Brian Easton reviews the ideas in four eighty-year-old books which are still vitally relevant today, exploring the role of the changing political economy

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Between 1942 and 1945, four refugees from Vienna each published a ground-breaking – seminal – book.* They left their country after Austria was taken over by fascists in 1934 and by Nazi Germany in 1938. Previously they had lived in ‘Red Vienna’; ruled by Social Democratic Workers' Party between 1918 and 1934, which had a brilliant record housing the population (but could be intrusive at the personal level). It never won over the countryside; hence the 1934 reversal.

Red Vienna was a world-leading centre of intellectual activity in architecture, economics, music, philosophy, psychology, science and sociology.** Contemporary thinking is still shaped by them. Other outstanding contributions came from Sigmund Freud, Erich Korngold, Marie Jahoda, Paul Lazarsfeld, Arnold Schoenberg, Erwin Schrödinger, and Ludwig Wittgenstein (and many other economists). Alas, it all fell apart with the fascist takeover, which was not only strongly anti-semitic but intolerant of dissent. Those who did not die (including in concentration camps), fled.

Hence the four refugees and the books they published, each of which was influenced by the writer’s personal experience.

Karl Popper’s The Open Society and Its Enemies was actually written in New Zealand. At the core of his thesis is that a totalitarian society led by people who have preconceived theories is unable to adapt to change. Implicitly, he is celebrating Red Vienna, which was an open society, and criticising what came after. His totalitarian societies are on the left as well as the right. The book juxtaposes Plato (i.e. Hitler) with Hegel (Stalin). If he were alive today, Popper might cite many current instances.

Friedrich Hayek’s The Road to Serfdom is not unrelated – he suffered from the rise of Austrian fascism too, although he was not a Jew – arguing that the abandonment of individualism and classical liberalism inevitably leads to a loss of freedom, the creation of an oppressive society, the tyranny of a dictator, and the serfdom of the individual. He especially condemned central planning which was popular not only in Stalin’s Russian but throughout the West. I doubt that anybody today supports the kind of central planning he was railing against but the theme of the dangers of empowering the state over the individual remains relevant.

Margaret Thatcher famously wrote: ‘the most powerful critique of socialist planning and the socialist state which I read at this time and to which I have returned so often since [is] The Road to Serfdom’. More moderate thinkers also found it valuable. Keynes wrote that ‘Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement’. although he did not think Hayek's philosophy was of much practical use.

Joseph Schumpeter’s Capitalism, Socialism, and Democracy also bears the marks of his Viennese experience. It saw success of capitalism leading to a form of corporatism and a fostering of values hostile to it. The intellectual and social climate needed to allow entrepreneurship to thrive would not exist in advanced capitalism. There would not be a revolution. Capitalism's collapse would come about as majorities voted for the creation of a welfare state and placed restrictions upon entrepreneurship, eventually destroying the capitalist structure.

That is not quite what happened. (Those who predict the future almost always get it wrong.) A quarter of a century after his death in 1950, there began a reaction against the welfare state, probably as a consequence of technological innovations from computing and the global net. But if the technological innovations slow down, Schumpeter’s thesis may become relevant again.

Central to Schumpeter’s analysis is that the political economy of society evolves. Denying that evolution, closed societies attempt to control it, slow it down and direct it into a dead end. Independently from Popper, Schumpeter is implicitly celebrating the open society, fearful that changing politics will close society down. (Which Western governments are currently attacking the viability of their universities?)

The role of the changing political economy is developed over a much longer period in Karl Polanyi’s The Great Transformation. It is the least known of the four books; perhaps it is the most insightful.

Polanyi’s thesis was invaluable to me when writing In Open Seas: The Economic History of New Zealand. Most of our ancestors who arrived in the nineteenth century had left societies which were already transforming market economies. However, as my book illustrates, Māori experienced the full transformation from pre-market to market society in situ. It was not only fascinating to describe it, but it alerted me to traces of pre-market and partial market behaviour in the immigrant population too. (For instance, small farmers were near subsistence until the arrival of refrigeration.)

Polanyi points out that pre-market societies were based on ‘reciprocity’, ‘redistribution’ and ‘householding’ (I would say villages/kainga) across personal and communal relationships. Economists might describe them as ‘multilateral’.

Industrialisation and the increasing extension of the state undermined these social tendencies, replacing them with formal institutions that aimed to promote a self-regulating market economy, fundamentally altering humankind's economic relations. In particular the shift from the gift exchange economy to the commercial market one – the great transformation – reduced the importance of interpersonal relationships and anonymous exchanges became much more important. While the shift facilitated the specialisation which is a key element of raising productivity they also impacted on the wider human condition.

The focus on the exchange of goods and services through market-based price mechanisms creates bilateralism and contractualism does not always work – not everywhere. I am hesitant to say too much but I observe that the social work profession (in say, Oranga Tamariki) is torn between treating the child in the multilateral context of an extended whanau and in a one-to-one bilateral context. The tensions exist elsewhere. It is not uncommon to see a multilateral issue being resolved (or attempted to be resolved) with a bilateral solution. (The most common public evidence is in Māori protests, which are often about preserving communal entitlements.)

Polanyi goes on to argue that modern society (he calls it ‘Market Society’) is not the discrete combination of the modern market economy and the modern nation-state but a single human invention. Social protectionism is the natural response to the ‘free’ market attempts to separate itself from the fabric of society; it is a ‘double movement’. Like Schumpeter, he sees capitalism and the welfare state as integral in social evolution.

Soberingly, Polanyi argues that markets cannot be understood solely through economic theory. Rather, they are embedded in social and political logic, which makes it necessary for economic analysts to take politics into account when trying to understand the economy. (They don’t always.)

As in the case of Schumpeter, today’s world looks very different from the one Polanyi was writing about two decades before he died in 1964. But all four books contain a truth which gives an insight into today’s world and the one we are evolving into. The challenge is to use them for the foundation for its analysis. That requires an open mind.

* A fifth seminal book written about the same time by Viennese refugee Oskar Morgenstern (with John von Neumann) was Theory of Games and Economic Behavior but it is in a different area of economics.

** See Richard Cockett’s Vienna: How the City of Ideas Created the Modern World.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.