Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (review)

The appropriate economic role of the state has been a staple of political economy debates since at least the eighteenth century, with the twentieth century experiencing the most profound oscillations in practice between totalitarian étatisme at one extreme and dogmatic liberalism at the other. For most of the advanced capitalist countries, there was a central tendency toward varieties of mixed-managed economies, or what Blyth, a political scientist, terms "embedded liberalism." This is conceived as an institutional form in which a pure market-conforming capitalist order was, under the intense pressures generated by the international depression of the 1930s, transformed into market-reforming regimes characterized by activist governments operating to address the multitudinous technical and social market failures of unregulated capitalism. For many contemporaries—especially Karl Polanyi, whose The Great Transformation (1944) provides the inspiration for Blyth's important new study—this embeddedness of liberalism was conceived of as a durable and thus permanent institutional transformation of capitalism. Yet, of course, embedded liberalism was to have its denouement in the 1970s and 1980s, when a new crisis, Blyth argues, a crisis of capital formation, was to bring about a renaissance of neoliberalism and thus a renewed phase of disembedding liberalism.

In Polanyi's great transformation, lasting institutional change was grounded in a "double movement" in which capital's imperative to expand the market's scale and scope generated a countermovement by labor's resisting such expansion, the consequences of which were an activist state that permanently repudiated self-regulating capitalism. For Blyth, this is a plausible heuristic, but not a robust theory of institutional change, and it must be reconceptualized, not least because Polanyi was wrong about the permanence of these changes. Progress is possible, however, if the role of economic ideas, interests, and institutions are remodelled, and this he does by using two case studies and five hypotheses intended to capture the appropriate sequence of institutional change. The two cases chosen, the United States and Sweden, exemplars of liberal and nationally coordinated market economies, respectively, represent the most and least likely environments in which to find the critical independent variables; the five hypotheses can be summarized:

1. In periods of economic crisis, ideas (not institutions) reduce uncertainty;
2. Following uncertainty reduction, ideas make collective action and coalition-building possible;
3. In the struggle over existing institutions, ideas are weapons;
4. Following the delegitimation of existing institutions, new ideas act as institutional blueprints; and
5. Following institutional construction, ideas make institutional stability possible.

In developing and applying these hypotheses a key role is played by "Knightian uncertainty": that is, situations regarded by contemporary agents as unique events in which they are unsure of their (rational) interests and of how to secure them, thereby giving to ideas—whether, hitherto, heterodox, respectably minority, or even previously repudiated—the potential to make sense of a crisis and of its possible resolution. Important, in this model, and to cite Friedman, "[W]hat mattered in the world of ideas was not what was true, but what was believed to be true." This, of course, has a particular resonance for the second great transformation, in which, in the United States, and following a remobilization of the political power of business, a motley crew of monetarist, rational expectations, supply-sider, and public choice arguments were assembled to attack embedded liberalism. Here, of course, the uncertainty was not deflation, as it had been in the 1930s, but inflation and claims of regulatory and tax overload. In Sweden the crisis that engendered disembedded liberalism had somewhat different characteristics but used much of the same corpus of ideas as in the United States and conformed to the sequence of the five hypotheses. However, though neoliberal economic ideas once more became the lingua franca of policy making there, mass support for activist government endured, in contrast...