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Three Ideologies of Political Economy Robert Gilpin Robert Gilpin is the Dwight D. Eisenhower Professor of Public and International Affairs, Emeritus, Princeton University.

OVER THE PAST century and a half, the ideologies of liberalism, nationalism, and Marxism have divided humanity. This book uses "ideology" to refer to "systems of thought and belief by which [individuals and groups] explain ... how their social system operates and what principles it exemplifies" (Heilbroner, 1985, p. 107). The conflict among these three moral and intellectual positions has revolved around the role and significance of the market in the organization of society and economic affairs.

Through an evaluation of the strengths and weaknesses of these three ideologies it is po§ible to illuminate the study of the field of international political economy.

The three ideologies differ on a broad range of questions such as: What is the significance of the market for economic growth and the distribution of wealth among groups and societies? What ought to be the role of markets in the organization of domes- tic and international society? What is the effect of the market system on issues of war or peace? These and similar questions are central to discussions of international political economy.

These three ideologies are fundamentally different in their conceptions of the relationships among society, state, and market, and it may not be an exaggeration to say that every controversy in the field of international political economy is ultimately reducible to differing conceptions of these relation- ships. The intellectual clash is not merely of historical interest. Economic liberalism, Marxism, and eco- nomic nationalism are all very much alive at the end of the twentieth century; they define the conflicting perspectives that individuals have with regard to the

implications of the market system for domestic and international society. Many of the issues that were controversial in the eighteenth and nineteenth centuries are once again being intensely debated.

Although scholars have produced a number of "theories" to explain the relationship of economics and politics, these three stand out and have had a pro- found influence on scholarship and political affairs. In highly oversimplified terms, economic nationalism (or, as it was originally called, mercantilism), which developed from the practice of statesmen in the early modem period, assumes and advocates the primacy of politics over economics. It is essentially a doctrine of state-building and asserts that the market should be subordinate to the pursuit of state interests. It argues that political factors do, or at least should, determine economic relations. Liberalism, which emerged from the Enlightenment in the writings of Adam Smith and others, was a reaction to mercantilism and has become embodied in orthodox economics. It assumes that politics and economics exist, at least ideally, in separate spheres; it argues that markets--in the inter- est of efficiency, growth, and consumer choice-,- should be free from political interference. Marxism, which appeared in the mid-nineteenth century as a reaction against liberalism and classical economics, holds that economics drives politics. Political conflict arises from struggle among classes over the distribution of wealth. Hence, political conflict will cease with the elimination of the market and of a society of classes. Since both nationalism and Marxism in the mcxiem era have developed largely in reaction to the tenets of liberal economics, my discussion and evaluation of these ideologies will begin with economic liberalism.

The Political Economy of International Relations, Chapter 2, Princeton University Press, 1987. 189

190 Chapter8 International Trade

The Liberal Perspective Some scholars assert that there is no such thing as a liberal theory of political economy because liberalism separates economics and politics from one another and as.5umes that each sphere operates according to particular rules and a logic of its own.* This view is itself, however, an ideological position and liberal theorists do in fact concern themselves with both political and economic affairs. Whether it is made explicit in their writings or is merely implicit, one can speak of a liberal theory of political economy.

There is a set of values from which liberal theories of economics and of politics arise; in the modern world these political and economic values have tended to appear together (Lindblom, 1977). Liberal economic theory is committed to free markets and minimal state intervention, although, as will be pointed out below, the relative emphasis on one or the other may differ. Liberal political theory is committed to individual equality and liberty, although again the emphasis may differ. We are primarily concerned here with the economic component of liberal theory.

