Homework 1

Approaches to International Political Economy

Three Traditional Schools of Thought

Summary

Overview: What is the best way to learn about international political economy? In other words, how do IPE scholars approach the study of the global economy?

There is no unique answer to this question because different individuals and groups who control different kinds of resources also have distinct preferences about how the world should be arranged. Moreover, different forms of analysis have different implications for organizing political-economic relations and thus for determining who wins and who loses. Remember the two questions IPE scholars examine: 1) How does politics affect resource allocations? 2) What are the consequences of those decisions? IPE investigates, analyzes, and proposes changes in the processes of economic flows and political governance that cross over and/or transcend national boundaries. These flows include the exchange of goods and services (trade), funds (capital), technology, labor, natural resources, environmental pollution, and so on. IPE attempts to provide explanations, to evaluate consequences, and to propose possible policy initiatives. In IPE, there are competing perspectives (or theories) that offer different analyses of the same phenomena.

Historically, theories of IPE have been organized in three broad schools of thought:

1) The Mercantilist School (or Mercantilism or Economic Nationalism)

2) The Liberal School (or Liberalism)

3) The Marxist School (or Marxism or Radicalism)

Mercantilism emphasizes the primacy of politics over economics and sees the state as playing a central role in guiding economic activity. Liberalism advocates a reduced role of the state in the economy and the free operation of the market mechanism. Marxism, by contrast, holds the view that the system of national and international capitalism biases economic outcomes to the benefit of certain social classes within the most powerful capitalist nations.

Let’s t briefly discusses these three schools of thought:

The Mercantilist School (or Mercantilism or Economic Nationalism)

Mercantilism is one of the enduring classical approaches to the study of international political economy. It is the first theory of international political economy to emerge in the modern era. Originating in the sixteenth and seventeenth centuries, mercantilist ideas are still informing foreign economic policy around the world. By placing the nation state at the center of analysis, mercantilism provides an explicitly political analysis of international economic relations. The three central propositions of classical mercantilism are:

1. There is a strong link between national power and wealth. National power in the international state system can mainly be derived from wealth.

2. Trade provides one way to acquire wealth, but only when a country maintains a positive balance of trade, i.e., exports > imports (or trade surplus).

3. Some forms of economic activities are more valuable than others. Specifically, manufacturing activities should be encouraged, while agriculture and other non-manufacturing activities should be discouraged.

The mercantilism system of international economy is best described as a zero-sum game , in which different economies compete with each other for a given size of economic wealth, where one nation’s gain is another nation’s loss. Mercantilists emphasize exports over imports as a primarily means to increase revenue for building armies and national construction projects.

So, the state should pay a dominant role in deciding how to allocate its resources. The uncoordinated market forces may neglect the important industries, manufacturing activities, and technology that could be of significant national interests. Economic policy can be used to channel resources to promote these vital sectors. The criterion used for judging policies and actions is the need to preserve and enhance the power and prosperity of the nation.

To summarize, mercantilism sees a close relationship between economic strength, technological prowess, economic competitiveness, military strength, and national influence. Mercantilists can be found among the military and economic planners of most nations. Frequently, groups disadvantaged by international trade will cast self-serving arguments in terms of protecting national economic and military strength. Military and economic planners in countries like the United States, Japan, South Korea, and China pay close attention to the relative capabilities of other nations. The contribution of mercantilists is to recognize that international economic relations operate within a world of competitive and conflictual nations. Economic capabilities do make a major contribution to military and political influence. Power and politics are always a part of economics.

The Liberal School (or Liberalism)

Liberalism emerged in Britain and the Western world during the nineteenth century with the political economy thoughts advocated by philosophers, such as Adam Smith and David Ricardo. They challenged the dominance of mercantilism in government circles. Supported by globalization and Western dominance in the international political economy, it has become the new global ‘orthodoxy’ in economic policymaking. Liberal ideas and principles were central to the international order created by the United States after the Second World War. While so-called ‘neo-liberal’ ideas have dominated the economic policies advocated by international economic institutions such as the World Bank and the IMF, most notably in the 1980s and 1990s, recent economic crises such as the 2008 financial crisis have cast a shadow over the future of global liberalism in economic policy. Liberalism challenged all three central propositions of classical mercantilism in the following ways:

1. There must be a strong line dividing politics from economics. The purpose of economic activity is to enrich individuals, not to enhance the state’s power.

