Perspectives of International Political Economy

What is International Political Economy

·   Examines international (between or among nation states) or transnational (across
national borders of two or more states)
·   It connotes a method of inquiry that is multidisciplinary
(i)                  Political dimension – use of power by a variety of political actors, politics
involves making rules pertaining on how states  achieve their goals, involves
institutions to pursue goals, emphasises on how much power each institution
has
(ii)                Economic dimension – Market is a driving force that shapes human
behaviour, economy works to coordinate social behaviour,
(iii)               Societal dimension – states and markets don’t exist in vacuum, many
different social groups within a state share an identity, norms
Perspectives and Methodologies of IPE
(i)                  Economic Liberalism
·       Study of markets and rational behaviour of actors
·       Orthodox economic liberals – champion free market trade, value
economic efficiency
·       Heterodox interventionist liberals – support more state regulation and
trade protection, markets work best when embedded in society
·       Under pure market conditions, people behave rationally, they seek to
maximise gains and minimize their losses
·       When an economy is inefficient, scarce resources go unused or could be
used in other ways that would be more beneficial to society
(ii)                Mercantilism
·       Associated with political philosophy of realism
·       Focuses on state efforts to accumulate wealth and power to protect
society from physical harm
·       State is a legal entity that governs territory and population or nation that
exercises sovereignty over citizens
·       Hard power – tangible military and economic assets
·       Soft power – selective tools that project a country’s values, norms
(iii)               Structuralism
·       Looks at how different class segments are shaped by dominant economic
structure
·       Markets don’t exist in social vacuum
Benefits of IPE
·       It is not a hard science, it may never establish a comprehensive theory with easily testable
propositions about cause and effect
·       By mixing elements of different disciplines, we are able to explain different aspects of global
political economy
·       Gives the freedom to select an analytical approach or combination that they feel best suits
the issue
 
 
Four levels of analysis
(i)                  Global level – importance of global factors like changes in technology, prices
creates constraints and opportunities for all governments
(ii)                Interstate level – relative balance of political, military and economic power
between states affects probability of war, cooperation or ways of exercising
leverage
(iii)               State/societal level – lobbying by socio-economic pressure groups, different
types of governments, decision making process within the state
(iv)               Individual level – narrowest but most important level, emphasises on
psychology and choices
Susan Strange’s four IPE structures
·       Networks, configurations, webs are complex arrangements that function as the underlying
foundations of the IPE
·       Rules of the game in each structure take the form of signed conventions, informal and formal
agreements
·       Issues in one structure impact the other, generate great deal of tension
·       The four IPE structures are
(i)                  Security structures – feeling safe from threat from other state and non
state actors
(ii)                Production and trade structure – the issue of who produces, for who and
on what terms,
(iii)               Finance and Monetary Structure – distribution of resources, access to
money, money is viewed as a means not an end, current global financial
structures have relaxed regulations for the flow of hot money
(iv)               Knowledge and technology structure – they are sources of wealth and
power for those who use them effectively, bargains made in all other
structures depend on access to knowledge
Globalisation, financial crisis and state market societal relations
·       It has been used to describe growing interdependence amongst people and different states
all over the world that resulted from new information and communication technology
·       Margaret Thatcher and Ronald Reagan were associated with the rise of economic liberalism
·       In 1990s the industrializing states of Southeast Asia grew quickly and steadily
·       They adopted export led growth strategies, integrated themselves into the new global
economy
·       Characteristics of globalisation are
(i)                  Economic process that reflects accelerated interconnectedness
(ii)                Integration of regional and local markets into a larger global market
(iii)               Political process that weakens the state authority and replaces with
deregulated market outcome
(iv)               Cultural process reflects densely growing network of complex cultural
interconnections
·       Speed was the new and necessary feature of 21 century communications
st

·       Friedman – globalization manifested power of unregulated and integrated markets

·       Globalism – economic liberal ideas behind globalisation, synonymous with production
efficiency, free flow of currency, free trade hyperglobalization reflects new phase of
capitalism that drives firms, TNCs to produce new and better products
·       Friedman, The world is flat – new technological developments are in the process of levelling
relationship of individuals to their states and one another
·       Due to emphasis on economic growth , it was supposed to create a more peaceful relation
between states
·       Anti-globalisation movements focused on poor countries,  damage to environment
·       Many of these groups formed coalitions with labour, environmental and peace activists
·       Globalization was seen as a shibboleth for a ‘wildcat’ version of capitalism
·       Friedman was concerned about the extent to which globalization was having a homogenizing
effect
·       After 9/11 many became critical of globalization for its role in intensifying tensions between
western industrialized nations  and Islamic nations
·       Leads to poverty, conventional and non conventional wars in developing regions especially in
failed states
·       HILs, structuralists and realists said that pro globalisation forces were responsible for global
economic problems
·       Global financial crises have generated criticism of globalisation
 
