International political economy
Question
Elaborate the Liberal economy. What is the difference
between a National or Liberal economy?
INTRODUCTION
The global economy is a complex system that requires global
cooperation. As long as the world is interconnected, the consequences
of our actions will not be contained within our borders.
-“Joseph Stiglitz”
In the study of International Political Economy (IPE), theoretical
perspectives provide essential frameworks for understanding the
complex interplay between politics and economics on a global
scale.It includes a variety of theoretical viewpoints that attempt to
explain how states and non-state entities interact in the international
arenas of commerce, finance, and development. Among these
approaches, liberalism and mercantilism stand out as fundamental
paradigms that provide distinct explanations for how political goals
impact economic relationships. This assignment will investigate
these two approaches, stressing their basic contrasts and
ramifications for international economic policy. As we go more into
the contrasts between liberalism and mercantilism, we must
consider how these ideologies affect economic policies and
international relations.
LAISSEZ-FAIRE:THE ECONOMIC LIBERAL
PERSPECTIVE
The term “liberalism” in international political economy (IPE) is
complex and takes on different meanings depending on the context.
In contemporary U.S. politics, a “liberal” is typically someone who
supports an active government role in addressing societal issues,
such as poverty and social programs. However, economic liberals,
often called “neoliberals,” advocate for a minimal role of the state in
the economy, focusing on market-driven solutions. In fact, their
views often align more with what are called “conservatives” in the
U.S. and other Western countries.The economic liberal perspective
emphasises the idea of liberty under the law and focuses on the
rational and competitive aspects of human nature, seeing
competition as constructive. Unlike mercantilists, who focus on
aggressive and combative traits of human nature, liberals view
self-interest as beneficial because it drives competition in
productive ways.
Roots and origin
This perspective originated in reaction to European developments
in the 17th and 18th centuries. François Quesnay and the
Physiocrats, for example, believed in minimal government
intervention in markets, advocating for laissez-faire policies. They
argued that government interference typically harms society. This
philosophy was carried forward by Adam Smith, often considered
the father of modern economics. In his seminal work, The Wealth of
Nations (1776), Smith argued against the mercantilist state, which
sought to create wealth through government power to ensure
national security.
Smith believed individual freedom in the marketplace was the best
way to allocate resources efficiently, as it avoided the risks of state
abuse. He was critical of Britain’s Parliament at the time, which
represented the interests of the landowning elite rather than
industrial entrepreneurs or ordinary citizens. His work laid the
foundation for capitalism, focusing on free markets, competition,
and minimal government intervention. These ideas have continued
to shape the thinking of modern economic liberals, such as David
Ricardo, Friedrich Hayek, and Milton Friedman.
Adam Smith is best known for his belief that a capitalist economy
ideally functions independently. In this system, consumers guide
the allocation of resources, while self-interest drives entrepreneurs
and firms to develop and produce goods and services that people
want. The market serves as a communication tool, relaying
consumer preferences to producers, and competition ensures that
the pursuit of self-interest ultimately benefits society.
Economic liberals, such as Smith, focused on cooperation and
competition between nations, seeing international trade as
beneficial for all parties. Smith argued that if another country could
produce goods more cheaply, it would be wiser to trade with them
rather than produce the goods domestically. Although Smith
opposed many state-imposed trade restrictions, he supported
specific measures like the Navigation Acts that protected British
industries through mercantilist policies.
David Ricardo, a successor to Smith, was a staunch advocate for
free trade and opposed protectionist measures like the Corn Laws.
He believed that free commerce allowed countries to specialise in
industries where they held a comparative advantage, benefiting
everyone. Ricardo viewed free trade as a way to stimulate
innovation, boost production, and tie nations together through
mutual interests. Ricardo and other economic liberals viewed it as a
positive-sum game, where cooperation could lead to collective
prosperity. He suggested that strong economic ties between nations
would diminish the need for conflict, fostering a more peaceful and
united world.
