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Populism’s great replacement of economics

This year should be a wake-up call for policymakers to heed the message that Polanyi articulated 80 years ago: No economy exists outside the society that created and sustains it.

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In 1944, as World War II neared its end, the exiled Hungarian economic sociologist Karl Polanyi published The Great Transformation, a treatise that focused on the dangers of trying to separate economic systems from the societies they inhabit. Eighty years on, Polanyi’s warnings about a market economy unleashed from human needs and relations may prove prescient. In fact, the future that he foretells bears a strong resemblance to Mary Shelley’s Frankenstein, in which the doctor’s creature runs amok and eventually turns on its creator.

That future may be upon us. In 2024, the biggest election year in history, people in dozens of countries, representing half of the world’s population, will go to the polls. The list includes the world’s two largest democracies (India and the United States) and three of its most populous countries (Indonesia, Pakistan, and Bangladesh). And the European Union, comprising nearly half a billion people from 27 countries, will hold parliamentary elections.

Many commentators and experts view this global synchronicity as a kind of plebiscite on the postwar global order. So far, the popular reviews do not look favourable. Some argue that the world is experiencing a “democratic recession,” citing evidence of declining levels of global freedom, authoritarian backsliding, and attacks on free and fair elections. Naturally, all of this raises the question of how we got from the blinding hope that accompanied the end of the Cold War – what Francis Fukuyama famously called the “end of history” – to today’s profound disillusionment.

While democracy has undoubtedly fallen prey to bad actors in countries ranging from Russia to Bangladesh and Pakistan, the current malaise runs deeper and is more fundamental than alarming setbacks to electoral integrity and freedom of expression. Leaders such as former US President Donald Trump, who will likely secure the Republican nomination for another presidential run, and Prime Minister Narendra Modi in India, who informally launched his re-election campaign in January by unveiling a controversial Hindu temple in Ayodhya, seem to be genuinely popular. Their populism and polarizing agendas appear to be expressing something real in the global psyche. But what?

After WWII, the world was promised perpetual peace and prosperity – the first to be delivered by political liberalism (in particular, democracy and the rule of law), and the second by neoclassical economics (a highly sophisticated quantitative iteration of economics that any society could adopt). But in an effort to replace the human touch with the invisible hand, these models were almost purely procedural, devoid of politics, values, and emotions. They were marketed as plug-and-play systems that needed no community or leadership, only infinite individual rationality, requiring minimal engagement with context or cognition.

The problem with this approach is that it ignored Polanyi’s key insight: the economy cannot be “disembedded,” as he put it, from society. After the Industrial Revolution, Polanyi argued, we embarked on a dangerous experiment, attempting to elevate the economy above society and reduce people to commodities within it. The result is a creature that poses an existential threat to its creators.

Seen from this perspective, the likely rejection of the postwar world order this year should not come as a surprise: elements of the narrative have become increasingly prominent in recent decades. The groundswell of discontent with globalization in the 1990s was interpreted as a geographically confined phenomenon – the growth pangs of regions that had been left behind. By the early 2000s, problems that were once thought to be confined to the developing world – declining growth, rampant inequality, failing institutions, a fractured political consensus, corruption, mass protests, and poverty – began to emerge in developed countries. Many warnings went unheeded: the 2008 global financial crisis, the eurozone’s sovereign-debt crisis starting in 2009, and the United Kingdom’s Brexit referendum in 2016.

Scholarly efforts to understand populism have had only limited success because they are trying to apply a rational lens to what is essentially an emotional response: atavistic fears and instincts triggered by a long-standing disregard for identity, trust, and community. Populist leaders around the world are gaining ground by abandoning the economistic arguments advanced by experts and invoking nativistic motifs – the mysticism and magic that, according to German sociologist Max Weber, capitalism had decisively quelled.

The tragedy is that the dominant populist narrative about the architects of the liberal postwar order, that they are mad scientists who have lost control of their creations, contains a kernel of truth. But our story could have had a different ending. As in Frankenstein, a little recognition of the finer feelings that the monster – in this case, the postwar economy – is capable of would have gone a long way toward changing its behavior. This year should be a wake-up call for policymakers to heed the message that Polanyi articulated 80 years ago: No economy exists outside the society that created and sustains it. — Project Syndicate

Antara Haldar, Associate Professor of Empirical Legal Studies at the University of Cambridge, is a visiting faculty member at Harvard University and the principal investigator on a European Research Council grant on law and cognition.