The liberal perspective on political economy is embodied in the discipline of economics as it has developed in Great Britain, the United States, and Western Europe. From Adam Smith to its contem- porary proponents, liberal thinkers have shared a coherent set of assumptions and beliefs about the nature of human beings, society, and economic ·activities. Liberalism has assumed many forms- classical, neo-classical, Keynesian, monetarist, Austrian, rational expectation, etc. These variants range from those giving priority to equality and tending toward S<Xial democracy and state interven- tionism to achieve this objective, to those stressing liberty and noninterventionism at the expense of social equality. All forms of economic liberalism, however, are committed to the market and the price

mechanism as the most efficacious means for organizing domestic and international economic relations. Liberalism may, in fact, be defined as a doctrine and set of principles for organizing and managing a market economy in order to achieve maximum efficiency, economic growth, and individ- ual welfare.

Economic liberalism assumes that a market arises spontaneously in order to satisfy human needs and that, once it is in operation, it functions in accordance with its own internal logic. Human beings are by nature economic animals, and therefore markets evolve naturally without central direction. As Adam Smith put it, it is inherent in mankind to "truck, barter and exchange."

The rationale for a market system is that it increases economic efficiency, maximizes economic growth, and thereby improves human welfare. Although liberals believe that economic activity also enhances the power and security of the state, they argue that the primary objective of economic activity is to benefit individual consumers. Their ultimate defense of free trade and open markets is that they increase the range of goods and services available to the consumer.

The fundamental premise of liberalism is that the individual consumer, firm, or household is the basis of society. Individuals behave rationally and attempt to maximize or satisfy certain values at the lowest possible cost to themselves. Rationality applies only to endeavor, not to outcome. Thus, failure to achieve an objective due to ignorance or some other cause does not, according to liberals, invalidate their premise that individuals act on the basis of a cost/benefit or means/ends calculus. Finally, hberaHsm argues that an individual will seek to acquire an objective until a market equilibrium is reached, that is, until the costs associated with achieving the objective are equal to the benefits. Liberal economists attempt to explain economic

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and, in some cases, all human behavior on the basis of these individualistic and rationalistic assumptions (Rogowski, 1978).

Liberalism also assumes that a market exists in which individuals have complete information and are thus enabled to select the most beneficial course of action. Individual producers and consumers will be highly responsive to price signals, and this will create a flexible economy in which any change in relative prices will elicit a corresponding change in patterns of production, consumption, and economic institutions; the latter are conceived ultimately to be the product rather than the cause of economic behavior (Davis and North, 1971). Further, in a truly competitive market, the terms of exchange are determined solely by considerations of supply and demand rather than by the exercise of power and coercion. If exchange is voluntary, both parties benefit. In colloquial terms, a "free exchange is no robbery."

Economics, or rather the economics taught in most American universities (what Marxists call orthodox or bourgeois economics), is assumed to be an empirical science of maximizing behavior. Behavior is believed to be governed by a set of economic "laws" that are impersonal and politically neutral; therefore, economics and politics should and can be separated into distinct spheres. Governments should not intervene in the market except where a "market failure" exists (Baumol 1965) or in order to provide a so-called public or collective good (Olson, 1965).

A market economy is governed principally by the law of demand (Becker, 1976, p. 6). This "law" (or, if one prefers, assumption) holds that people will buy more of a good if the relative price falls and less if it rises; people will also tend to buy more of a good as their relative income rises and less as it falls. Any development that changes the relative price of a good or the relative income of an actor will create an incentive or disincentive to acquire (or produce) more or less of the good; this law in turn has profound ramifications throughout the society. Although certain exceptions to this simple concept exist, it is fundamental to the operation

Gilpin Three Ideologies of Political Economy 191

and success of a market system of economic exchange.

On the supply side of the economy, liberal economics assumes that individuals pursue their interests in a world of scarcity and resource constraints. This is a fundamental and inescapable condition of human existence. Every decision involves an opportunity cost, a tradeoff among alter- native uses of available resources (Samuelson, 1980, p. 27). The basic lesson of liberal economics is that "there is no such thing as a free lunch"; to get some- thing one must be willing to give up something else.

