International Political Economy
Session Four and Five
Spring 2010
Zainab Shakir
The Liberal IPE Perspective
• Roots of the Liberal Perspective
• The Liberal View of International Relations
• John Stuart Mill and the Evolution of the
Liberal Perspective
• John Maynard Keynes and the Great
Depression
• The Resurgence of Classic Liberalism
• Globalization and Liberalism
Roots of the Liberal Perspective
• Liberalism means “liberty under the law”
• View of human nature: competitive in a constructive way. Guided by
reason not emotion.
• Mercantilists—human nature is aggressive, combative and suspicious.
• Rooted in reactions to events in Europe in the 17th and 18th centuries.
• Francois Quesnay (1694-1774)---led a group of French
philosophers—Physiocrats---condemned government interference in
the market—with few exceptions, it bought harm to society—motto
was “laissez faire” meaning ‘let be’.
• This became the theme of Adam Smith (1723-1790), a Scottish
contemporary of Quesnay-- regarded as the father of modern
economics.
Adam Smith(1723-1790)
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Respect for the market
Distaste for the state
State: “dangerous and untrustworthy”
State against which he argued—mercantilist state of the 18th century--national interest is best served when state power is concentrated and
used to create wealth which produces more power.
For Smith---Individual freedom of the market best alternative to
potentially abusive state power for allocation of resources or
organizing economic activity.
Liberals—heavily on the side of markets when talking about the
fundamental tension that characterizes IPE: state, market and society.
Smith believed in the cooperative, constructive side of human nature.
Best Interest of all society served by rational, individual choices—
these choices act like an “invisible hand”---guide the economy and
promote common good.
Adam Smith (1723-1790)
• Reference to the “Invisible Hand” in Smith’s works—two tightly
intertwined parts:
• Self Interest
• Competition
• Writing at a time when Capitalism replacing Feudalism
• In a capitalist economy:
• Self interest drives individuals to make rational choices that best serve
their own needs and desires.
• Competition constrains self interest—prevents it from becoming
destructive to the interests of others.
• Producers face competition—forces them to charge reasonable prices
and provide quality goods.
• Consumers---face competition from other consumers.
• If producers want to push up prices as much as they can and
consumers want to push them as low as they can---the force of
competition keeps the pursuit of self interest from going to the
extreme.
Adam Smith (1723-1790)
• Wealth of Nations—not only concerned with
wealth and economics but a view on politics,
power and freedom.
• Associated with the liberal doctrine of laissez faire
BUT for Smith the state had a number of limited
tasks to perform in a society that individuals
cannot perform by themselves:
• Establishing and maintaining a basic legal system
• Assuring national defense
The Liberal View of International Relations
• Nation States—show their cooperative, constructive,
peaceful natures through harmonious competition
• International Trade is seen as being mutually
advantageous, not cut throat competition for wealth and
power
• Smith opposed most state restrictions on free international
markets
• Condemned tariffs used by mercantilists to condemn
wealth and power
• David Ricardo (1772-1823)---followed Smith in adopting
liberal view of international affairs
• Ricardo—free commerce makes nations efficient—
efficiency is a quality valued by liberals almost as highly
as liberty.
The Liberal View of International
Relations
Free International
Market
Stimulates
Industry
Creates a General
Benefit by
Raising
Production
Encourages
Innovation
The Liberal View of International Relations
• Outcomes from interaction of states, markets and society—
Positive Sum Game—everyone can potentially gain more
out of a bargain than they put into it
• Market exchanges of goods and services are mutually
advantageous to both parties---Why??
• Ricardo’s concept of basing trade on Comparative
Advantage
• Contrast this with the view of Mercantilists
• View life as a Zero Sum game—gains by one group or
person necessarily come at the expense of others
The Liberal View of International Relations
• Most Importantly, proponents of globalization
propose the creation of a ‘universal society’
• Free individual actions in the production, finance
and knowledge structures create strong ties of
mutual advantage among nations---need for a tie
of security may become irrelevant
• Nations of the world become part of a ‘universal
society’—not separated by their national interests,
weakening or even eliminating reasons for war
The Liberal View of International Relations
• Mercantilists –ruled by the passion to pursue self interest
even at the expense of foreigners
• Liberals also pursue self interest BUT
• In Liberalism, the pursuit of self interest is restrained by
competition that prevents anyone from gaining too much
power that could lead to coercion.