Laissez Faire : the economic Liberal perspective
Roots of Economic Liberal perspective
·       Essentially liberalism means liberty under the law
·       Focuses on human nature based on rationality and self interest
·       Francois Quesnay (father of modern economics) led a group of economists called
Physiocrats -motto was laissez faire, but in spirit telling the state ‘let be, let pass’
·       Quesnay condemned government interference in the market as it harmed society
·       In wealth of nations, Smith criticised mercantilism established on the principle that the nation
is best served when state power is used to create wealth, which produces power and more
wealth
·       Classical economic liberals – individual freedom in the marketplace represents the best
alternative to potentially abusive state power
·       For smith state meant parliament, it only represented the interest of the landed gentry and
not the entrepreneurs and citizens of growing industrial centres
·       Best interest of society served by rational individual decisions
Tenets of capitalism
(i)                  Markets coordinate society’s economic activities
(ii)                Extensive markets exist for the exchange of land, labour, money and
commodities
(iii)               Competition regulates economic activity
(iv)               Freedom of enterprise
(v)                 Private property
·       The first three tenets address the nature and behaviour of the market
·       In modern market, product and service are commodified, market price is established for
goods and services  as a result of producers setting prices for their goods and buyers paying
for it
·       Charles Lindblom – markets organize and coordinate society
·       Another important feature of capitalism is the existence of land, labor and money
·       Karl Polayni – In UK when land was privatized,  people moved into small factories and capital
was generated through trade
·       According to Smith, following our interests does not lead to disorder rather self interest
serves society’s interests
·       Competition constraints and disciplines self interest and prevents it from becoming
destructive to others
·       Price competition results in the efficient allocation of resources among competing uses
·       When economists say that markets coordinate society’s economic activity, they mean that
nobody should be in charge of how resources are allocated
·       Freedom of enterprise – individuals are free to start up any new business without state
permission
·       Capitalists are adamant that the owner of a resource is legally entitled to the income that
flows from the resource
·       In a capitalist economy, the owners pay for the costs of production and then sell the finished
goods in the market
·       Whatever is left between the difference of revenue and costs belongs to the capitalist, this is
a legal right of ownership known as capitalist property rights
·       Private property encourages the owner to make investments in improving the land
·       Freedom of enterprise allows entrepreneurs to test new ideas in the marketplace, allows
firms to increase or reduce their labour
·       Self interest motivates entrepreneurs to produce goods and services according to the desires
of the consumers
Smith, Cynic and Moralist
·       Categories of Smith’s tenets of capitalism – role of the state, motives and behaviour of
capitalists related to the preservation of the market and a variety of moral issues
·       Clear functions of the state – defending the country, policing, public works, preventing spread
of diseases
·       Evolution of human society from hunter stage without property rights to nomadic agriculture
with shifting residences
·       Next stage was feudal society in which laws and property rights are established to protect the
privileged class       
·       Modern societies characterised by free markets
·       Pursuit of self interest by a monopoly producer leads to restricted output, higher prices for
goods
·       Invisible hand theory is often presented in terms of natural phenomenon that guides free
markets and capitalism in the direction of efficiency, through supply and demand  and
competition for scarce resources
·       Merchants had a disproportionate influence over the parliament and could press their private
interests
·       Manufacturers influence the legislature such that they acquired the exclusive use of license,
tariffs, quotas
·       Companies like IBM, Pfizer, Samsung and many others to strongly protect patents which are
legal, temporary monopolies on invention
·       Risk of introducing new products, given huge investments and time lags involved, are
mitigated if these firms are guaranteed captive markets and consumer acceptance
·       He supported state exercising vigilance and enforcing competition policies to preserve
competition and help market function properly
·       He feared rent seeking – manipulation of the state to rig the market in a way to reward
powerful business interests with high prices and profits
·       As the labour force grew in size, he argued that welfare of servants, labour should be prime
concern of economic policy
·       Identifies the basic rules of prudence and justice needed for society to survive
·       For Smith, the passion to pursue self-interest leads mercantilists to cutthroat competition in
which winners create losers
·       Mercantilists would argue that the only way to prosper was to hoard gold and place tariffs on
imports
·       According to this theory, nations should sell their goods to other countries while buying
nothing in return
·       For eg – making vine in Scotland, good grapes could be grown in Scotland in hothouses, yet
the extra costs of heating would make Scottish wine 30 times more expensive than French
wine
·       It would be better to trade something Scotland had in abundance such as wool for French
wine
·       Economic liberals can pursue their self interests but their passions are restrained by
competition that prevents anyone from gaining too much power
·       Serving one’s own interest in a competitive society means to best serve interests
Transformation of Liberal Ideas and Policies
·       Classical liberals underscore the importance of negative rights, positive rights and right of
democratic participation
·       Smith opposed state restrictions on free international markets, he condemned the tariffs that
mercantilists used to concentrate wealth and power
·       Ricardo – champion of free trade, opposed the Britain corn laws
·       Said that introducing tariffs on agricultural products ensured that less productive domestic
land would be cultivated and rents would be driven up
·       Profits will be directed towards landlords and away from emerging industrial capitalists,
landlords  tended to squander their wealth on luxuries rather than invest
·       For Ricardo, free commerce makes nations efficient, efficiency is a value that liberals value
as highly as liberty
·       Individual success is connected with ‘universal good’, free international economy creates
general benefit by raising production
·       Outcomes of state, market and society relations are a positive sum game, everyone can
potentially get more by making bargains with others as opposed to not trading with them as
opposed to not trading with them
·       Mercantilists view life as a zero sum game in which gains of one group come at the expense
of others
·       Absolute and comparative advantage
·       Comparative advantage – countries can benefit from international trade by specializing in
production of goods for which they have a relatively lower opportunity cost even if they
don’t have absolute advantage
·       A country that trades for products it can get at a lower from another country will be better off
than if it produced those products at home
·        for example, Poorland can produce one bottle of wine with five hours of labor and one loaf of
bread with ten hours. Richland’s workers, on the other hand, are more productive. They
produce a bottle of wine with three hours of labor and a loaf of bread with one hour. One
might think at first that because Richland requires fewer labor hours to produce either good,
it has nothing to gain from trade.

·  Think again. Poorland’s cost of producing wine, although higher than Richland’s in terms of
hours of labor, is lower in terms of bread. For every bottle produced, Poorland gives up half
of a loaf, while Richland has to give up three loaves to make a bottle of wine. Therefore,
Poorland has a comparative advantage in producing wine. Similarly, for every loaf of bread it
produces, Poorland gives up two bottles of wine, but Richland gives up only a third of a
bottle. Therefore, Richland has a comparative advantage in producing bread.
·       For example – mutual trade benefit would be realized between china and UK, from china
specializing in production of porcelain and tea with UK concentrating on machine parts
·       Absolute advantage – ability to produce greater quantity of good or service with the same
quantity of inputs per unit time
 
Britain’s corn laws
·       Britain enacted corn laws in 1815 after Napoleon’s defeat
·       System of tariffs that restricted imports of food into Britain
·       Argument – Britain needed to be self sufficient in food
·       Right to vote in parliament was not, members were chosen on the basis of rural
landholdings, not on distribution of population
·       Parliament represented the interest of landed estates
·       Growing towns and industries was growing source of wealth, not represented in parliament
·       Corn laws were in favour of landed class rather than industrial class
(i)                  By forcing prices up, these laws indirectly forced employers to increase the
wages they paid workers
(ii)                By reducing imports from other countries, limited britain’s manufactured
export to these markets
(iii)               US counted on sales of agricultural goods to Britain to pay for imported
goods
·       Without agricultural exports, US could not afford many British imports
·       1832 reform act began the political process that eventually abolished corn laws, repealed in
1846
·       Crop failures in Ireland in 1840s left parliament with no choice
·       As opposed to mercantilist policies, Britain adopted liberal trade values, became workshop of
the world
JS Mill and the Evolution of the Liberal Perspective
·       Liberal ideas behind full blown capitalism was destructive for European economies in the 18 th