J.S MILL AND EVOLUTION OF LIBERAL
PERSPECTIVE
John Stuart Mill played a key role in shaping the evolution of liberal
thought, particularly as the relationship between the state, market,
and society changed with cultural values.Building on the liberalism
of Adam Smith and David Ricardo, Mill’s work Principles of Political
Economy with Some of Their Applications to Social Philosophy
(1848) became a defining text for liberalism for many years. Mill
recognized that while liberal ideas had fueled capitalism and the
weakening of central authority, they had also led to revolutions that
expanded individual freedoms in Europe and the U.S.He advocated
for selective state intervention, particularly in areas like education
and poverty relief, where individual efforts were insufficient to
promote social progress.This evolution of liberalism in Mill’s time
maintained the core principle of laissez-faire government yet
accepted limited state intervention where necessary. Mill’s
questions on the role of government—how much involvement is
justified and when it infringes on individual rights—continue to
shape liberal thought today.
JOHN MAYNARD KEYNES AND THE GREAT
DEPRESSION
John Maynard Keynes was a key figure in 20th-century political
economy, shaping a new strand of liberalism known as Keynesian
economics. His ideas gained prominence during the Great
Depression and World War II and were influential until the early
1970s. Keynes challenged the classical laissez-faire approach,
which believed the market would naturally correct itself after
disruptions. He argued that this model failed to explain economic
crises like booms and busts, which were caused by individuals
making irrational decisions in uncertain times, leading to collective
outcomes that were destructive.
One example Keynes gave was the “paradox of thrift,” where
people respond to economic uncertainty by saving more and
spending less. While individually rational, this behaviour reduces
overall demand, worsening the recession and unemployment that
people were trying to avoid. Keynes also warned about unregulated
speculation in financial markets, which could make the economy
vulnerable to disaster.
To address these issues, Keynes advocated for a balanced
approach where the state would intervene to stabilise the economy
but not overly restrict private enterprise. During the Great
Depression, governments adopted Keynesian policies, such as
deficit spending to stimulate demand and public works projects to
create jobs. In the U.S., President Franklin Roosevelt implemented
many of Keynes’s ideas, including unemployment insurance and
Social Security.
Keynes believed that a liberal society should protect individual
freedoms while ensuring economic stability, rejecting extremist
ideologies like Fascism or Communism. Like Adam Smith, Keynes
saw economics as a tool to improve society, not just to accumulate
wealth. He envisioned a world where people could spend their
leisure time enjoying a good quality of life, rather than merely
focusing on wealth creation.
RESURGENCE OF CLASSICAL LIBERALISM
In the late 1960s and 1970s, President Nixon and others began to
challenge Keynesian economic policies due to concerns over
government spending and stagnating growth. With the shift to a
flexible exchange rate system in 1973 and economic issues like the
OPEC oil crisis, Keynesianism was increasingly criticised for
leading to “stagflation” — the simultaneous occurrence of low
growth and high inflation. In response, economists like Friedrich
Hayek and Milton Friedman promoted classical liberalism,
advocating for minimal government intervention in the economy.
They believed that too much government control threatens
individual freedom and economic stability, arguing for free markets
as the best path to both economic security and personal liberty.
This ideology, later called neoliberalism, emphasised controlling
inflation and reducing state interference in private economic
decisions. These ideas were echoed in later political figures, like
Paul Ryan, who advocated for smaller government and greater
reliance on communities and private institutions for social support.