• Serving your interests in a competitive society means
competing to best serve the interests of others, to behave
honestly and gain a reputation for fairness.
• In a world of intense competition, an honorable reputation
is a powerful advantage.
John Stuart Mill and the Evolution of the
Liberal Perspective
• Political economy is a dynamic field
• The liberal view has evolved overtime as state-marketsociety interactions have changed reflecting changes in
values and ideas
• John Stuart Mill (1806-1873)-critical person in intellectual
development of liberalism
• Doubted the extent to which the competitive process and
economic freedom inherent in capitalism could turn the
most powerful human motive, pursuit of self interest into
the service of society’s welfare.
• For social progress---state should undertake limited action
to supplement the market, correcting for its failures or
weaknesses.
John Stuart Mill and the Evolution of the Liberal
Perspective
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Restrictive state action in areas of:
Educating Children
Assisting the Poor
Situation:
Parents had a duty to educate children but couldn’t be expected to pay
for it if already poor
Also dangerous for the state to take over education as a centralized
activity
Answer: Some state action in the form of:
Grants to some people to pay for school
Operation of “model schools”
The Guiding Principle was still to be “Laissez Faire”
When in doubt, state interference was to be avoided.
However in a economy based on individuals and markets, some
limited state action was desirable
The central question then, for Liberal thinkers of the time
was:
“How far can the state go before its interference with
individual rights and liberties is abusive?”
John Maynard Keynes and the Great
Depression
• Keynes (1883-1946)
• Developed a subtle stream of Liberalism called the
Keynesian theory of economics.
• Combines state and market influences in a way that relies
on the “invisible hand” over a narrower range of issues but
sees a larger but still limited sphere for constructive state
action.
• Influenced by the Great Depression of the 1930s. Led him
to believe that the “invisible hand” can sometimes err in
devastating ways.
The Great Depression
• Severe worldwide economic depression in the decade preceding World
War II.
• Started in about 1929 and lasted until the late 1930s or early 1940s.
• The depression originated in the United States, starting with the stock
market crash of October 29, 1929 (known as Black Tuesday), but
quickly spread to almost every country in the world.
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EFFECTS???
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Personal income, tax revenue, profits and prices dropped, and international
trade plunged by a half to two-thirds.
Unemployment in the United States rose to 25%, and in some countries rose as
high as 33%.
Cities all around the world were hit hard, especially those dependent on heavy
industry. Construction was virtually halted in many countries. Farming and
rural areas suffered as crop prices fell by approximately 60 percent.
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The Great Depression
• Cause?
• Keynes Explanation:
• There was a large-scale loss of confidence that led to a sudden
reduction in consumption and investment spending.
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Once panic and deflation set in, many people believed they could
make more money by keeping clear of the markets as prices dropped
lower and a given amount of money bought ever more goods,
exacerbating the drop in demand.
John Maynard Keynes
• It is possible for individuals to behave rationally and in their individual
self interest and yet for the collective result to be irrational and
destructive—a clear failure of the invisible hand.
• Classic Example—Paradox of Thrift
• What is the rational thing to do when faced by unemployment?
Uncertainty about future income—spend less, save more..
• If everyone behaves rationally in this way and spends less, then less is
purchased, less is produced, fewer workers are needed, and less
income is created.
• The recession and unemployment that everyone feared will come to
pass and will be caused by the very action that individuals took to
protect themselves from this eventuality.
John Maynard Keynes
• No individual caused the recession and no individual can
reverse or prevent it either.
• Who can???
• Collective Action through the State.
• The state should spend and invest when individuals will
not, to offset their collective irrationality.
The Keynesian Compromise: Balancing State and
International Relations
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Advocated free markets in a wide domain, including international trade and
finance.
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Believed that positive government action was necessary and useful to deal
with problems that the invisible hand would not set right.
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Beginning in the early 1930s and then World War II, these problems ranged
from unemployment and inflation,social security programs to international
trade and finance.
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Near the end of WWII, leaders of the Allied nations met at Bretton Woods,
New Hampshire to forge global structures (referred to as the Bretton Woods
system of international political and economic arrangements and institutions)
that would change the war-depression-war pattern of the first half of the
twentieth century.
The Keynesian Compromise: Balancing State and
International Relations
• Keynes led the British delegation.
• The Post war Bretton Woods system has been called the
Keynesian Compromise
• A Keynesian version of liberalism was embedded in the international
political economy.