century
·       Developed philosophy of social progress based on ‘moral and spiritual progress rather than
mere accumulation of wealth’
·       Doubted how competitive process and economic freedom inherent in capitalism would turn
the most powerful human motive into service of society’s welfare
·       Recognised inequality of outcomes produced by the market, stat must take definitive action
to supplement the market, correcting its failure or weakness
·       All individuals must start on equal terms, with division of instruments of production fairly
among all members of society
·       Once each member has equal amount of wealth and property, they must be left to their own
exertion not to be interfered with by the state
·       Government role was to promote equality of opportunity
·       Selective state action in educating children and assisting the poor
·       Said ‘ centralize knowledge, decentralize power’ , guiding principle was still laissez faire
Keynes and the Great Depression
·       His ideas gained popularity from the 1930s to the 1970s
·       Was the first to separate the study of economic behaviour and individual incentives from the
study of broad aggregate variables and constructs
·       If aggregate demand fell, the resulting weakness in production would lead to decline in
wages
·       During period of economic woes, Keynes advocated a countercyclical fiscal policy,
government should undertake deficit spending to boost consumer spending to stabilize
aggregate demand
·       Deficit spending would lead to a multiplier effect, in which 1$ of government spending could
lead to more than 1$ of economic output, directly linked to the marginal propensity to
consume
·       Spending for one customer becomes income for a business that spends on equipment etc
and wages
·       Keynesian economics focuses on demand side solution to recessionary periods, if there is a
period of recession markets are not sufficient to overcome the cycle
·       Supply side economics would say that fiscal policy should target companies, rely on tax cut
and deregulation  
·       He said that it is not true that individuals possess a natural liberty in their economic activities
·       Individuals acting separately to promote their own ends are ignorant or weak to attain those
·       Experience does not show that individuals when they make up a social unit are always less
clear sighted than when they act separately
·       Laissez faire version of classical liberalism can hardly offer any explanation of booms and
busts, because according to the model they should not even occur
·       Recessions and depressions occur when individuals make decisions that are unwise in a
situation of uncertainty
·       An act in self interest may be both irrational and destructive for the collective
·       Paradox of thrift – when threatened by unemployment, rational response is to spend less, if
everyone purchases less, less is produced, fewer workers needed
·       Was worried about speculation in the international economy
·       His solution was to combine state and market influences in a way that it relies on the invisible
hand but supports a larger but still limited sphere of constructive state action
·       During the great depression, many states used combination of monetary and fiscal policy to
sustain wages for labour
·       Worried that due to great depression people could turn toward Nazism or fascism
·       Found the soviet system and communism repressive and disregarding individual freedom
·       Moral humanist who wanted to get beyond the problem of accumulating wealth, which he
viewed as disgusting morbidity
·       Friedman argued that his economic policies could lead to stagflation – a situation in which
there is low growth and high inflation
·       Critiquing the theory of comparative advantage, he preferred a certain degree of
specialization rather than comparative advantage
·       Surplus countries exert a negative externality on their trading partners, they get richer at the
expense of others
·       When trade deficit increases, unemployment rises and GDP growth slows down, products of
surplus countries should be taxed
Keynesian compromise
·       Played a major role in the setting up of IMF, World Bank and GATT
·       Problem was to square two allied objectives – necessary to restore stability and economic
growth while helping states recover from the war
·       Positive Government action was necessary to deal with problems the invisible hand did not
solve, same time he advocated free international economic system
·       There would be no incentive for states to avoid substantial trade surplus, burden would
continue to fall on the deficit countries
·       Keynesian compromise – management of the international economy would be conducted
through peaceful cooperation of states in the Bretton woods institutions
·       States would gradually reduce their regulatory policies to become more competitive
·       Embedded liberalism – strong international markets subject to social and political restraints
and regulations reflecting domestic priorities became mainstream
·       Mid 1960s golden age – role of state emphasised to create democratic socialist system
·       Post WW II system worked well because US paid expenses to maintain the global monetary
system
·       Countries like Japan and Western Europe benefited from the open trade, peace and security
·       Hegemonic stability – international markets work best when a hegemon accepts the costs
associated with keeping them open for the benefit of both itself and allies by providing
certain international public goods at their own expense
·       Those at Bretton Woods envisioned an international monetary system that would ensure
exchange rate stability, prevent competitive devaluations and promote economic growth
Resurgence of classical liberalism
·       In 1973, US replaced the fixed exchange rate system with flexible exchange rate
system, led to increased speculation
·       The same year OPEC countries hiked their oil prices
·       Keynesian policies to deal with recession generated stagflation – low growth and
high inflation
·       Hayek – government role for economic security first step to slippery slope to fascism
·       Hayek role of the state in economy
(i)                  State should provide framework for competitive markets
 (ii)                Employ rule of law criteria to distinguish permissible from non permissible
state intervention
(iii)               Moves towards idea of minimal state
·       He said that government control of our economic life amounts to totalitarianism
·       Coordinating function of the price system requires the working of competition
·       Price system is endangered by tendency of capitalist entrepreneurs to subvert
competition through monopoly  
·       Only way to have security and freedom was to limit the role of government and draw
security from the opportunities provided by the market
·       Friedman – government is an instrument through which we can exercise our
freedom, yet by concentrating power In political hands it can be a threat to the
freedom
·       Friedman rejected the use of fiscal policy as a tool of demand management,
·       Great depression had been caused by an ordinary financial shock whose duration
and seriousness were increased by subsequent contraction of money supply caused
by misguided policies of the central bank
·       Capitalism with free competitive market diffuses power and preserves freedom
Reagan, Thatcher and Neoliberalism
·       Thatcher motive was TINA – there is no alternative to economic liberal policies
·       She supported supply side economics, wanted to control inflation over
unemployment, monetarism supporter, increased interest rates
·       Through multiple acts, she reduced the power of trade unions to strike, key public
sector industries were privatized
·       Neoliberalism emphasises growth over stability
·       Reagan supported supply side economics, lower taxes instead of increased
spending will increase money supply and then demand
·       Reaganomics – deregulation of banking, energy, investment; privatization,
decreased social spending, increased military spending
·       Cutting of individual income tax and corporate tax led to decrease of
unemployment below 6%, inflation reduced t below 4%
·       Laffer curve – excessive tax rates actually reduce potential tax revenues  by
lowering incentive to produce, insufficient tax rates directly lead to lower tax
revenue
·       Argued that the state was too big and needs to be rolled back
·       State reflects vested interests, market was neutral that redistributes income to
those who are most efficient, hardworking