2. Countries do not enrich themselves by running a positive balance of trade or trade surpluses. Gains can accrue whether it is a positive or negative trade balance

3. Countries do not prosper by encouraging manufacturing activities and discouraging agriculture and other non-manufacturing industries. Rather, countries gain by producing those goods and services that they can produce at a relatively low cost at home and trading those products with the goods and services that require a relatively high cost of production at home.

According to liberals, government efforts to allocate resources hurt economic efficiency and reduce general well-being. They see government spending as harming economics efficiency and reducing liberty. Liberals argue in favor of the market-based system of resource allocation. They embrace the virtue of free-market and trade. Perhaps liberals’ most important contribution is the idea that all participants in a system of free markets and trade are beneficiaries.

Liberalism generally have a somewhat negative and even hostile view of government. Liberals often see the state as composed of self-seeking individuals who use power only to promote their own narrow ends. They, however, still perceive some role of the government in specific situations such as “market failures”, in which market outcomes are inefficient. The role of the government should, therefore, be limited to protecting and preserving institutions of private property rights, enforcement of contracts, and political stability. More recently, a new version of liberalism (neoliberalism) has built on older versions of political economy. Neo-liberals make broad claims about the impact of markets, international interdependence, and the possibilities for cooperation among nations.

The Marxist School (or Marxism or Radicalism)

Marxism is the third major theory of international political economy to emerge in the modern era. It aims at a radical departure from conventional political economy, in that it seeks to unearth the eternal forces of history that produce change and that will bring about the eventual downfall of the contemporary international order, namely global capitalism. Insofar as Marxism provides a rationale for the revolutionary overthrow of the existing system, it differs fundamentally from mercantilism and liberalism, which both seek to help to understand and manage the existing system.

Marxism is developed by the philosophy and writings of Karl Marx as a critique of capitalism, which is based on the relationship between the private ownership of the means of production i.e., capital and wage labor. According to Marx, capitalist do not pay in full for the contribution of labor in the production. They just pay the subsistence wage to workers and keep the rest as their profits for making more investment and production. The process gives rise to further increase in capital stock which ultimately concentrates only in few hands. Since larger stock of capital lowers the returns to capital, profits decline, and capitalists are forced to reduce the wage further, thereby worsening the condition of already impoverished worker groups (called “proletariat”). The resulting condition is the imbalance between the economy’s ability to produce goods and the consumers’ ability to purchase those goods. This increasing social inequality and big gap between production and consumption causes workers to rise-up, overthrow the capitalism, and replace it with socialism. In other words, Marxism predicts revolution which is embedded in the capitalist system of economy.

Marxism argues, in contrast to liberalism, that rather than free-market system playing the role of making decisions regarding allocation of resources, capitalist enterprises supported by the political system and controlled by the capitalist class make decisions about how the society’s resources are used. Marxists focus our attention on the area of greatest weakness for liberalism and mercantilism: the way that economic power and political power create interests and shape outcomes. Thus, Marxists hold the view that the system of national and international capitalism biases economic outcomes to the benefit of certain social classes within the most powerful capitalist nations. They want us to see a global capitalist economy framed by the logic of capitalist exchange. One such radical view argues that market relations between rich and poor states are based on and reinforce inequality. Marxism helps us see how power can affect the distribution of economic benefits.

To summarize, according to mercantilists, international political economy (IPE) is characterized by the distributional conflict when governments compete to attract and maintain industries. According to liberals, international economic interactions are essentially harmonious and mutually beneficial. The problem with liberals is to create a system of global framework that would enable countries to reach international agreements and facilitate free and fair trade. According to Marxists, international political economy is fundamentally characterized by the distributional conflict between labor and capital within countries and by the distributional conflict between the advanced industrialized countries and developing countries withing the international arena.

The distinct resource allocation mechanisms and unique evaluative criteria offered by the three classical schools of thought generate three very different images of the central dynamic of IPE as shown in the following Table (IPE, Oatley):