• This system envisioned a liberal or open international system in which
market forces and free trade policies would play major roles in each
states foreign economic policy objectives.
• The Keynesian flavor of Liberalism—markets swirled with a
distinctive state stripe—became the mainstream IPE in industrialized
world from the 1930s to the 1970s,as many industrialized nations used
state power to supplement, strengthen and stabilize the market
economy within the liberal Bretton Woods system of international
institutions.
• In some places such as Hong Kong, the market was emphasized to a
greater extent, creating a dynamic free wheeling free market system.
• In places such as Sweden, the role of the state was emphasized more
creating a more socialist system.
• In the early days of the Cold War after WWII, the international
economy remained relatively open generating a tremendous amount of
productivity and growth.
• However, it became increasingly difficult to keep the international
trade, monetary and finance systems open as states were driven by
their domestic agendas to protect themselves in an international arena
marked by increased interconnectedness and intense competition.
The Liberal View of Hegemony
• In the 1970s and 1980s a number of researchers focused on the
Hegemonic Stability Theory to explain how international markets
work best when a hegemon, a single dominant state, accepts the costs
of keeping the domestic economy open for its friends and allies by
providing them with certain international collective or public goods.
• Examples include a sound system of US defense of western Europe
after WWII. In this case, the hegemon, the US, covered many of the
expenses associated with establishing and maintaining the monetary
system and providing for the defense that each of the allies would have
had to pay for alone.
• As a result, the allies in Europe could spend more on their recovery
while benefiting from a system of opening up the trade system, sound
money and peace and security that stimulated the growth of markets
everywhere.
The Liberal View of Hegemony
• In Today’s world:
• George W. Bush administration efforts to compel NATO
nations to share in the costs of the War in Iraq. Some
countries made it clear that they would not contribute
personnel or funds to US efforts even if US efforts in Iraq
provided these countries with some form of security.
Neo Liberalism- the Resurgence of Classic
Liberalism
• As domestic and international protectionist measures increased in the
1970s and 1980s, the popularity of the Keynesian Compromise
gradually diminished.
• In its place, classic liberal ideas like those of the Austrian Friedrich
Hayek and the American Milton Friedman became increasingly
popular.
• Laid the theoretical groundwork for what has become a distinct
variation of liberalism, otherwise known as economic liberalism or
neoliberalism.
• Drawing on older ideas of economic liberalism, Hayek argued that the
only way to have security and freedom was to limit the role of the
government.
Neo Liberalism- the Resurgence of Classic
Liberalism
• Thomas Friedman—returned to classic liberalism of Adam Smith.
• Power concentrates in the state and the great threat to freedom is the
concentration of power.
• Capitalism with its free competitive market diffuses power and so
preserves freedom.
• Friedman’s title, “Capitalism and Freedom” stresses the classic liberal
view that the market preserves and protects liberty.
Reagan, Thatcher and the Neoconservatives
• In the 1980s, the classical liberal view of IPE reasserted itself even
more forcefully with a movement called NEOCONSERVATISM.
• In Great Britain, this movement was associated with the Conservative
political party but today it is universally termed NEOLIBERALISM.
• PM Margaret Thatcher and President Ronald Reagan were the chief
practitioners of neoconservative ideas.
• Their views of state-market relations owed far more to Adam Smith,
Hayek and Milton Friedman than to Keynes.
Reagan, Thatcher and the Neoconservatives
• Neoliberalism in the US and Britain was designed to
reduce state control of private sector activities, cut taxes
and deregulate markets.
• The success of these economic liberal policies in the US
and Great Britain, combined with the collapse of
communism in Eastern Europe, led to a dramatic renewal
of economic liberal policies around the world.
• Many attribute the recovery of the global economy after
1992 to deregulation and privatization.
Globalization and Neoliberalism
• Most neoliberals support globalization because of its emphasis on
values such as increased production efficiency, the free flow of
currency, free trade, markets, positive sum outcomes for markets and
individual empowerment.
• Thomas Friedman and other neo liberals argue that globalization
reflects a new brand of capitalism that drives individuals, states and
trans national corporations to continually produce new and better
products in a hyper competitive world.
• Joseph Stiglitz-critical of IMF policies-difficult for developing nations
to get out of the debt trap and benefit from globalization.
Mercantilism Vs Liberalism
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Most important actor??
Role of the state??
Image of the IPE??
Proper objective??