·       Might lead to inequality but benefits will trickle down to lower sections
·       US promoted globalization in mid 1980s to enhance production efficiency, new
technologies, generate jobs
 ·       Neoliberal policies – eliminating price control, deregulating markets, lowering
trade barriers, reducing stae influence in the economy
·       Neoliberalism is distinct from classical liberalism insofar as the state does not
advocate laissez faire, but the state is strong  to bring about market reforms
·       In Chile, Pinochet led a sweeping neoliberal economic reform,
·       Late 1980s Washington consensus – benefits of economic liberal policies
promoted through IFIs
·       Policies promoted by Washington consensus included – Reduce national budget
deficits, Reform tax system, Liberalize the financial sector with the goal of market
determined interest rates, adopt a competitive single exchange rate, reduce
trade restrictions, abolish barriers to FDIs, privatize state owned enterprises
·       Most of the ex communist regimes of eastern Europe replaced centralized state
planning with market oriented development strategies
1990s and 2000s : Neoliberalism and Globalisation under attack
·       It became commonplace to read that neoliberalism was practically and theoretically
triumphant
·       Neoliberal style capitalism and open markets were directly linked to the US economic and
military interests
·       Mexico, India, China adopted pro market reforms encouraging FDi and trade with US
·       Criticism – violation of human rights, damage to environment, depriving the poor countries of
effective representation
·       Battle of seattle – strong anti globalization protests
·       Joseph Stiglitz – criticized the IMF for making it difficult for developing countries to get out of
debt and benefit from globalization
·       According to him, globalisation could be a success or a failure depending on who manages
it, if managed by the state it may be success, if managed by IMF it will fail
·       For eg – south Asian countries benefited from globalisation because it was managed by the
state
·       The IMF advocated ‘shock therapy’ in a rush to market economies, without first establishing
institutions to protect the public and local commerce
·       IMF loan conditions led to fiscal austerity and rising interest rates, this led to bankruptcy,
unemployment
·       Dani Rodrick – too much economic integration, free trade poses a threat to democratic
politics
·       Open markets succeed only when embedded in social, legal, political institutions that provide
them legitimacy by ensuring that the benefits are equally shared
·       The countries that experienced greatest growth during the heyday of ‘Washington
Consensus’ were Japan, China, South Korea which never fully embraced globalization
·       Friedman – recognised environmental concerns due to globalisation, government needs to
create incentive for technological innovation in renewable energy
·       David Colander – law of one price, wages and prices in the world would become more
equalized with the spread of capital and technology
·       UN, WB, IMF  imposed market based policies on countries that lacked socio political
institutions like good government and accountable leaders
·       Poor countries need to be allowed to develop their own institutions to support market system,
even if they want to use protectionism
The financial crises
·       Alan Greenspan, the chairman of the US Fed Reserve after 2008 admitted that his faith in
self regulating financial market had been misplaced
·       Before the crisis, he argued that financial markets were self regulating, rational and profit
maximising financial actors took all necessary steps to avoid excessive risk taking
·       Retrospectively, banks and investment firms were willing to incur economic risks
·       High yielding investments – original investors profited handsomely from the original deals,
risks associated were spread out to new investors and mortgage holders
·       Later measures were intended to stabilize the financial system and correct policies that
threatened to destroy it
An outdated economic theory and ideology
·       Keynes – markets are prone to failure
·       Friedman – nation’s money supply was key to inflation, market self correcting mechanism
·       Efficient Market hypothesis – at every moment, shares price themselves in the market
through attracting the input of all information relevant to their value
·       Models have many shortcomings when it comes to quantifying fundamentals such as
preferences, technology
·       These models assume an equilibrium but markets exhibit uncertainties
·       Free market theorists have overestimated the markets ability to self adjust
·       Factors that account for popularity of laissez faire outside academia
(i)                  Group think among politicians and people in finance reason for
entrenchment of theories
(ii)                Letting the market decide public policy is a correct and simple, laissez faire
policies have been much easier to understand    as opposed to the messy
role of politics in resource distribution
(iii)               Focus on growth rather than stability and equality of income distribution
(iv)               Promise of greater wealth and faster growth easier for the public to buy
rather than higher taxes , slower growth for sustainability
(v)                 It has been supported by the  wealthy who dominate the media and political
space
(vi)               Financial oligarchy has developed in US that serves their interest at the
expense of public
We are all Keynesians
·       For HILs Keynes is a key figure because of his efforts to manage society that serves broader
interest of society
·       Some OELs agree, the era of financial liberalization has ended, state plays a role in rescuing
banks
·       HIL proposals
(i)                  Spend more to grow the economy, don’t worry about inflation
(ii)                Invest more in technology
(iii)               Impose tougher regulations on banks
(iv)               Manage globalization without stopping it
·       Keynes would suggest that financial system would require framework that only the state can
provide , state can enforce laws without stifling profit motive
·       HILs don’t have a problem with globalization but would like equitable distribution
·       Reform institutions like IMF, WB, creating policy space for developing countries to be more
protectionist, more lax on IP rights
·       Developed countries need to drop their protectionist barriers to key LDC exports like textiles
and agricultural goods, allow immigration from poor countries, forgive debt of poor countries
·       HIL scholars observed – Nordic countries have highest openness to international economy
and highest expenditure on social programs
·       Government spending compatible with openness of market
·       Dani Rodrik – need for maintaining ‘escape clauses’ and opt outs so that individual countries
can benefit from globalization consistent with their political realities, cultural needs,
resources
·       OELs less comfortable with Keynes ideas,  democrats like Obama share more interventionist
views
·       Americans are conservative people who distrust the state but also have an appetite for risk
·       Proposals made by OELs
(i)                  Limit government support for banks, infrastructure
(ii)                Decrease regulation from many parts of the economy
(iii)               Cut taxes from the wealthy and middle class
(iv)               Foster more globalisation
·       OELs say that financial crises was the fault of the government
·       Fed reserve created housing bubble in 2001 by dropping interest rates
·       Globalisation is a good thing, lifted people out of poverty
·       US needs to lower its out of control budget deficit, reduce trade deficit, increasing national
savings
·       Big stimulus spending will generate inflation, governments must return bailed out companies
to private control
ORDOLIBERALISM
·       Failure of liberalism resulted from lack of policy makers to Smith’s insights that market is
embedded in legal and political systems
·       Espouse classical liberal notions – competition, economic and political freedom are
inextricable, individuals protected from excessive state power
·       Ordoliberals emphasize that individual freedoms must be protected from private power in
form of monopoly control
·       Market processes will promote liberal values only if rules governing market process are
established by the state   
·       Rules governing market process should be constitutional rules immune from political
manipulation that reflect shared liberal values of society
 
