Chapter 3 - Karl Polanyi and the First Catastrophe
There is a persistent misunderstanding about Karl Polanyi that has quietly blunted his relevance. He is remembered as an economic historian. Sometimes as a critic of laissez-faire. Occasionally as a theorist of embedded markets. Rarely as what he actually was: a diagnostician of civilizational strain.
This misremembering is convenient. If Polanyi was “only” talking about economics, then his work can be filed away with other twentieth-century debates about tariffs, gold standards, and industrialization—interesting, perhaps even instructive, but safely bounded in time and topic.
That reading is wrong.
Polanyi was not describing a malfunction in markets. He was describing what happens to societies when markets are asked to perform functions they cannot perform without destroying the social order that sustains them. His subject was not prices. It was responsibility. And the catastrophe he described was not recession, but disembedding—the systematic removal of stabilizing social functions from their institutional contexts.
This was the first outsourcing error at scale.
Polanyi’s central work, The Great Transformation, is often summarized as a history of the rise and fall of nineteenth-century market liberalism. This summary is accurate and insufficient.
What Polanyi actually argued is more precise and more disturbing: that modern societies attempted something unprecedented and structurally unsound—organizing social life as if markets could regulate themselves, and as if the most fundamental elements of human existence could be treated as ordinary commodities.
This attempt did not merely fail. It destabilized the social fabric so profoundly that society itself had to intervene to protect its own conditions of survival.
The “great transformation” was not industrialization. It was the attempt to subordinate social life to market logic without remainder.
Polanyi’s insight was not moral. He did not argue that markets were greedy or that capitalism was evil. He argued that markets are powerful tools with limited jurisdiction. When that jurisdiction is exceeded, damage follows—not as a punishment, but as a consequence.
The conceptual fulcrum of Polanyi’s argument is his identification of fictitious commodities.
A commodity, properly speaking, is something produced for sale on a market. Its production, distribution, and pricing can be governed by supply and demand without undermining the conditions of its own existence.
Polanyi argued that modern market society treated three things as if they were commodities, even though they were not produced for sale and could not be safely governed by market mechanisms:
- Labor — human life and activity
- Land — nature and ecological systems
- Money — social trust and credit
He called these “fictitious” not because they were imaginary, but because commodifying them was a category error.
Labor is not produced; people are born.
Land is not manufactured; it is inherited.
Money is not a thing; it is a social relation.
To subject these realities to market logic without protection is to expose them to forces they cannot absorb. Wages can fall below subsistence. Land can be exhausted. Money can evaporate trust. In each case, the market does not merely allocate resources—it reorganizes responsibility in ways that undermine social stability.
This is the first place Polanyi’s relevance to our project becomes unmistakable. He was not describing inefficiency. He was describing risk displacement.
Markets are often praised for their allocative efficiency: they move goods to where they are most valued. This is true within limits. What is less often acknowledged is that markets also move responsibility.
When a function is marketized, responsibility for managing its risks shifts. The system no longer guarantees outcomes; individuals must hedge, adapt, and absorb volatility. This is not necessarily unjust. But it is not neutral.
Polanyi observed that when labor is commodified, workers bear the risk of unemployment. When land is commodified, communities bear the risk of ecological collapse. When money is commodified, societies bear the risk of financial instability. In each case, the market reallocates risk downward, away from collective structures and toward individual actors.
This is why Polanyi insisted that a self-regulating market was a “stark utopia.” Not because it was immoral, but because it was unsustainable. A society that attempts to run entirely on market logic will inevitably provoke protective responses—not as ideological choices, but as survival mechanisms.
We can now name the key concept introduced by this chapter: disembedding.
Disembedding refers to the removal of social functions from the institutional contexts that stabilize them, and their exposure to forces that do not carry responsibility for the consequences.
Markets disembed when they are allowed to operate without social constraints that absorb risk, enforce limits, and provide repair. This is not an argument against markets. It is an argument against treating markets as complete social systems.
Disembedding is dangerous not because it creates inequality, though it often does. It is dangerous because it dissolves the connective tissue that allows societies to metabolize shock.
Polanyi’s great insight was that economies are always embedded in social relations. Attempts to deny this fact do not succeed; they merely force societies to correct the error through what he famously called the double movement.
The double movement describes the oscillation between market expansion and social protection.
On one side, markets push outward, seeking to commodify more domains, reduce friction, and maximize flexibility. On the other side, society pushes back, reasserting constraints to protect human beings, nature, and social continuity.
This pushback can take many forms: labor law, welfare systems, tariffs, regulation, unions, even authoritarian politics. Polanyi was careful not to romanticize it. Protective movements can be humane or brutal, democratic or coercive. Their moral character varies.
What does not vary is their inevitability.
Societies will not tolerate the full commodification of their own foundations indefinitely. When disembedding threatens survival, correction follows. Not because people become wiser, but because systems respond to strain.
This is the first place where Polanyi’s argument clearly exceeds economics. The double movement is not about prices; it is about binding. It is the social system’s attempt to reassert limits when market logic dissolves them.
Why call Polanyi’s diagnosis the first catastrophe?
Because it marks the moment when modern societies learned—painfully—that certain functions cannot be outsourced to markets without destabilizing the entire system.
Labor, land, and money were the first domains subjected to large-scale outsourcing of responsibility. The consequences were not subtle: mass unemployment, ecological degradation, financial crises, social unrest. These were not market failures in the narrow sense; they were failures of embedding.
Societies responded by reintroducing structure: labor protections, environmental regulation, central banking, social insurance. These were not ideological luxuries. They were emergency repairs.
The lesson was clear enough to those who lived through it. What is remarkable is how thoroughly it was forgotten.
The error we must now correct is the belief that Polanyi’s analysis applies only to economic life.
Polanyi identified a pattern: when systems treat non-commodities as commodities, they disembed stabilizing functions and provoke collapse. There is nothing in this pattern that limits it to wages, soil, or currency.
Once seen, it generalizes.
What happens when truth is treated as a market good?
What happens when meaning is privatized?
What happens when care, repair, authority, or time itself are subjected to optionality without protection?
The mechanism is the same. Responsibility migrates downward. Individuals are told to manage risks once absorbed collectively. Systems gain flexibility; people absorb fragility.
Polanyi did not live to see these later transformations. But he gave us the analytic tools to recognize them.
The contemporary world is often described as suffering from distrust, polarization, or moral confusion. These diagnoses are incomplete. What we are witnessing is a new wave of disembedding—one that extends beyond economics into cognition, morality, and temporal life.
Institutions withdraw from binding. Individuals inherit the work. The protective envelope dissolves. Exhaustion follows.
This is not a failure of character. It is a structural repetition.
Polanyi showed us the first version of this story. We are now living through its sequel.
Karl Polanyi was not merely writing about markets. He was writing about the conditions under which societies remain governable.
He showed that when systems attempt to offload non-market realities onto market logic, they do not become efficient. They become brittle. And when they become brittle, they provoke reactions that reassert structure—often clumsily, sometimes violently.
To read Polanyi as an economic historian is to miss the core of his argument. He was diagnosing the consequences of disembedding—of removing stabilizing functions from their social contexts and pretending nothing essential had been lost.
That mistake did not end in the twentieth century.
It only changed domains.
And once one understands that, the question is no longer whether Polanyi is still relevant. The question is how many times a society can repeat the same structural error before it runs out of protective responses capable of holding it together.