Unit Three: Thinking Liberally Diversity and Hegemony in IPE
Dr. Russell Williams
Required Reading:

Cohn, Ch. 4.
Class Discussion Reading:

Eric Helleiner, “Economic Liberalism and Its Critics:
The Past as Prologue?,” Review of International
Political Economy, 10-4 (November 2003), pp. 685696.
Outline:
1.
2.
3.
4.
5.
Introduction – Basics of Liberal Political Economy
“Normative” Liberal Approaches
“Analytical” Liberal Approaches
Conclusions
Further Reading
1) Introduction – Basics of Liberal
Political Economy:

Most popular approach in IPE


Ideological basis for:
 Most international institutions
 Most states’ international economic policies
 The “Washington Consensus”
Supported by:



MNCs
Most academics
However, is it a single school of thought?


Diverse and complex = may encompass too wide a
body of thought to be a single school
Often defined by its opposition to realism
 Residual or “discursive”
 The
“Liberal Paradigm”:
1) Methodological Individualism
2) Political pluralism
3) Markets preferred to states

E.g. Purpose of cooperation = achieve most efficient use
of world’s resources
4) Optimistic about potential for international
cooperation

E.g. Focus on “absolute gains”, not “relative gains”

Absolute benefits of cooperation seen as large
5) International politics “separable” from international
economics (?)
 Two
kinds of liberal approaches:


Normative
Analytical
2) “Normative” Liberal Approaches:
a) Classical or “Orthodox Liberalism”:
(Locke, Smith, Ricardo and early economics)

Free markets more efficient
 E.g. Smith’s “invisible hand” - Linked production
more efficiently to consumption through “voluntary
exchange”
Three key principles:
1) Accumulation of profit leads to overall economic
growth

States’ job = create conditions for profit
2) Labor theory of value:

Price of goods directly proportional to the value of labor
in production
3) “Comparative advantage” – “invisible hand” of
free trade

Different than normal “Absolute Advantage” and
specialization

If each country produced what they were most efficient
at, regardless of whether they were the most efficient
producer over-all, total production would be higher
=“Absolute gains”
Without trade:
Wine
Portugal
(18)/2=9
Cloth
(12)/4=3
England
(15)/5=3
(15)/5=3
Total =
12 Wine
6 Cloth
With trade & specialization:
Wine
Cloth
Portugal
(30)/2=15
(0)/4=0
England
(0)/5=0
Total =
15 Wine (+3) 6 Cloth
 Total
(30)/5=6
output higher = absolute gains
2) Labor theory of value:

Price of goods directly proportional to the value of labor
in production
3) “Comparative advantage” – “invisible hand” of
free trade

Different then normal “Absolute Advantage” and
specialization

If each country produced what they were most efficient
at, regardless of whether they were the most efficient
producer over-all, total production would be higher
=“Absolute gains”

Powerful proof of benefits of free trade
2) “Normative” Liberal Approaches:
b) Marginalism and Neo-classical economics:
Liberal economics develops as a “science”
 Marginalism: Value of goods determined by price . . . Not
labour

= Neoclassical Economics: Combined arguments
supportive of free market, with mathematically &
scientifically inclined school of economics.

Assumed:
1) Markets were perfectly competitive
2) Markets moved towards equilibrium
 Theoretically
suggested little role for the state
in managing the economy . . . .
 E.g. A natural and efficient division of labour
will develop
= Only “irrational” governments would
ignore the benefits of specialization
c) Embedded Liberalism and Keynesianism:
a.k.a. “Interventionist” liberalism
 Saw benefits of free markets, but argued markets had to
be “embedded” in social and political realities . . . .


Sources:
 State desire for “autonomy”
 Growing popularity of Keynesian economics
c) Embedded Liberalism and Keynesianism:
a.k.a. “Interventionist” liberalism
 Saw benefits of free markets, but argued markets had to
be “embedded” in social and political realities . . . .



Sources:
 State desire for “autonomy”
 Growing popularity of Keynesian economics
“Keynesianism”: Argued there was a need for
macroeconomic state intervention in the economy
 States should manipulate monetary and fiscal policies to:
1) Increase demand during recession
2) Decrease demand during “overheated” economic
growth
“Keynesianism” . . . . ideas often called:


“Counter-cyclical demand management”
“Macroeconomic stabilization”
 Justified
the growth of social/welfare policies and
was basis of Post War “class compromise”
 Key
point: Post War economic cooperation designed
to make Keynesian policies possible
Reduce domestic radicalism
 Reduce international conflict
 Ensure states would continue to support free trade

 Result
– Liberal free trade was “embedded”
d) “Neoliberalism”:


Return to the neo-classical economics and a rejection of
Keynesianism
Beliefs:
1) Individual freedom goal of society
2) Self regulating market still most efficient
3) Where market failures occur, state unlikely to improve on
the situation
4) Profits the basis of economic growth
5) Size of the state should be reduced = Increase the
scope of the market in allocating resources in society
Neo-Liberals see the state as playing only a
“residual” or “supplementary” role:
E.g. National Defense
3) Analytical Liberal Approaches:
Much liberal analyses in IR focused on:
Problem of interstate cooperation
 Limitations of “Realism”

Major “groups” of liberal arguments:
1) “Institutionalist” approaches: Focus on problems of
interstate cooperation and international institutions
2) “Interdependence” approaches: More clearly “liberal”focus on domestic politics, interests, and institutions
 E.g. More interest in non state actors