REAGAN, THATCHER, AND THE NEOLIBERALISM
In the early 1980s, classical economic liberalism regained influence
through a movement known as neoliberalism. Margaret Thatcher,
Prime Minister of Great Britain, and U.S. President Ronald Reagan
were key proponents of this approach, Thatcher’s famous slogan,
“There Is No Alternative” (TINA), reflected her belief in the necessity
of neoliberal policies.Neoliberals argued that the state was too large
and prone to representing the interests of powerful groups, whereas
markets were seen as neutral mechanisms that rewarded efficiency,
innovation, and hard work. While these policies risked increasing
income inequality, proponents believed that economic growth
among the wealthy would eventually benefit everyone through a
“trickle-down” effect. Both Reagan and Thatcher also emphasised
minimal state intervention, except in the area of national security,
where they adopted strong anti-communist stances. which
extended neoliberal economic principles worldwide.By the
mid-1980s, the United States began advocating for
globalisation,Globalization was expected to boost efficiency, spread
technology, create jobs, and help lift people in developing nations
out of poverty. In the late 1980s, the “Washington Consensus”
supported these policies, and institutions like the International
Monetary Fund (IMF), World Bank, and the General Agreement on
Tariffs and Trade (GATT) promoted neoliberalism. The success of
these policies in the U.S. and Great Britain, combined with the
collapse of communism in Eastern Europe, led many developing
nations to adopt more market-friendly strategies.By the 2000s, even
some proponents of globalisation started acknowledging its flaws.
By the mid-2000s, both economic liberal scholars and
anti-globalization activists converged on the idea that neoliberal
globalisation had created significant problems. They differed on the
solutions but agreed that global markets needed better regulation
and governance. Markets, they argued, must be embedded in
political and social institutions to address deeper human issues and
retain legitimacy. Ultimately, the global financial crisis of 2007
demonstrated the limitations of both globalisation and piecemeal
reforms, underscoring the need for more systemic change.
HETERODOX INTERVENTIONIST AND ORTHODOX
ECONOMIC LIBERALS ( A DEBATE)
The debate between Orthodox Economic Liberals (OELs) and
Heterodox Interventionist Liberals (HILs) centres around the role of
government intervention in the economy, especially in light of
financial crises.
Heterodox Interventionist Liberals (HILs) lean on Keynesian
economic principles, which emphasise that government spending is
necessary to maintain economic stability, especially during
downturns. They argue that the state must play an active role in
stabilising the financial system and managing the broader economy.
This includes:
•Increasing public spending, particularly in sectors like healthcare,
education, and infrastructure, to create jobs and stimulate growth.
•Imposing stricter regulations on banks, especially regarding their
capital reserves, pay, and bonuses.
•Advocating for reforms in international institutions like the World
Bank and IMF, aiming to give developing countries more flexibility
(“policy space”) to manage their economies.
Orthodox Economic Liberals (OELs), on the other hand, favour
minimal state intervention, supporting the idea that free markets
should primarily regulate themselves. They attribute the 2008
financial crisis more to government mismanagement, particularly
blaming low-interest rates that fueled risky borrowing practices.
OELs advocate for:
•Limiting government support for banks and social programs.
•Reducing taxes and regulations to stimulate private investment
and economic growth.
•Pushing for greater globalisation, with fewer trade barriers and
restrictions, arguing that it fosters global prosperity and poverty
reduction.
In the context of the recent financial crisis, OELs believe that
government bailouts and stimulus spending could lead to inflation
and burden future generations with debt. HILs, however, contend
that without state intervention, the financial system would collapse.
They argue that the state must prevent the excesses of unregulated
markets from creating financial instability.This debate reflects a
broader ideological struggle between those who believe in free
markets’ efficiency (OELs) and those who argue for the state’s role
in protecting the public from the instability of markets (HILs). While
OELs seek to preserve the laissez-faire system, HILs call for
reforms that would better manage globalisation and ensure more
equitable economic outcomes.
THE MERCANTILIST PERSPECTIVE
Our economic rights are leaking away. ... If we want to recover
these rights... we must quickly employ state power to promote
industry, use machinery in production, and give employment to the
workers of the nation....'
-Sun Yat-sen, 1920
Mercantilism, as the oldest economic perspective, is rooted in the
belief that nations must create and maintain wealth and power to
ensure security and independence from external threats.
Historically, classical mercantilism involved promoting exports and
limiting imports to generate trade surpluses, which would
strengthen the state and protect societal groups.
Realism, a theory closely related to mercantilism, focuses on
achieving state security, using both economic and military tools to
protect nations from a wider range of threats. As the global political
economy becomes more intertwined, distinguishing between
economic and military threats has become increasingly difficult.