Liberalism also assumes that a market economy exhibits a powerful tendency toward equilibrium and inherent stability, at least over the long term. This "concept of a self-operating and self-correcting equilibrium achieved by a balance of forces in a rational universe" is a crucial one for the econo- mists' belief in the operation of markets and the laws that are believed to govern them (Condliffe, 1950, p. 112). If a market is thrown into a state of disequi- librium due to some external (exogenous) factor such as a change in consumer tastes or productive technology, the operation of the price mechanism will eventually return it to a new state of equilib- rium. Prices and quantities will once again balance one another. Thus, a change in either the supply or the demand for a good will elicit corresponding changes in the price of the good. The principal tech- nique of modern economic analysis, comparative statics, is based on this assumption of a tendency toward systemic equilibrium.

An additional liberal assumption is that a basic long-term harmony of interests underlies the mar- ket competition of producers and consumers, a harmony that will supercede any temporary con- flict of interest. Ind1vidual pursuit of self-interest in the market increases social well-being because it leads to the maximization of efficiency, and the resulting economic growth eventually benefits all. Consequently, everyone will gain in accordance with his or her contribution to the whole, but, it should be added, not everyone will gain equally because individual productivities differ. Under free exchange, society as a whole will be more

192 Chapter8 International Trade

wealthy, but individuals will be rewarded in terms of their marginal productivity and relative contribution to the overall social product.

Finally, most present-day liberal economists believe in progress, defined most frequently as an increase in wealth per capita. They assert that the growth of a properly functioning economy is linear, gradual, and continuous. It proceeds along what an economist colleague has called "the MIT standard equilibrium growth curve." Although political or other events-wars, revolution, or natural disas- ters-can dramatically disrupt this growth path, the economy will return eventually to a stable pattern of growth that is determined principally by increases in populations, resources, and productivity. Moreover, liberals see no necessary connection between the process of economic growth and political develop- ments such as war and imperialism; these political evils affect and may be affected by economic activi- ties, but they are essentially caused by political and not by economic factors. For example, liberals do not believe that any causal relationship existed between the advance of capitalism in the late nineteenth cen- tury and the upheavals of imperialism after 1870 and the outbreak of the First World War. Liberals believe economics is progressive and politics is retrogressive. Thus they conceive of progress as divorced from pol- itics and based on the evolution of the market.

On the basis of these assumptions and commit- men ts, modern economists have constructed the empirical science of economics. Over the past two centuries, they have deduced the "laws" of maximiz- ing behavior, such as those of the theory of compar- ative advantage, the theory of marginal utility, and the quantity theory of money. These "laws" are both contingent and normative. They assume the existence of economic man-a rational, maximizing creature-a variant of the species homo sapiens that has been relatively rare in human history and has existed only during peculiar periods of favorable conditions. Further, these laws are normative in that they prescribe how a society must organize itself and how people must behave if they are to maximize the growth of wealth. Both individuals and societies may violate these laws, but they do so at the cost of

productive efficiency. Today, the conditions neces- sary for the operation of a market economy exist, and the normative commitment to the market has spread from its birthplace in Western civilization to embrace an increasingly large portion of the globe. Despite setbacks, the modern world has moved in the direction of the market economy and of increas- ing global economic interdependence precisely because markets are more efficient than other forms of economic organization (Hicks, 1969).

In essence, liberals believe that trade and economic intercourse are a source of peaceful rela- tions among nations because the mutual benefits of trade and expanding interdependence among national economies will tend to foster cooperative relations. Whereas politics tends to divide, econom- ics tends to unite peoples. A liberal international economy will have a moderating influence on international politics as it creates bonds of mutual interests and a commitment to the status quo. However, it is important to emphasize again that although everyone will, or at least can, be better off in "absolute" terms under free exchange, the "relative" gains will differ. It is precisely this issue of relative gains and the distribution of the wealth generated by the market system that has given rise to economic nationalism and Marxism as rival doctrines.

The Nationalist Perspective Economic nationalism, like economic liberalism, has undergone several metamorphoses over the past sev- eral centuries. Its labels have also changed: mercantilism, statism, protectionism, the German Historical School, and, recently, New Protectionism. Throughout all these manifestations, however, runs a set of themes or attitudes rather than a coherent and systematic body of economic or political theory. Its central idea is that economic activities are and should be subordinate to the goal of state building and the interests of the state. All nationalists ascribe to the primacy of the state, of national security, and of military power in the organization and functioning of the international system. Within this general commitment two basic positions can be discerned.