Wealth and power : the mercantilist perspective
 
·       Mercantilism – basic compulsion of all people and nation states:  to create and sustain
wealth and power in order to preserve nation’s security from any number of real and
imagined threats
·       Classical mercantilism - Efforts by state to promote exports and limit imports generating trade
surplus
·       Realism – emphasises state efforts to achieve security, mercantilist focus on economic
threats, realists emphasise a larger amount of physical threats (military and economic
threats to a state)
·       Neomercantilism – more complex world marked by interdependence and globalisation, states
use economic instruments to protect their societies
·       Five theses in the chapter
(i)                  Mercantilism is rooted in the desire for protection by both individual and
state
(ii)                States have been and will always regulate markets
(iii)               States pursue economic liberal objectives only when they coincide with
national interest
(iv)               Globalization has entrenched national insecurities, not reduced compulsion
of states to protect themselves
(v)                 States find it difficult to cooperate with one another to solve financial crises
Mercantilism as History and Philosophy
·       Classical mercantilism – rise of modern nation state, idea of state building in economy for the
sake of making the nation state dominated economic thought
·       Nation – collection of people who define themselves as  members of an extended political
community
·       State – legal entity, sovereignty over defined territory and population,
·       Charles Tilly – war was the primary factor that motivated monarchs to organise societies
·       15 century – fiefdoms formed larger state units to protect themselves against other states
th
·       Warrior kings created bureaucratic machinery to make budget, collect taxes
·       Kings declared themselves as state to control the nobles, many kings conceded absolute
property rights and limits on their power to nobles
·       By 15 century France was already a nation state, followed by Holland, England, Spain
th

·       Henry VII and Elizabeth I pursued industrial policy (state planned strategy to promote certain
businesses) – enclosure acts, monopoly rights, tariffs and export subsidies, import
substitution policies
·       After 30 years war – states became sovereign over territory, political authority was
centralized
·       Trade replaced agriculture as principal source of income, merchants gained social position
·       Merchants wanted strong state – would protect their interests, state sanctioned monopolistic
merchant control over certain industries was profitable
·       Security dilemma – other states threatened by first state’s efforts to increase war making
capabilities
·       Zero sum outlook – absolute gains by one state meant absolute loss by another, a policy that
would benefit one group would by definition harm the other
·       Territorial defence first priority of the state, it was expensive to raise armies wealth became
important for national security
·       Mercantilism was synonymous with exploration and imperialism, colonialism was instrument
states used to control trade and generate wealth
·       Colonies – market of goods from mother countries, source of raw material, cheap labour
·       Dominant powers used violence to harness advantage for their own traders, slavery, opium
trade, genocide against indigenous people of America
·       To grow its wealth, England introduced fiscal policies that discouraged colonists from buying
foreign products and incentivise them to buy their own products
·       Sugar Act of 1974 raised duties on foreign refined sugar imported by colonies to give British
growers in West Indies a monopoly    
·       Navigation act of 1651 forbade foreign vessels from trading along the British coast and
required colonial exports to first pass through British control before being redistributed in
Europe    
·       To protect British manufacturers, government raised tariffs on competitive goods and
subsidized exports, competitive imports from colonies was banned,
The Economic Liberal challenge to mercantilism
·       Smith attacked mercantilism for restricting competition, production inefficiencies
·       Comparative advantage – even when a country can produce variety of goods more efficiently
than other countries, it should specialise in producing select number of items and trade with
other countries for other goods it needs
·       Smith supported taxes on luxury carriages, alcohol, sugar and tobacco, favoured navigation
acts that required only English ships to transport between UK and colonies
·       Smith differentiated between money and wealth – mercantilists would say that wealth is
merely bullion (precious metals ) but wealth of a country consists, not in its gold and silver
only but in its land, houses and consumable goods
·       Smith was opposed to policies that required America to export products like fur pelts only to
England, laws made it illegal for Americans to operate steel making furnaces
·       Mercantilists encouraged war so that they could lend money at high rates to the government
and exploit the conquered lands
·       Mercantilism offers a corporatist belief that state and business are allies in pursuit of
common objective such as domestic economic growth
·       Liberals advocated a clear separation of state and businesses
·       Free trade not an ideological end, economically liberal states use free trade policy as a tool
to support their industries and gain competitive advantage
·       IN the face of growing American and European competition, British manufacturers had
countermovement against open market policies, in favour of protectionism
·       After 1870s, there was wave of economic nationalism (loyalty to the nation state), 2 wave of
nd