Neomercantilism adapts these ideas to the modern world,
emphasising the use of a broader set of economic instruments to
safeguard societies in an interdependent world.
HISTORY AND EVOLUTION
Mercantilism, as both a historical and philosophical concept, is
deeply tied to the rise of modern nation-states in Europe between
the sixteenth and nineteenth centuries
During the fifteenth century, smaller fiefdoms consolidated into
larger state units for better protection. Warrior-kings established
bureaucratic agencies for managing finances, taxes, and other state
functions, asserting their authority as the embodiment of the state,In
exchange for nobles’ support in staffing armies and collecting taxes,
monarchs often granted them absolute property rights and limited
their own powers, leading to agreements that some historians
believe paved the way for modern democracy and constitutionalism.
Over time, European states like France, England, and Spain
emerged as nation-states, while others like Germany and Italy
unified much later in the nineteenth century.The Thirty Years’ War,
ending in 1648, marked a significant turning point for mercantilism.
States increasingly centralised political authority, established
common currencies, and promoted infrastructure to boost economic
growth.European states adopted a zero-sum approach to power,
believing that one state’s gain was another’s loss, leading to military
expansion and competition for resources.
Mercantilism is often associated with the first wave of European
imperialism. States, seeking wealth, used military power to occupy
territories and establish colonies, which provided markets for goods
and sources of raw materials and labour. Colonial powers like the
Dutch and British used these resources to strengthen their
economies and created charter companies to manage trade.
NEOMERCANTILISM
In 1973, OPEC drastically raised oil prices, embargoed shipments
to the U.S. and the Netherlands, and reduced supplies globally.
This resulted in soaring oil prices, followed by another hike in 1979,
transferring massive wealth to oil-producing nations and shifting
economic and political power. The oil crisis led to significant
economic recessions in both industrialised and developing nations,
As a result, economic security became a top priority for oil-importing
nations, even rivalling the cohesion of NATO in importance.
In response to the economic challenges of the oil crisis, the U.S.
and its allies promoted the opening of international markets through
negotiations under the General Agreement on Tariffs and Trade
(GATT) and bilateral agreements. As U.S. debt grew, trade became
a crucial tool for boosting exports and job creation. Countries like
Japan and South Korea capitalised on this open economy, adjusting
their strategies to focus on export-driven growth.
By the 1980s, neomercantilist policies were widely used to protect
national interests. One prominent example from the 1970s was the
U.S.-led effort to reduce dependence on OPEC oil.Japan’s
economic success during this period is a key example of
neomercantilism. By the late 1970s, Japan’s government played an
active role in guiding industries through the Ministry of International
Trade and Industry (MITI), providing subsidies and other support to
foster export-led growth
FREE MARKET VS ECONOMIC SOVEREIGNTY
“Understanding Liberal and Nationalist Economies"
(A COMPARATIVE ANALYSIS)
A liberal economy is one that is based on classical economic theory
and is distinguished by little government interference and a strong
conviction in the efficacy of free markets. The freedom of individuals
to invest, trade, and produce as they like is made possible by
private ownership of resources and businesses, which is the
foundation of the liberal economy.
In this paradigm, the government's functions are restricted to
safeguarding fundamental rights, upholding agreements, and
supplying necessities such as infrastructure and national defence.
The liberal economy upholds David Ricardo's theory of comparative
advantage, which views internationa by l trade as a positive-sum
game in which all participating nations profit from specialisation and
exchange. This is in stark contrast to mercantilism, which sees all
international trade as zero-sum and intrinsically competitive.
In contrast, a Mercantilist economy is predicated on the idea that
the state has a duty to increase its wealth by enforcing stringent
regulations over trade and commerce. Economic strength is thus
seen as a direct correlate of national power.
Unlike liberalism’s emphasis on individual enterprise, mercantilism
relied on heavy state involvement in the economy, with
governments regulating trade, controlling industries, and using
military might to enforce economic dominance. Mercantilism also
encouraged colonial expansion as a means of securing raw
materials and exclusive markets for exports, ensuring a continuous
inflow of wealth into the mother country.