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Some nationalists consider the safeguarding of national economic interests as the minimum essen- tial to the security and survival of the state. For lack of a better term, this generally defensive position may be called "benign" mercantilism. On the other hand, there are those nationalists who regard the international economy as an arena for imperialist expansion and national aggrandizement. This aggres- sive form may be termed "malevolent" mercantilism. Th~ economic policies of Nazi economic minister Hjalmar Schacht toward eastern Europe in the 1930s were of this type (Hirschman, 1945).

Although economic nationalism should be viewed as a general commitment to state building, the precise objectives pursued and the policies advocated have differed in different times and in different places. Yet, as Jacob Viner has cogently argued in an often-quoted passage, economic nationalist (or what he calls mer- cantilist) writers share convictions concerning the relationship of wealth and power:

I believe that practically all mercantilists, whatever the period, country, or status of the particular individual, would have subscribed to all of the following proposi- tions: (1) wealth is an absolutely essential means to power, whether for security or for aggression; (2) power is essential or valuable as a means to the acquisition or retention of wealth; (3) wealth and power are each proper ultimate ends of national policy; ( 4) there is long-run harmony between these ends, although in panicular circumstances it may be necessary for a time to make economic sacrifices in the interest of military security and therefore also of long-run prosperity (Viner,1958, p. 286).

Whereas liberal writers generally view the pursuit of power and wealth, that is, the choice between "guns and butter," as involving a tradeoff, nationalists tend to regard the two goals as being complementary (Knorr, 1944, p. 10).

Economic nationalists stress the role of economic factors in international relations and view the struggle among states-capitalist, socialist, or whatever-for economic resources as pervasive and indeed inherent in the nature of the international system itself. As one writer has put it, since economic resources are necessary for national power,

Gilpin Three Ideologies of Political Economy 193

every conflict is at once both economic and political (Hawtrey, 1952). States, at least over the long run, simultaneously pursue wealth and national power.

As it evolved in the early modem era, economic nationalism responded to and reflected the political, economic, and military developments of the sixteenth, seventeenth, and eighteenth centuries: the emergence of strong national states in constant competition, the rise of a middle class devoted at first to commerce and increasingly to manufactur- ing, and the quickening pace of economic activities due to changes within Europe and the discovery of the New World and its resources.

For several reasons, the foremost objective of nationalists is industrialization (Sen, 1984 ). In the first place, nationalists believe that industry has spillover effects (externalities) throughout the econ- omy and leads to its overall development. Second, they associate the possession of industry with economic self-sufficiency and political autonomy. Third, and most important, industry is prized because it is the basis of military power and central to national security in the modern world. In almost every society, including liberal ones, governments pursue policies favorable to industrial development. As the mercantilist theorist of American economic development, Alexander Hamilton, wrote: "not only the wealth but the independence and security of a country appear to be materially connected to the prosperity of manufactures" (quoted in Rostow, 1971, p. 189); no contemporary dependency theo- rist has put it better.

Economic nationalism, both in the early modem era and today, arises in part from the tendency of mar· kets to concentrate wealth and to establish depen- dency or power relations between the strong and the weak economies. In its more benign or defensive form it attempts to protect the economy against untoward external economic and political forces. Defensive economic nationalism frequently exists in less devel- oped economies or in those advanced economies that have begun to decline; such governments pursue pro- tectionist and related policies to protect their nascent or declining industries and to safeguard domestic interests. In its more malevolent form, economic

194 Chapter8 International Trade

nationalism is the conduct of economic warfare. This type is most prevalent in expanding powers. The classic example is Nazi Germany.

