fiat money, whose value is said to be derived only from trust, common consent, and seigniorage rather than any precious metallic content.

3 As we shall see, Polanyi divides actual, or token, money into bank and fiat money.

4 This is not to argue that the point of taxes is to fund government expenditure.

5 ELR creates price stability because as the value relationship between a monetary unit and a standardized labor unit becomes explicitly defined, the ELR wage becomes the de facto “basic wage” and thus dampens cyclical price trends.

6 Polanyi seems to believe that policymakers would follow this approach as he was writing TGT. Circumstantial evidence to this effect is found in Wray (2018), who points out that the main principles of functional finance were widely accepted in the immediate post-War era.

Additional information

Notes on contributors

Devin T. Rafferty

Devin T. Rafferty is Associate Professor and Founding Director of MS Finance in the Department of Economics and Finance at Saint Peter’s University. Valeria A. Moreno is an economics and finance double major in the Department of Economics and Finance at Saint Peter’s University.

Valeria A. Moreno

Devin T. Rafferty is Associate Professor and Founding Director of MS Finance in the Department of Economics and Finance at Saint Peter’s University. Valeria A. Moreno is an economics and finance double major in the Department of Economics and Finance at Saint Peter’s University.