Born in Vienna on 21 October, 1886, Karl Polanyi was the son of a Hungarian engineer and entrepreneur, Michael Pollacsek, and a Russian mother, Cecile Wohl, who was a figure in Hungarian intellectual and political society. His brother was the philosopher and chemist Michael Polanyi.

Raised in Budapest, Polanyi attended the University at Budapest and Kolozsvar, earning a doctorate of law in 1909. He was called to the bar in 1912. It was at University, in 1908, that Polanyi became engaged in Hungarian politics, helping to found the left-liberal Galilei Circle, a radical political movement that put Polanyi in touch with key figures of Hungarian politics. He would later edit the Circle's journal Szabadgondolat until its suppression in 1919. In 1914, he helped to form the Hungarian Radical Party.

During the First World War, Polanyi served as a cavalry officer in the Austro-Hungarian army on the Russian front until severe illness necessitated his hospitalization first in Budapest, and later in Vienna, where he met, Ilona Duczynska, whom he married in 1923. After the war, in 1921, Polanyi worked for the Hungarian weekly Becsi Magyar Ujsag.

In 1924, Polanyi began work in Vienna as a writer and editor for Der Oesterreichische Vokswirt, the leading economic and financial weekly of Central Europe, specializing in international affairs. During this time, Polanyi hosted a seminar in his home on the topic of 'a democratic associational socialist economy.' The rise of fascism in Austria forced him to resign from the journal and, in 1933, to flee to London.

In England, Polanyi was active in the Christian Left Group, producing pamphlets and circulars, and later edited Christianity and the Social Revolution with John MacMurray and Joseph Needham. In 1935 Polanyi began a series of lecture tours in the United States. Additionally, he worked as a tutor at the Workers Educational Association adult education program at the Universities of Oxford and London, where his lectures on English social and economic history and international affairs laid the groundwork for his classic work The Great Transformation. This latter work was written in the United States, during a period as a visiting scholar at Bennington College in Vermont from 1940-1943. During this time, Ilona taught mathematics at Bennington.

Returning to London, Polanyi resumed teaching at the Workers Educational Association, and resumed political work in the Hungarian Club of London and, later, the Hungarian Council, both of which were Hungarian émigré organizations.

In 1947 Polanyi accepted a position in Columbia University's Department of Sociology. Ilona, however, was denied a visa to the United States because of her association with the Hungarian Communist Party, and her prominent part in the failed Hungarian Revolution of 1919. As a result, the Polanyi's took up residence outside Toronto, and for the rest of his career Polanyi commuted between Toronto and New York City.

At Columbia, Polanyi taught, primarily, a course entitled General Economic History, which he described as dealing with "the origins of economic institutions." At the same time, Polanyi also led a faculty seminar and research project on the same topic, called the University Seminar on the Institutionalization of the Economic Process. Though he retired in 1953, Polanyi was retained by Columbia as an emeritus professor, and received a Ford Foundation grant to lead an Interdisciplinary Project on Economic Aspects of Institutional Growth. This project ultimately resulted in the publication of the collaborative work Trade and Market in the Early Empires.

In 1963 Polanyi and Ilona co-edited The Plough and the Pen: Writings from Hungary 1930-1956, a collection of English translations of Soviet Hungarian literature and political writings. Also during that year, Polanyi visited Hungary for the first time since 1919, and gave a series of lectures at the Hungarian Academy of Sciences. Later that year, and shortly before his death, Polanyi founded the journal Co-Existence. He died on 23 April, 1964, in Pickering, Ontario.

A number of Polanyi's works have been published posthumously, including Dahomey and the Slave Trade, and, in 1977, The Livelihood of Man, edited by Harry Pearson.