imperialism
Protectionism in US history
·       Alexander Hamilton – specialization in agricultural production was not in the best interest of
the US, would not make it economically and militarily powerful
·       Hamilton’s rationale for promoting manufacturing was a defensive neomercantilist one, he
argued that it was key to defending ‘independence and security’
·       Cultivation of domestic manufacturing would boost wealth, would reduce reliance on unstable
foreign markets
·       Henry Carey was critical of the impact of free trade on traders, farmers and women
·       Argued for protection of US infant industries, role of state in protecting domestic industries
·       Favoured export subsidies to make US goods more competitive
·       Friedrich List – it is more important to invest in the future ability to produce more than to
consume fruits of today’s prosperity
·       Investment in education, technology, manufacturing industrial goods more important than
agriculture
·       Liberal policies did not equally benefit the importers and exporters, British technology was
better than European labour
·       In a cosmopolitan world there could be no free trade until states could compete with one
another on an equal footing
·       During War of 1812, US Congress doubled tariffs and continued till WWII
·       Congress subsidized railroads along with manufacture of coal, iron, steel
·       At the onset of Great Depression, Smoot-Hawley tariff act raised average tariff to 48%
·       Donald Trump – economic nationalismand neomercantilism, key goal of protectionist policies
was to pressure foreign governments, tariffs can protect domestic workers
Keynes, Depression and Postwar order
·       After 1929, many lost faith in market capitalism and increased support to Nazism and
Fascism
·       Keynes – markets sometimes fail, recessions and depressions last a long time
·       To diffuse the tendency of people to support authoritarian leaders, states should pump
national economy to stimulate employment
·       Formation of Bretton woods led to promotion of economic liberal objectives
·       GATT brought down trade barriers, IMF eliminated currency discrimination, WB helped in
post war reconstruction
·       Role of IFIs – sustain capitalism within pro west countries, containing communism of USSR
·       US benefited from use of dollar, US role in providing liquidity, finance, aid,
·       US trade concessions – sacrifices that took the form of shifting of low paying jobs to Japan,
Europe
Entrenchment of Neomercantilism
·       In 1973, OPEC raised price of oil 4 times, embargoed oil shipments to US and Holland,
reduced oil shipments to the rest of the world
·       This one and 1979 price hike weakened the west
·       Dependence of the west on OPEC for oil helped push issue of economic security higher on
the policy agenda of oil importing countries
·       Factors leading to shift in international political economic structure
(i)                  US withdrawal from Afghanistan, Nixon administration implemented
pentagonal balance of power configuration based on increasing
interdependence
(ii)                Post oil crisis, US emphasis on free trade
·       Before WWII many states had high tariffs, boycotted exports, stopped these in 1970s
·       Increasing interdependence made it difficult to be protectionist and isolationist
·       Neomercantilist policies – government spending,  regulation of industries, interest rate
changes
·       1970s – US sponsored development of strategic petroleum reserve, promoted development
of North Slope Oil fields in Alaska
·       There was increasing use of nontariff barriers – complex government regulations related to
health and safety standards, licensing and labelling requirements
·       Voluntary export agreement – negotiated quota between an exporter and an importer,
exporter voluntarily complies with the importer’s request to limit exports
·       Japan – Ministry of international trade and industry cooperated with industry officials and
liberal democratic party to guide development, some industries received subsidies        
Neomercantilism and globalization
·       Reagan and Thatcher – market oriented policies for more wealth, political and military
powers to advance their countries’ interest
·       Gilpin made difference between malevolent and benign mercantilism – former is a hostile
economic warfare and expansionary economic policies to expand their territorial base at the
expense of others
·       Benign mercantilism is defensive In nature – protect the economy against untoward
economic and political forces
·       Reagan doctrine – encouraged LDC to adopt anticommunist stance and liberal policies of
IFIs
·       Reagan mixed liberal and mercantilist – liberal goal was to create level playing field by
cutting down  nontariff barriers
·       Japan’s relations with the west became acrimonious because of its trade surplus, export led
growth strategy, import restriction
·       Reagan threatened to use super 301 legislation to punish Brazil and Japan for using export
subsidies
·       US was dependent on Japan to buy its exports, invest in US Treasury bonds, pressurizing
NATO to reduce dependence on USSR strengthened criticism of US foreign policy
Neomercantilism and Financial crisis
·       People found it harder to adjust to dislocations of globalization
·       Political and economic competition between states has intensified
·       Businesses have been compelled to go abroad in search of cheap labour
·       Neomercantilists – globalization tends to undermine itself, as more wealth and power
diffused around the world, more states have investment in protecting themselves against the
negative impacts of globalisation
·       Financial crises uprooted socio, economic and political structure
·       The crisis has fuelled illegal economies, weakened the dollar, increased US dependence on
China
·       It has undermined the idea that the US economy is the model, convinced others that US is
trying to maintain its wealth and power at the expense of others
·       Growth of populist movements in Latin America can’t be separated from desire of protection
from globalisation
 
LDC Neomercantilist policies
·       Developing countries have been looking for mix of policies that accounts for interests of the
society and the market
·       LDCs wanted to catch up with the developed countries,  accept the same rules as the
leading countries
·       Chang – When players or conditions for each team is unfair and that there needs to be a
level playing field
·       For LDCs, trade protection plays role in generating income protecting local producers from
foreign competition
·       Most developing countries signed the 1994 agreement that introduced liberal norms for
agricultural subsidies, IP rights, they did not benefit from final agreement
·       Structural Adjustment policies imposed on them are a form of malevolent mercantilism
·       IMF and World Bank were another example of state power being used to increase US,
European and Japan state power
·       Industrialized countries trying to adopt measures to require high labour and environmental
standards are masking protectionist support for their own inefficient industries
Neomercantilist policies today
·       Poor countries have particular interest in catching up with industrialized countries, but must
work within the ideological constraints imposed by WTO
·       Two types of neomercantilist policies – industrial and infrastructural
·       What many emerging economies want are weak protection of IPRs, mix of protectionism with
some free trade     
Industrial and infrastructural policies
·       Many states limit foreign investment in many subtle and non subtle ways
·       They can limit the percentage of shares by international company in a domestic firm
·       Can ban foreign investment in strategic sectors
·       US and European countries had many such restrictions till 20 century          
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·       Japan prohibited foreign direct investment in vital industries, limited foreign ownership at
50% in many industries
·       East Asian economies – political elites and heads, encouraged high rates of savings,
manipulated the prices
·       They used a lot of public investment to complement private investment
·       Developmental state entails massive investments in public infrastructure
·       Public education and investments in higher education give widespread economic benefits
·       Developed countries have done the same to spur innovation, development of knowledge
based economy
·       Government procurement can be a powerful neomercantilist mechanism to spread benefits
to local businesses that are denied to foreigners
·       US government uses procurement policies to create ‘national champions’ – big globally
competitive companies like IBM, Microsoft that relied on long term government contracting
·       Purpose of helping one’s own companies is not just to save jobs, boost exports or hurt
foreigners. The purpose may be defensive and non-economic
·       Preserving ‘cultural sovereignty’ in the face of globalization’s homogenizing effects is a
political goal
Strategic Resource policies
·       Interdependencies are not always symmetrical between states, suppliers of oil and other
strategic resources as something positive that improves their power and security
·       Only complete self sufficiency In raw materials would make nation state politically and
economically secure
·       States try to reduce dependence on other countries, while fostering conditions that make
others dependent on them
·       France expanded its nuclear power industry after the 1973 oil crisis
·       China has signed long term supply agreements with countries in Africa and Latin America,
invested in exploration as a way of getting ‘first dibs’ on these global commodities
·       Motivation for benign mercantilism is derived from the fear that other countries might use
malevolent mercantilism
·       Access to and control over strategic resources has always been a top concern of
industrialised nations who fear that being 'cutoff’ from energy, minerals will cripple their
economy
·       Industrialized democracies establish political and military alliances with governments of big
resources
·       Countries like China and US encourage national companies to diversify suppliers overseas
·       Global tension as commercial development and national security are increasingly wedded in
the minds of policy makers
US Beef and Japanese National Security
·       In 2003, US discovered its first ever case of ‘mad cow’ disease which affects the nervous
system of the cattle
·       Japan banned the import of US beef, costing 1.4$ billion annually to the US
·       Japan lifted the ban in 2005 only to reimpose it within 2 months
·       In 2006, they lifted the ban under the condition that they be inspected
·       Agreement – surprise inspections in US plants with US officers, Japan said that in the case
of another case, they would target the shipment rather than a blanket ban
·       This case of Japan’s resistance to beef imports from the US blurs the line between
acceptable and unacceptable forms of protectionism
China vs Unocal
·       In 2005, Chevron corporation, the largest US oil based conglomerate made 16.5 billion bid to
acquire controlling stake in its smaller domestic rival, unocal
·       Chinese National Offshore Oil Corporation, a firm in which Chinese government holds a 70%
stake leveraged its strong fiscal reserves to make a 18.5 billion proposal for Unocal
·       The deal became a national security issue, house of representatives passed a resolution
urging the president to block the deal as threat to national security
·       Chinese foreign ministry condemned it, CNOOC dropped its bid
·       Both the countries operated under fundamental mercantilist principle
·       US framed the issue under the guise of realism as a security concern
·       China retaliated with classical economic liberal language about interfering with the market
·       Acting through its controlling interest in CNOOC, Chinese government was attempting to
secure oil supply – perfect example of neomercantilism
 