In a world of competing states, the nationalist considers relative gain to be more important than mutual gain. Thus nations continually try to change the rules or regimes governing international eco- nomic relations in order to benefit themselves dis- proportionately with respect to other economic pow- ers. As Adam Smith shrewdly pointed out, everyone wants to be a monopolist and will attempt to be one unless pre·vented by competitors. Therefore, a liberal international economy cannot develop unless it is supported by the dominant economic states whose own interests are consistent with its preservation.

Whereas liberals stress the mutual benefits of international commerce, nationalists as well as Marxists regard these relations as basically conflict- ual. Although this does not rule out international economic cooperation and the pursuit of liberal policies, economic interdependence is never symmetrical; indeed, it constitutes a source of continuous conflict and insecurity. Nationalist writers from Alexander Hamilton to contemporary dependency theorists thus emphasize national self- sufficiency rather than economic interdependence.

Economic nationalism has taken several different forms in the modern world. Following the Industrial Revolution, industrial mercantilists like Hamilton and List stressed the supremacy of indus- try and manufacturing over agriculture. Following the First and Second World Wars these earlier concerns have been joined by a powerful commit- ment to the primacy of domestic welfare and the welfare state. In the last decades of this century, the increasing importance of advanced technology, the desire for national control over the "command- ing heights" of the modern economy, and the advent of what might best be called "policy competitive- ness" have become the distinctive features of contemporary mercantilism. In all ages, however, the desire for power and independence have been the overriding concern of economic nationalists.

Whatever its relative strengths and weaknesses as an ideology or theory of international political

economy, the nationalist emphasis on the geographic location and the distribution of economic activities provide it with powerful appeal. Throughout modern history, states have pursued policies promoting the development of industry, advanced technology, and those economic activities with the highest profitability and generation of employment within their own borders. As far as they can, states try to create an international division of labor favorable to their political and economic interests. Indeed, economic nationalism is likely to be a significant influence in international relations as long as the state system exists.

The Marxist Perspective Like liberalism and nationalism, Marxism has evolved in significant ways since its basic ideas were set forth by Karl Marx and Friedrich Engels in the middle of the nineteenth century. Marx's own thinking changed during his lifetime, and his theories have always been subject to conflicting interpretations. Although Marx viewed capitalism as a global economy, he did not develop a systematic set of ideas on international relations; this responsi- bility fell upon the succeeding generation of Marxist writers. The Soviet Union and China, furthermore, having adopted Marxism as their official ideology, have reshaped it when necessary to serve their own national interests.

As in liberalism and nationalism, two basic strands can be discerned in modern Marxism. The first is the evolutionary Marxism of social democ- racy associated with Edward Bernstein and Karl Kautsky; in the contemporary world it has tapered off and is hardly distinguishable from the egalitarian form of liberalism. At the other extreme is the revo- lutionary Marxism of Lenin. Because of its triumph as the ruling ideology in one of the world's two superpowers [during the Cold War] this variation is the more important and will be stressed here.

Marxism characterizes capitalism as the private ownership of the means of production and the existence of wage labor. It believes that capitalism is driven by capitalists striving for profits and capital

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accumulation in a competitive market economy. Labor has been dispossessed and has become a commodity that is subject to the price mechanism. In Marx's view these two key characteristics of capitalism are responsible for its dynamic nature and make it the most productive economic mechanism yet. Although its historic mission is to develop and unify the globe, the very success of capitalism will hasten its passing. The origin, evolution, and eventual demise of the capitalist mode of production are, according to Marx, governed by three inevitable economic laws.

The first law, the law of disproport ionality, entails a denial of Say's law, which (in oversimplified terms) holds that supply creates its own demand so that supply and demand will always be, except for brief moments, in balance (see Sowell, 1972). Say's law maintains that an equilibrating process makes overproduction impossible in a capitalist or market economy. Marx, like John Maynard Keynes, denied that this tendency toward equilibrium existed and argued that capitaHst economies tend to overproduce particular types of goods. There is, Marx argued, an inherent contradiction in capitalism between its capacity to produce goods and the capacity of con- sumers ( wage earners) to purchase those goods, so that the constantly recurring disproportionality between production and consumption due to the "anarchy" of the market causes periodic depressions and economic fluctuations. He predicted that these recurring economic crises would become increasingly severe and in time would impel the suffering proletariat to rebel against the system.