Both have evolved as explanations for why there is more
economic cooperation then realists assume
a) Liberal Institutionalism:

E.g. Robert Keohane = “Neo-liberal institutionalism”

Attempted to “subsume” “neo-realism” - argued:
1) States motivated by:
 Anarchy and distribution of power
 Pursuit of wealth – E.g. absolute gains from
economic interdependence and free trade
2) Economic cooperation (liberalism) impeded by fear of
“cheating”
 E.g. “Prisoner’s Dilemma”
Canada
Cooperate
(Remove tariffs)
United
States
Defect
(Cheat on tariffs)
Cooperate
Defect
(Remove tariffs)
(Cheat on tariffs)
C,C
C,D
D,C
D,D
•United State’s preference = DC>CC>DD>CD
•Canada’s preference = CD>CC>DD>DC
•Realism: If both states are rational, fear of cheating and
“relative gains” leads to: Equilibrium at (D,D)
Key Point: Both states worse off then they could be . . .
Not “Pareto-Optimal”
Canada
Cooperate
(Remove tariffs)
United
States
Defect
(Cheat on tariffs)

Cooperate
Defect
(Remove tariffs)
(Cheat on tariffs)
C,C
C,D
D,C
D,D
Neoliberal Institutionalists argue (C,C) is often
equilibrium
 Why?
1) “Iteration” - repeated interaction increase likelihood of
cooperation
2) Institutions – reduce fear of cheating
Surveillance & transparency
Dispute resolution
a) Liberal Institutionalism:

E.g. Robert Keohane = “Neo-liberal institutionalism”

Attempted to “subsume” “neo-realism” – arguing:
1) States motivated by:
 Anarchy and distribution of power
 Pursuit of wealth – E.g. absolute gains from
economic interdependence and free trade
2) Economic cooperation (liberalism) impeded by fear of
“cheating”
 E.g. “Prisoner’s Dilemma”: Category of game
used to explain possibilities of cooperation . . . .
 International institutions can increase possibility
of pareto optimal outcomes
b) “Regime Theory”:

Key liberal response to HST – explains endurance of
international cooperation in absence of a hegemon

“Regime”: Institutional relationships that deal
with specific issue areas in international politics

E.g. The trade regime
 Create
regularity in actors’ behavior and expectations
 Made up of formal institutions, decision making
procedures, rules, principles and norms . . . .
3) Analytical Liberal Approaches:
Other liberal theories are less institutional – see IR in more
pluralistic terms – states are not unitary actors . . . .
a) “Interdependence Theory” (Keohane and Nye)


Increased economic integration alters “calculations” of states creates costs for non-cooperation
States not free to pursue unilateral policies because of complex
web of relationships

Interdependence can be hierarchical :
 Interdependence  Asymmetric interdependence 
Dependence

Suggests:
 Power politics not separate from economics . . . .
 Interdependence, once achieved, creates domestic pressure to
keep cooperating
 Domestic politics “matters” . . . .
 “Globalization” changes nature of global politics
b) Republican Liberalism:


Emphasis on domestic politics
Domestic political institutions make cooperation more or
less likely


Examples:



E.g. Democracy makes it harder for “rent seeking” elites to lead
states into irrational policies
Theory of Democratic Peace
Democracies more likely to support free trade (Moresescik)
By ignoring those different domestic institutional
contexts, realists cannot explain why democracies get
along better then non-democracies
c) Commercial Liberalism:

Economic interdependence alters individual
preferences, which via domestic politics changes “state
preferences”

State directly transmits the desires of citizens/firms
Interdependence:
More international
trade and
investment
-Advent of MNCs


Domestic Politics

More domestic
actors with
international
economic interests
State Preferences:

Support for free
trade and global
economic liberalism
Issues are “intermestic” – no clear distinction between domestic
and international politics
Suggests:

Non-state actors likely to be important

Economic Globalization supports “Neoliberalism”, not “neorealism”
Further Reading:

Robert O. Keohane and Lisa L. Martin, “The
Promise of Institutionalist Theory,” International
Security, 20-1 (Summer 1995), pp. 39-51.

Robert O. Keohane and Joseph S. Nye, Power
and Interdependence, (Scott, Foresman, 2nd
ed., 1989), chapter 1 (pp. 3-22) and chapter 2
(pp. 23-37).
Either is a good example of two major varieties of
liberal thinking . . . .
4) Conclusions
Strengths of Liberal Approaches:

Incorporation of domestic politics . . .


Empirical . . .


Levels of analysis division of international/domestic
politics unrealistic
Can explain persistence of economic cooperation
Globalization . . .

Liberal approaches dealing directly with the meaning
of globalization for modern IPE and domestic politics
4) Conclusions
Problems?

Too many considerations! Not parsimonious

Lack of focus on “distributional consequences”
of international politics


Is liberalism idealistic in this regard?
Perspective is very ideological

Global capitalism and free markets are inherently
good
For Next Time:

Unit Four: Historical Materialism (a.k.a
“Marxism”) and IPE

Required Reading:


Cohn, Ch. 5.
Class Discussion Reading:


Shaun Breslin, “Power and production: rethinking China’s
global economic role”, Review of International Studies, Vol.
31, No. 4 (October 2005), pp. 735-53.
Robert W. Cox, “Civil Society at the Turn of the Millennium:
Prospects for an Alternative World Order,” Review of
International Studies, 25 (1999), pp. 3-28.