 Economic Determinism and Exploitation : the Structuralist perspective
Feudalism, Capitalism, socialism – Marx’s theory of history
·       Marx understood history to be a dynamic, evolving creature determined fundamentally by
economic and technological forces
·       Historical materialism – takes its starting point  the notion that forces of production of society
(sum total of knowledge and technology contained in society) set the parameters for the
whole political economic system
·       At lower level of technology society would be organized into hunting gathering system
·       At a higher level we would see an agricultural system using steel ploughs and horses, oxen
·       Technological determinist - Technological advancement leads to change in social relations
·       Feudalism characterised by strata of peasant farmers and a smaller aristocracy
·       Human knowledge and technology have a quality – forces of production will continually
improve
·       humans are agents of change, organized into conflicting social classes, class relations
change more slowly than technological development
·       bourgeoisie controlled the resources, they made most members of the parliament, controlled
the state
·       proletariat were the exploited workers who did not receive adequate wages
·       three objective laws that would destroy capitalism from within
(i)                  law of falling rate of profit – as investment causes machines to replace
workers, profits will decline
(ii)                law of disproportionality – because of its anarchic, unplanned nature is
prone to instability such that workers cannot afford to buy what they make,
extract surplus value, poor workers could not buy them leads to an
oversupply driving down the profits
(iii)               law of concentration – increasing inequality of income and wealth
distribution    
·       capitalism is a necessary stage towards socialism, it plays two roles
(i)                  breaks down feudalism
(ii)                creates social and economic foundations for the eventual transition to a
higher level of social development
·       when class conflict becomes very severe, social revolution will sweep away existing social
relations
·       neo Marxists and structuralists accept notion of exploitation, separated from labour theory of
value
·       neo Marxists don’t say that capitalism will destroy itself, capitalism was regarded as a viable
economic system’
Contributions of Marx to Structuralism
Definition of Class      
·       capital, what marx called the means of production refers to privately owned assets used to
produce commodities in an economy       
·       capital goods refer to existence of such productive assets
·       to call an asset capital means that it is privately owned, someone has legal ownership and
effective control over the asset
·       Marxists regard the original distribution of assets as unjust, historically small number of
people confiscated large amounts of land and other resources
Class conflict and exploitation of labour
·       Exploitation of the proletariat due to lack of bargaining power
·       In a capitalist economy, there is certain level of unemployment (there is idle
machinery that could put everyone to work if it is utilised properly ), workers are
denied access to capital and the ability to produce goods
·       By restricting access to productive assets, capitalists create an artificial scarcity of
capital
·       The presence of unemployment functions to keep down the wages of the employed
·       Workers are in a situation In which they have to either accept low wages or starve
·       The only thing worse than being exploited is not being exploited, the worst outcome
for those in the working class is to be unemployed
·       Even when conflict is recognised, it is possible that a compromise between classes
can be found
·       France, Sweden and Germany – harmonious relationship between the workers and
businesses, high wages, unemployment compensation
·       The presence of an ‘objective’  interest does not mean that workers will actually form
socially and politically active movement
·       They may not recognise common objective interest (false consciousness), they may
recognise interest but may not be able to organise 
·       Workers are a class in itself without becoming a class for itself
Capitalist control over the state
·       State is the most powerful organization  within any society
·       Capitalists and workers would seek to capture the state
·       Capitalist class has easy financial resources which translates into easy influence to the
political system
·       Workers for their part have greater numbers, to turn this into political power the state must
have strong democratic institutions that give workers a role in policy making
·       Capitalist don’t always prefer democratic institutions, want property rights to be defended but
can happen in undemocratic countries
·       Workers influence political system through strikes and protests, they have power to withhold
labour through strikes
·       Superior financial resources of capitalists and the difficulties in forming large worker or social
movements give them an advantage
·       Like mercantilists, they agree that state can be regarded as an actor in global system made
of other states
·       State can form treaties, agreements, can go to war
·       Mercantilists see state as an actor with its own interests, structuralists believe that state will
act to advance       narrower interest of class that dominates it
·       Marxists see imperialism as a natural feature in the global capitalist system
·       In search for profits, capitalists in the rich states not only exploit domestic workers but
workers in other countries
Ideological manipulation
·       Power derives control over hard resources like capital or military, power has a softer side to
control people’s heart and mind
·       Ideology is linked to class, generating notion of capitalist or working class ideology
·       The domain of ideology is another terrain upon which class struggle is fought
·       Capitalist ideology goal is to give legitimacy to capitalist economic system
·       Dictatorship least stable because it relies on brute military force, democracy is seen as
legitimate
·       Capitalism is regarded as legitimate, people believe that it is a just system, those with fewer
resources will believe that they should have fewer resources
·       Belief of workers in the system ensures that
(i)                  They will not replace it with something else
(ii)                They will work harder within the system, increase income of capitalist
·       Noam Chomsky analysed the ways by which consent of proletariat is manufactured eg –
threat of foreign enemies
·       Capitalists use their resources to promote their ideology while workers promote their own set
of competing beliefs
·       Capitalists not only exploit workers but also take part of this undeserved wealth, manipulate
beliefs of workers, apathetic of their own exploitation
·       Belief in the legitimacy of capitalism by workers is false consciousness
Lenin and International capitalism
·       Through imperialism advanced capitalist states expanded control over ‘backward’ colonial
regions leaving them unevenly developed
·       Centralization of market power into a hands of a few capitalists fuel capitalism
·       Profit seeking capitalists were unwilling to use surplus capital to improve living standards of
proletariats
·       To prevent capitalism from imploding, imperialism was necessary outlet  for surplus finance
·       Presence of monopolies and imperialism was another epoch of history between capitalism
and socialism
·       Imperialism converted poorer colonial regions into new proletariat of the world
·       Elites in poor regions competed for capital and investment, became targets for production
monopolies
·       Imperialism remained influential in China, Vietnam, Venezuela
·       Assumption of lenin theory of imperialism – capitalism’s nature of finance and production
biased in favour of owners of capital
·       In theory, relationship between capital abundant nations and capital scarce nations should be
one of interdependence because each needs the other for maximum growth
·       The result in practice is dependence, exploitation and uneven development
Imperialism and global world orders
Dependency theory
·       Highlights the relationship between core and peripheral countries, calling attention to the
constraints put on the latter group
·       Global political economy essentially enslaves less developed countries of the south by
making them dependent on the capitalist countries
·       Dos Santos sees three areas of dependence – colonial, financial industrial, postwar
multinational corporations
·       Andre frank development of underdevelopment thesis – developing nations were never
underdeveloped in the sense of backward societies
·       Once great civilizations in their own right became underdeveloped due colonization
·       Wanted peripheral nations to withdraw from the global political economy
·       UNCTAD – developing countries have made their goal to monitor and recommend policies
that would redistribute power and income between north and south
·       Many have supported the call for new international economic order after oil price hike
·       Served as critique of the relationship of core to peripheral nations
Modern world system
·       Focuses on  the way global system has developed since 15 century
th

