The person who predicted the demise of the self-regulating market order was Hungarian historian, sociologist and economist Karl Polanyi (1886-1964). His book, The Great Transformation, came out in 1944, the same year as The Road to Serfdom, by Austrian economist Friedrich A. Hayek (1899-1992).

Hayek founded the Mont Pelerin Society in 1947, which had great success in pushing for neoliberalism around the world on the premise of free markets, free trade, free capital flows, rule of law, primacy of individual freedoms and electoral democracy. Hayek was the intellectual father of the current order.

Polanyi presciently points out that “the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness”.

In short: “To allow the market mechanism to be the sole director of the fate of human beings and their natural environment … would result in the demolition of society.”

Polanyi’s thesis rests on four crucial insights. First, the economy is embedded in society, which is itself embedded in nature. But to claim the market is self-regulating dehumanises society: when the market is a mechanical system, human beings and mother nature are reduced to cogs and wheels.

Second, Polanyi argues that the commodification of land, labour and capital is fictitious: land is a natural resource, not something to be traded and valued. (It is ironic that land is a commodity, but that gross domestic product calculations do not measure the costs of ecological destruction and pollution.)

Third, Polanyi says: “The social history of our time is the result of a double movement: the one is the principle of economic liberalism, aiming at the establishment of a self-regulating market; the other is the principle of social protection, aiming at the conservation of man and nature as productive organisation.” In other words, one movement generates the other.

Fourth, the gold standard was a key invention that anchored the idea of a self-regulating market. Gold imposed a “hard budget constraint”, forcing people and states to live within their means.

But it was precisely the pain of deflation, unemployment and social distress – caused by the misguided return to the gold standard – that created the conditions for the rise of fascism in the 1930s.

Modern central banking, on the other hand, is a “soft budget constraint”: when the market tries to impose pain on individuals, firms and states living beyond their means, central banks are asked to print more money.

Free markets cannot exist in practice as long as central banks are around, injecting trillions into global markets and holding more than their fair share of sovereign debt, equity and even non-performing assets in the name of monetary and financial stability. Central bankers are no longer independent if they perceive their job as maintaining the stability of stock market indices.

We cannot talk of a new global order without a hard look at the world as a total, in human, political, financial, social and ecological terms. Economics can no longer be allowed to run riot, independent of politics, sociology and ecology. It just does not add up.

Polanyi was correct about a great transformation, which continues in the 21st century. But what we are facing now is a great destruction.

Andrew Sheng writes on global issues from an Asian perspective