Between the two systems, there are significant differences in terms
of government engagement. While mercantilist economies view
government participation as essential to regulating trade and
safeguarding domestic industries, liberal economies support less
government involvement and allow markets to function freely. The
belief that free trade produces the best results for everyone is a
fundamental component of liberalism's faith in the power of the
market. To build wealth and power, governments must aggressively
chase trade surpluses, according to mercantilism, which views
commerce as competitive.
Historically, mercantilism flourished in nations like Louis XIV's
France and Great Britain throughout their colonial expansion. In an
effort to make France economically independent while maintaining
control over trade routes and colonies,
On the other hand, the United Kingdom adopted liberal economic
policies during the 19th century, especially after the Corn Laws
were repealed in 1846, signalling a significant move in favour of
free trade. Following World War II, the United States emerged as a
leading proponent of liberal economic concepts, spearheading the
establishment of international organisations like the World Trade
Organization (WTO) and the General Agreement on Tariffs and
Trade (GATT) to advance open markets and free trade.
Mercantilism encourages self-sufficiency and the amassing of
material wealth such as gold and silver, which frequently leads to an
inefficient distribution of resources because industries are protected
regardless of how competitive they are. Liberal economics, on the
other hand, liberal economy encourages efficiency through
competition, meaning that only the most inventive and productive
businesses are successful. Wealth in a liberal economy is not
limited to holding onto precious metals or maintaining trade
surpluses; rather, it is determined by the country's total growth and
prosperity as a result of innovative industries and technological
advancements.
Aspect Liberal Economy Mercantilist Economy
Core Based on free-market Focused on maximising state
Philosophy principles; minimal wealth through government
government intervention regulation of trade and
in the economy. accumulation of precious
metals.
Market Control Market forces (demand Strong government
and supply) determine intervention, controlling
production, distribution, production, trade, and
and pricing. accumulation of wealth.
Individual vs. Prioritises individual Prioritises state control, often
State economic freedom and at the expense of individual
entrepreneurship. economic freedom.
Liberal Economy Mercantilist Economy
The U.S. follows a liberal France (17th century) under
economic model with a Louis XIV's finance minister
focus on free markets, Jean-Baptiste Colbert
open competition, and adopted a mercantilist
minimal regulation, approach, heavily regulating
though some government the economy to increase
intervention exists. national wealth.
The UK has embraced Spain (16th century)
neoliberal policies since followed mercantilism by
the Thatcher era, focusing on accumulating
emphasising privatisation, gold and silver from its
deregulation, and trade colonies and maintaining
liberalisation. trade surpluses.
Singapore is a prominent Japan (Tokugawa Era)
example of a liberal implemented mercantilist
economy with its open policies, emphasising
trade policies, strong domestic control and limiting
property rights, and low foreign trade, particularly
tariffs. under the sakoku ("closed
country") policy.
CONCLUSION
The major distinctions in the results of the liberal and mercantilist
economic theories are highlighted by the comparative data.
Through protectionism and governmental control, mercantilism has
historically assisted some countries in accumulating riches, but this
expansion was frequently unsustainable, concentrated, and
wasteful. Liberal economic policies, on the other hand, have been
linked to sustained growth, increased trade, and rising living
standards. In the current world, the liberal economic model still
holds sway, even though some contemporary protectionist
movements have brought back aspects of mercantilism. All systems
ultimately fail or succeed based on how well they are tailored to the
unique political, social, and economic circumstances of a country.
BIBLIOGRAPHY-
Balaam, David N. and Bradford Dillman (2014), "Laissez-Faire: The
Economic Liberal Perspective", "Wealth and Power: The Mercantilist
Perspective", and "Economic Determinism and Exploitation: The
Structuralist Perspective" , in Introduction to International Political
Economy, 6th edition, Boston: Pearson, pp. 25-52; 53-77; 78-100.