The second law propelling the development of a capitalist system, according to Marxism, is the law of the concentration (or accumulation) of capital. The motive force of capitalism is the drive for profits and the consequent necessity for the individual capital- ist to accumulate and invest. Competition forces the capitalists to increase their efficiency and capital investment or risk extinction. As a result, the evolu- tion of capitalism is toward increasing concentra- tions of wealth in the hands of the efficient few and the growing impoverishment of the many. With the petite bourgeoisie being pushed down into the

Gilpin Three Ideologies of Political Economy 195

swelling ranks of the impoverished proletariat, the reserve army of the unemployed increases, labor's wages decline, and the capitalists society becomes ripe for social revolution.

The third law of capitalism is that of the falling rate of profit. As capital accumulates and becomes more abundant, the rate of return declines, thereby decreasing the incentive to invest. Although classi- cal liberal economists had recognized this possibil- ity, they believed th at a solution could be found through such countervailing devices as the export of capital and manufactured goods and the import of cheap food (Mill, 1970 [1848], pp. 97-104). Marx, on the other hand, believed that the tendency for profits to decline was inescapable. As the pressure of competition forces capitalists to increase efficiency and productivity through invest- ment in new labor-saving and more productive technology, the level of unemployment will increase and the rate of profit or surplus value will decrease. Capitalists will thereby lose their incentive to invest in productive ventures and to create employment. This will result in economic stagnation, increa sing unemployment, and the "immiserization'' of the proletariat. In time, the ever-increasing intensity and depth of the business cycle will cause the workers to rebel and destroy the capitalist economic system.

The core of the Marxist critique of capitalism is that although the individual capitalist is rational (as liberals assume), the capitalist system itself is irra- tional. The competitive market necessitates that the individual capitalist must save, invest, and accumu- late. If the desire for profits is the fuel of capitalism, then investment is the motor and accumulation is the result. In the aggregate, however, this accumulating capital of individual capitalists leads to the periodic overproduction of goods, surplus capital, and the disappearance of investment incentives. In time, the increasing severity of the downturns in the business cycle and the long-term trend toward economic stag- nation will cause the proletariat to overthrow the system through revolutionary violence. Thus, the inherent contradiction of capitalism is that, with capital accumulation , capitalism sows the seeds of its

196 Chapter 8 lnternationalTrade

own destruction and is replaced by the socialist economic system.

Marx believed that in the mid-nineteenth century, the maturing of capitalism in Europe and the drawing of the global periphery into the market economy had set the stage for the proletarian revolution and the end of the capitalist economy. When this did not happen, Marx's followers, such as Rudolf Hilferding and Rosa Luxemburg, became concerned over the continuing vitality of capitalism and its refusal to disappear. The strength of nation- alism, the economic successes of capitalism, and the advent of irn:perialism led to a metamorphosis of Marxist,thought that culminated in Lenin's Imperialism(1939), first published in 1917. Written against the backdrop of the First World War and drawing heavily upon the writings of other Marxists, Imperialismwas both a polemic against his ideologi- cal enemies and a synthesis of Marxist critiques of a capitalist world economy. In staking out his own position, Lenin in effect converted Marxism from essentially a theory of domestic economy to a theory of international political relations among capitalist states.

Lenin set himself the task of accounting for the fact that nationalism had triumphed over proletar- ian internationalism at the outbreak of the First World War and thereby sought to provide the intellectual foundations for a reunification of the international communist movement under his lead- ership, He wanted to show why the socialist parties of the several European powers, especially the German Social Democrats under Karl Kautsky, had supported their respective bourgeoisies. He also tried to explain why the impoverishment of the proletariat had not taken place as Marx had pre- dicted, and instead wages were rising and workers were becoming trade unionists.

