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 17 th and 18 th 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) • Respect for the market • Distaste for the state • State

: “dangerous and untrustworthy”

• State against which he argued—mercantilist state of the 18 th 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”

intertwined parts: • Self Interest in Smith’s works—two tightly • 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 Advantage trade on Comparative • 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-market society 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 • 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 War II .

economic depression in the decade preceding World • 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.

• EFFECTS???

• • • Personal income , tax revenue, profits and prices dropped, and international trade plunged by a half to two-thirds.

Unemployment in the high as 33%.

United States rose to 25%, and in some countries rose as Cities all around the world were hit hard, especially those dependent on industry . Construction was virtually halted in many countries.

heavy Farming and rural areas suffered as crop prices fell by approximately 60 percent.

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.

• 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 • Advocated free markets in a wide domain, including international trade and finance.

• Believed that positive government action was necessary and useful to deal with problems that the invisible hand would not set right.

• 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.

• 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

   

Most important actor??

Role of the state??

Image of the IPE??

Proper objective??