Why 'Free Markets' Needed Fascism & Communism | Karl Polanyi's Warning

Was the rise of totalitarianism in the 20th century merely an unfortunate political deviation, or was it connected, in a deep and disturbing way, to the prevailing economic ideology of the time? In his seminal 1944 work, The Great Transformation, Karl Polanyi presented a radical argument: the utopian attempt to create a society based on self-regulating 'free markets' was not only unnatural but inherently destructive, ultimately paving the way for the very authoritarian regimes—Fascism and Communism—that seemed its antithesis.

The Myth of the Self-Regulating Market

Polanyi challenged the core assumption of classical economics: that the market economy is a natural, almost inevitable, stage of human development. He argued the opposite. For most of human history, economies were embedded within social relations. Markets existed, but they were subordinate to social needs, religious customs, and political structures. The 19th century saw a radical departure: a conscious effort to disembed the economy from society, creating a system where society itself became an adjunct to the market mechanism. This required deliberate, often forceful, state intervention—paradoxically, state power was needed to create the 'free' market.

Fictitious Commodities: The Fatal Flaw

Central to Polanyi's critique is the concept of "fictitious commodities." The architects of the market system needed to treat three fundamental elements of human existence—Labor, Land, and Money—as if they were goods produced for sale on the market, like any other commodity. Polanyi argued this was a dangerous fiction:

Labor is simply human activity; treating it as a commodity subject solely to supply and demand ignores the human beings whose lives depend on it, leading to social dislocation, poverty, and exploitation.

Land is nature; subjecting it to market logic threatens the environment, community stability, and traditional ways of life.

Money (specifically, the value of currency) is a social and political creation; treating it purely as a market commodity creates inherent instability, risking deflationary spirals or inflationary chaos that can cripple economies and societies.

Allowing the market mechanism alone to dictate the fate of people's work, their natural surroundings, and the very medium of exchange was, for Polanyi, an invitation to societal self-destruction.

The Double Movement: Society Fights Back

Because the commodification of labor, land, and money is inherently damaging to the fabric of society and nature, Polanyi observed a predictable reaction: a "double movement." As the market expanded its reach (the first movement), society spontaneously generated counter-movements demanding protection (the second movement). These took various forms: factory laws, social insurance, trade unions, agricultural tariffs, central banking—all attempts to shield people and nature from the ravages of the unregulated market.

This wasn't necessarily a conscious socialist project; it was often a pragmatic, cross-ideological response driven by the need for social stability. People demanded protection from unemployment, environmental ruin, and financial instability.

From Market Utopia to Authoritarian Reality

The tension between these two movements defined the late 19th and early 20th centuries. The relentless push for market liberalization, especially after World War I with attempts to restore the gold standard (a key mechanism for commodifying money internationally), clashed violently with the societal need for protection. This created immense social and economic stress: mass unemployment, agricultural crises, financial panics, and a breakdown of social cohesion.

Polanyi argued that the resulting deadlock and societal paralysis created the conditions for extreme solutions. When democratic and market mechanisms failed to provide security and stability, societies became vulnerable to ideologies that promised order and collective protection, even at the cost of freedom.

Polanyi's insight suggests that the market utopia's failure to deliver on its promises of peace and prosperity led instead to a desperate search for alternatives. Society, threatened with disintegration by the disembedded market, sought re-embedding by any means necessary.

Fascism offered a perverse form of protection by subordinating the economy to nationalist, authoritarian politics, sacrificing democracy and individual liberty. Communism, in its state-controlled form, offered another totalizing solution, abolishing the market altogether but also suppressing freedom. Both, in Polanyi's view, were tragic responses born from the catastrophic failure of the self-regulating market project to create a viable social order.

Embedded vs. Disembedded: A Historical Perspective

Understanding Polanyi requires grasping the shift from historically dominant embedded economies—where economic activity served broader social goals—to the 19th-century attempt to create a disembedded market society, where social structures were forced to conform to economic dictates. This project, Polanyi maintained, was unsustainable because human beings and nature cannot be treated as mere commodities without disastrous consequences.

Polanyi's Enduring Warning

The Great Transformation is not just a historical account; it's a profound warning for our times. The tensions Polanyi described are strikingly relevant today. Globalization has often mirrored the earlier push for market liberalization, leading to similar pressures on labor, the environment, and financial stability. Financial crises, rising inequality, the resurgence of populism and nationalism can all be viewed through Polanyi's lens as manifestations of the ongoing "double movement"—society pushing back against the perceived threats of a disembedded global market. These ongoing struggles echo Polanyi's analysis, and exploring his ideas further can offer critical insights. For a deeper dive into these concepts, consider resources like the discussion found at

Polanyi compels us to question the fundamentalist belief in self-regulating markets. He reminds us that economies must serve societies, not the other way around. Ignoring the need to embed markets within social and ethical frameworks, to protect people and nature from their potentially destructive logic, risks repeating the crises that paved the way for the catastrophes of the 20th century. His work remains a vital call for a more humane, balanced, and sustainable relationship between the economy, society, and the planet.