·       Immanuel Wallerstein – world economy provides sole means of organization in international

system
·       Modern world system shows the following characteristics – single division of labour, nation
states are mutually dependent on economic exchange, sale of goods and products for
profit,  division of the world into 3 socioeconomic units
·       Capitalist core states of northwest Europe moved beyond agricultural specialization to higher
skilled industries
·       East Europe became the agricultural periphery and exported grain, wood to the core
·       Mediterranean Europe and labour intensive industries became the semiperiphery
·       MWS not based on nation states but the core represents a geographical region
·       Every nation has elements of the core, periphery and semiperiphery
·       Core states dominate periphery through unequal exchange for extracting cheap raw material
·       Semiperiphery has a political role, both exploited and exploiter
·       Like Marxists, mercantilism accepts that the world is politically arranged in an anarchical
manner, no single sovereign political authority
·       State served interest of the capitalist, state machinery has certain autonomy
·       Theory criticised for being deterministic, economically and in terms of constraining the effect
of global capitalist system
·       Wallerstein argues that nation states are not free to choose courses of action, regulated to
play economically determined role
·       He is faulted for viewing capitalism as end product of current history
Neoimperialism, neocolonialism and empire building redux
·       Neoimperialism is newer and more subtle form of imperialism
·       Differs from classical imperialism as there is no need to capture territory
·       Motives behind US efforts to promote economic liberal policies of GATT could not be
separated from security interest
·       Realists argue that US intervened in Vietnam and other developing countries to ‘contain
communism’
·       US was motivated by breakdown of British hegemony coupled with growth of monopoly
capitalism – domination of economy by large firms which concentrate and centralize
production
·       Impacts of Vietnam war and 1973 oil crisis led to decline of US hegemony
·       Classical imperialism emerged with carter doctrine – US’s willingness to intervene in gulf
region to protect its oil interests
·       Reagan doctrine – US renewed its efforts to intervene in developing nations that threatened
economic and political interests of US
·       After fall of USSR, Bush ushered in a ‘new age of imperialism’
·       Core nations could penetrate in the periphery via trade
·       Washington consensus – economic liberal trade served this purpose, became rationale for
IMF, WB, WTO
·       These IFIs  were ‘fronts’ viewed by structuralists to exploit the periphery
·       Clinton’s campaign of engagement and enlargement mixed hard and soft power, not overtly
interventionist
·       Structuralists critical of the latest phase of capitalism – hypercapitalism that drives TNCs to
produce new products in a supercompetitive global atmosphere in which individuals are
made to feel that they are better off but they are not
·       Neoconservatives felt that after the fall of USSR , US missed an opportunity to capitalize on
unipolar moment by imposing its benevolent will on the world
·       During Bush, US had policies similar to the roman and British empire
·       US hegemony became a naked form of imperialism
A structuralist analysis of 2007 financial crisis
·       Point out the contradiction between global glut of capital and growing debt in most countries
·       Much of the capital was earned from export sales by emerging economies and not invested
back in US which led to a debt problem
·       Marx said that heavy investment in production leads to overproduction that outruns the
capacity of consumers to buy enough goods to keep the prices from falling
·       From 1990s to 2008, middle class and poor could easily get mortgages, mortgage increased
·       This form of debt would not have been troubling if housing prices kept increasing, but when
they started coming down, many people owed more mortgage than they could get by selling
house
·       Initially debt good for economy because those who borrow likely to spend it on car, house
·       When middle class spend large portion of their income to pay debt, leads to less production
and lower employment
·       Core nations looked at LDCs as export markets, semiperipheral countries employed
protectionist policies and have been on economic recovery
·       Solution – strengthening capacity of the state to regulate banking, financial system
·