Functional Democracy: Polanyi's Forgotten Antidote to Fascism and neoliberalism
Janek Wasserman
11.09.2025
As Professor of History at the University of Alabama, Janek Wasserman specializes in modern Central European history and the development of economic thought, in particular, Austrian economic thought. In this short essay he traces the formation of Karl Polanyi’s ideas during his Vienna years (1919-1933), especially his theories relating to democracy, liberalism, and fascism. Prof. Wasserman puts forward that Polanyi’s pragmatic and humane proposal for a Functional Democracy – emphasizing the need for transparency and participation in economic and political decision-making – carries important lessons for today, and offers a powerful basis for rethinking economic, political, and social relations in the twenty-first century.
Polanyi’s quest for a new, non-Marxist socialism
When Karl Polanyi emigrated from Hungary to Austria in 1919, he threw himself into the intellectual debates roiling Central Europe, infusing a distinctive blend of Christian spirituality, philosophical idealism, and liberal socialism. He was disaffected by Communism after the failed Hungarian Revolution—and debates with his friend, the Marxist György Lukács—yet unconvinced about the efficiency or merits of free market capitalism. He argued instead for a system that honored the dignity of the individual.
His first public Viennese intervention came during the Socialist Calculation debate of 1922. He had no interest in reigniting the dispute between free market liberals (such as Ludwig von Mises), Communists (the Bolsheviks), and the various socialists (Otto Neurath, Karl Kautsky). He agreed with liberals that a centralized bureaucracy could not solve the accounting and pricing problems of a modern economy. However, he disagreed that a capitalist economy was the only – or best – answer. A “practical” third way, pioneered by Otto Bauer, G.D.H. Cole, and Vladimir Lenin, suggested a better solution. Building on this, Polanyi advocated for a “functional, guild-socialist-organized” form of socialism that opened space for democratic governance within the economy. This approach required democratic participation and transparency in all decisions as part of an “oversight” (Übersicht) apparatus. This functionalism necessitated a new, non-Marxist socialism.
Morality as the common missing link between collectivist and capitalist approaches
Polanyi believed liberals, conservatives, and Marxists had failed to theorize an efficient and moral economy. Both liberals and collectivists were myopically focused on accounting as the basis of a functioning economy. While the former emphasized market prices and profits for decision-making; the latter stressed state statistics and production quotas. As he wrote in his essay “Sozialistische Rechnungslehre” (Socialist Accounting Theory), neither could justify their decisions based on social or moral principles: “Whether these goals are ‘theoretically’ right or wrong, possible or impossible, moral or immoral, contradictory or logical, accounting must remain indifferent (gleichgültig).”
In Polanyi’s view, this moral agnosticism doomed both approaches as the foundation for a humane economy. A humane system must marry productive efficiency and social justice. Collectivism had failed to maximize technical output and achieve positive social outcomes, as the Bolshevik regime had already revealed. In the Capitalist model, too, technical production lagged because zero-sum competition hindered the efficient allocation and utilization of productive resources in various sectors, while the boom-and-bust nature of finance capitalism led to production gridlocks and bottlenecks. These technical failures left the common interest (Gemeinnützigkeit) by the wayside.
The capitalist system had no means for understanding (or calculating) the social relations between people that—as opposed to prices— undergirded all economic production. Channeling the earlier Viennese reformer Josef Popper, Polanyi argued that this condition, “…contradicted the right to live that every member of society possesses.”
Centering democratic and transparent decision-making in a functional democracy
Polanyi’s termed his alternative the ‘functionally organized society’ (or ‘functional democracy’). Such a system would place democratic representation and transparent decision-making at the center of production and consumption decisions. Associations for producers and industries would co-exist alongside consumer societies. The political nature of these open negotiations ensured their effectiveness and ethics: “The commune is not only a political organ but the actual carrier of the higher goal of the common good.” Ongoing negotiations would assure just wages and prices, a reasonable distribution of goods and profits, an equitable allocation of productive resources, and acceptable levels of capital reinvestment. They would also engage people as active participants in economic and political processes.