In the years between Marx and Lenin, capital- ism had experienced a profound transformation. Marx had written about a capitalism largely confined to western Europe, a closed economy in which the growth impulse would one day cease as it collided with various constraints. Between 1870 and 1914, however, capitalism had become a vibrant,

technological, and increasingly global and open system. In Marx's day, the primary nexus of the slowly developing world economy was trade. After 1870, however, the massive export of capital by Great Britain and subsequently by other developed economies had significantly changed the world economy; foreign investment and international finance had profoundly altered the economic and political relations among societies. Furthermore, Marx's capitalism had been composed mainly of small, competitive, industrial firms. By the time of Lenin, however, capitalist economies were domi- nated by immense industrial combines that in tum, according to Lenin, were controlled by the great banking houses. For Lenin, the control of capital by capital, that is, of industrial capital by financial cap- ital, represented the pristine and highest stage of capitalist development.

Capitalism, he argued, had escaped its three laws of motion through overseas imperialism. The acqui- sition of colonies had enabled the capitalist economies to dispose of their unconsumed goods, to acquire cheap resources, and to vent their surplus capital. The exploitation of these colonies further provided an economic surplus with which the capitalists could buy off the leadership ("labor aristocracy") of their own proletariat. Colonial imperialism, he argued, had become a necessary feature of advanced capitalism. As its productive forces developed and matured, a capitalist economy had to expand abroad, capture colonies, or else suffer economic stagnation and internal revolution. Lenin identified this necessary expansion as the cause of the eventual destruction of the interna- tional capitalist system.

The essence of Lenin's argument is that a capital- ist international economy does develop the world, but does not develop it evenly. Individual capitalist economies grow at different rates and this differential growth of national power is ultimately responsible for imperialism, war, and international political change. Lenin added a fourth law to the original three Marxist laws of capitalism. The law is that, as capitalist economies mature, as capital accumulates, and as profit rates fall, the capitalist economies are

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compelled to seize colonies and create dependencies w serve as markets, investment outlets, and sources of food and raw materials. In competition with one another, they divide up the colonial world in accor- dance with their relative strengths. Thus, the most advanced capitalist economy, namely Great Britain, had appropriated the largest share of colonies. As other capitalist economies advanced, however, they sought a redivision of colonies. This imperialist conflict inevitably led to armed conflict among the rising and declining imperial powers. The First World War, according to this analysis, was a war of territorial redivision between a declining Great Britain and other rising capitalist powers. Such wars of colonial division and redivision would continue, he argued, until the industrializing colonies and the proletariat of the capitalist countries revolted against the system.

In more general terms, Lenin reasoned that because capitalist economies grow and accumulate capital at differential rates, a capitalist international system can never be stable for longer than very short periods of time.

Lenin's internationalization of Marxist theory represented a subtle but significant reformulation. In Marx's critique of capitalism, the causes of its downfall were economic; capitalism would fail for economic reasons as the proletariat revolted against its impoverishment. Furthermore, Marx had defined the actors in this drama as social classes. Lenin, however, substituted a political critique of capitalism in which the principal actors in effect became competing mercantilistic nation-states driven by economic necessity. Although interna- tional capitalism was economically successful, Lenin argued that it was politically unstable and constituted a war-system. Capitalism would end due to a revolt against its inherent bellicosity and polit- ical consequences.

In summary, Lenin argued that the inherent con- tradiction of capitalism is that it develops the world and plants the political seeds of its own destruction as it diffuses technology, industry, and military power. It creates foreign competitors with lower wages and standards of living who can outcompete the previ- ously dominant economy on the battlefield of world

Gilpin Three Ideologies of Political Economy 197

markets. Intensification of economic and political competition between declining and rising capitalist powers leads to economic conflicts, imperial rival- ries, and eventually war.

A Critique of the Perspectives As we have seen, liberalism, nationalism, and Marxism make different assumptions and reach conflicting conclusions regarding the nature and consequences of a world market economy or (as Marxists prefer) a world capitalist economy.

Each of the three perspectives has strengths and weaknesses. Although no perspective provides a complete and satisfactory understanding of the nature and dynamism of the international political economy, together they provide useful insights.