While liberals such as Ludwig von Mises objected that “functional socialism” lacked a clear executive power and remained “nebulous and vague” for Polanyi, the lack of a single basis of power was precisely the point. Functional socialism (or functional democracy) was not about naked power relations (Machtverhältnisse) but relationships of mutual recognition (Anerkennungsverhältnisse).
A need for empathy in economics
Polanyi saw oversight as the pathway to a transformed human order. Oversight concerned moral questions as much as material ones. Grappling with such disparate sources required empathy. As he wrote in “New Reflections Concerning Our Theory and Practice”: “Means of production are visible, tangible aspects of the external world, which are countable, measurable and externally ascertainable. The needs and hardships of another person, by contrast, we can only envision in some fashion, through mentally putting ourselves in his situation, through an empathetic experience of his needs and hardships, through entering into them within ourselves.” Only through interpersonal interactions could human beings understand one another’s needs. Administrative bodies and unions could assist with external (material) oversight, but inner (intersubjective) oversight required democratic self-organization.
How neoliberalism’s 'cruel rationality' paved the way for fascism
Polanyi would later link the failures of liberal economics with the rise of fascism—the twin causes of the crises of the 1930s. His critiques of contemporaries such as Mises, Friedrich Hayek, and Walter Lippmann, not to mention classical British political economists, formed the core of his analysis of early neoliberalism, which culminated in his 1944 The Great Transformation.
He utilized the young Marx’s ideas of alienation to critique liberal categories of goods, labor, land, and capital. In “Community and Society,” Polanyi lamented the cruelty that passed as rationality in liberal society: “Grotesque perversions of common sense take on the semblance of rationality under the way of what is supposed to be an economic law.” Labor became, “a commodity to be bought and sold, like cucumbers. That to this commodity a human being is attached is treated as an accidental feature of no substantial relevance.” The use of money exacerbated alienation, obscuring the reality of human relations behind the seemingly objective notion of value. The fetish of capital was, “the most disastrous to the emancipation of mankind,” because it effaced the accumulated human labor in capital goods.
Countering fascism required reconceptualising freedom, from individual to 'social'
Recasting Marx’s thought in a humanist vein allowed Polanyi to imagine a popular front against fascist capitalism. It opened the door to a “sphere of the personal.” In “On Freedom” Polanyi conceptualized a new theory of social freedom: “[It] is based on the real relation of men to men… Being free therefore no longer means, as in the typical ideology of the bourgeois, to be free of duty and responsibility but rather to be free through duty and responsibility.” Our reimagined communities would not be the realm of individual freedom imagined by liberals, nor the völkisch dystopias of the fascists. They would rest on mutual dependence, empathy and social freedom.
In their quest for stability, neoliberals embraced illiberalism
The specter of fascism increasingly haunted Polanyi’s thoughts. He saw it as an atavistic reaction against the failed promises of liberalism, even as it entrenched capitalist relations. Polanyi associated fascism with the growing rift between liberal economics and democracy. Contemporary liberals such as Mises disparaged parliamentarianism and sided with conservatives and fascists in a quest for economic stability, thus destroying the very freedoms they claimed to support. Fascists responded to the spiritual needs that liberalism had betrayed. Politically, fascism was anti-democratic and illiberal; it supported authoritarianism and dictatorship. Economically, it opposed democratic socialism and capitalism, preferring a corporatist economy. Its “anti-capitalism” focused on finance capital (with an antisemitic stamp) rather than economic inequality or property relations. Ideologically, it emphasized ideas of race, blood, myth, and empire against reason, humanity, law, and democracy.
For Polanyi, fascism failed as a solution because it destroyed individual freedom and re-entrenched capitalism. This was his major contribution to fascist theory and an important note on modern capitalism: “The intervention of fascism in this sense means the practical salvation of capitalism, and indeed with the help of revolutionary transformations of the entire state and social system. It is not a return to liberal ‘laissez-faire’ but a planned economy that is led not by an anti-entrepreneurial democratic state but by ‘titans-of-industry’ capitalists themselves.” Polanyi saw fascism’s total subordination of the state and society to the economy as the culmination of liberal economistic fantasies. Fascism and the market fundamentalism of neoliberalism had much in common.
Polanyi saw national socialism as capitalism rooted in a nationalist state
By the time Polanyi left Vienna in 1933 he had developed powerful critiques of fascism, liberalism and capitalism. Polanyi’s analysis of Othmar Spann’s universalism, the Austro-Fascist Constitution of May 1934, and National Socialism laid bare their claims of “true democracy” and anti-capitalism. For Polanyi, Spann was an intellectual pioneer whose system anticipated the Fascists and Nazis. But Spann’s corporatist system left economic control in the hands of the elites. In “Spanns faschistische Utopie,” Polanysi concluded, “His utopia confirms that the essence of fascism guarantees the control of property owners and managers of the means of production over the economic chamber, establishing the power of that chamber over society as a whole.”
Polanyi made the same point about Austro-Fascism, whose leaders paid lip service to Catholic social theory yet rooted their power in capitalist economics. Polanyi disparaged the May Constitution as, “an embodiment of religious and racist fundamentalism,” and, “the arrival of theocracy.” The corporate bodies in the Austrian state had no democratic representation; everyone was appointed.
National Socialism failed Polanyi’s test even more egregiously. Within months of gaining power, Hitler abjured attacks on the wealthy and promised an end to economic experimentation. Polanyi declared acidly in “Hitler und die Wirtschaft,” “Never and nowhere did Hitler promise to his followers the abolition of the capitalist system. Rather, the essential thrust of his program consisted in a belief in the healthy functioning of the capitalist system within the nationalist state.” Nazi leadership clearly had no interest in the “S” in the NSDAP.
No alternative? Revisiting Polanyi's powerful call for a functional democracy
Recasting Marx’s thought in a humanist vein allowed Polanyi to imagine a popular front against fascist capitalism. It opened the door to a “sphere of the personal.” In “On Freedom” Polanyi conceptualized a new theory of social freedom: “[It] is based on the real relation of men to men… Being free therefore no longer means, as in the typical ideology of the bourgeois, to be free of duty and responsibility but rather to be free through duty and responsibility.” Our reimagined communities would not be the realm of individual freedom imagined by liberals, nor the völkisch dystopias of the fascists. They would rest on mutual dependence, empathy and social freedom.
Ninety years later, Polanyi’s lessons endure. Fascism and far-right populism pose renewed threats to the world order. Capitalist individuals and corporations once again accommodate illiberal politicians in the name of shareholder value and profit. Meanwhile, participatory democratic proposals and democratic socialism are dismissed as utopian: there is no alternative to capitalism.
Yet as centrist political parties struggle to mobilize their eroding bases—thanks to failed neoliberal policies which offer little to most citizens—we would be wise to revisit Polanyi’s critiques, and ideas. His positive program for functional democracy is a powerful alternative to both the sclerosis of neoliberal centrism and an emboldened far-right populism.
Janek Wasserman is Professor of History at the University of Alabama.
Further Reading
- Dale, Gareth. Karl Polanyi: A Life on the Left. New York: Columbia University Press, 2016.
- Polanyi, Karl. Chronik der großen Transformation. Artikel und Aufsätze (1920-1945). Edited by Michele Cangiani and Claus Thomasberger. 3 vols. Marburg: Metropolis, 2003.
Polanyi, Karl. Economy and Society: Selected Writings. Edited by Michele Cangiani and Claus Thomasberger. Cambridge, UK: Polity, 2018.