Critique of Economic Liberalism Liberalism embodies a set of analytical tools and policy prescriptions that enable a society to maximize its return from scarce resources; its com- mitment to efficiency and the maximization of total wealth provides much of its strength. The market constitutes the most effective means for organizing economic relations, and the price mechanism operates to ensure that mutual gain and hence aggregate social benefit tend to result from economic exchange. In effect, liberal economics says to a society, whether domestic or international, "if you wish to be wealthy, this is what you must do."

The major criticism leveled against economic liberalism is that its basic assumptions, such as the existence of rational economic actors, a competitive market, and the like, are unrealistic. In part, this attack is unfair in that liberals knowingly make these simplifying assumptions in order to facilitate scientific research; no science is possible without them. What is more important, as defenders cor- rectly point out, is that they should be judged by their results and ability to predict rather than by their alleged reality (Posner, 1977, ch. 1). From this perspective and within its own sphere, economics has proven to be a powerful analytical tool.

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198 ChapterB International Trade

By th e same tok en, h owever, liber al econ omics can be criti cized in several important respects. As a means to underst and societ y and especi ally its dynamics, economi cs is limit ed; it cann ot serve as a comp reh ensive approac h to political econo my. Yet liber al econ omists h ave tended t o forget this inherent limitatio n, to regard econ omics as the master socia l science, an d to permit econ o mics to become imper ialistic. Wh en this occurs, the n ature and basic assumpti ons of th e discipline can lead the econom ist astray. and limit its utilit y as a th eory of political economy.

The first of these limit atio ns is that economics artificially separate s the econ omy from o ther aspect s of societ y and accepts th e existin g sociop olitical framework as a given, including the distributi on of power and prope rt y right s; the resource and other endo wments of individu als, groups, and n ational societies; and th e framework of social, politic al, and cultural institution s. Th e liberal world is viewed as on e of h omogeneous, ration al, and equal individuals living in a world free from political bounda ries and social con str aint s. Its "laws" prescribe a set of maxi- mizing rules for econ omic act ors regardless of where and with what they start ; yet in real life, one 's start ing point most frequently determin es where one finishes (Dahrend orf, 1979).

Another limit ati on of liberal economics as a the ory is a ten denc y to disregard the justice or equity of the out come of econ o mic acti vit ies. Despite heroic effort s to fash ion an "obj ective" welfare eco nom ics, the di stribution of wealth within and among societies lies outside the prim ary concern of liberal econo mics. There is some truth in the Marxist criticism th at lib eral econ omic s is a tool kit for managing a capitalist or market econ omy. Bourgeois economic s is, in the Mar xist view, a discipline of engineerin g rather than a holistic science of society. It tells one how to achie ve particul ar objectives at the least cost under a given set of const raints; it does n ot purport to answer questions regarding the future and de stiny of man, question s dear to the h earts of Marxists and econ omic nati onalists.

Liberalism is also limit ed by its assumptio n that exchan ge is always free and occ urs in a competitive

market between equals who possess full information and are thus en abled to gain mutu ally if they choose to exch ange one value for anoth er. Unfortunately, as Charl es Lindblom ha s argued, exch ange is seldom free and equ al (Lindb lom, 19 77, pp. 40-50) . Instead, the term s of an exchange can be profoundly affected by coercion, difference s in bar gaining power (monopoly or monopsony), and other essen- tially political factor s. In effect, because it neglects both t he effects of noneconomi c facto rs on exchang e and the effects of exch ange on politics , liberali sm lacks a true "political econo my."

Liberal econ omics, with its laws for maximizing behavi or, is based o n a set of highl y rest rictiv e assumpti ons. N o society ha s ever or could ever be composed of the true "econo mic man" of liberal theory. A functi oning society requires affective ties an d the subordin ation of individu al self-interest to larger soc ial val ues; if this were n o t th e case th e society would fly apa rt (Polanyi, 1957) . Yet Western society h as gon e far in h arne ssing for socia l and economic bett er ment a basic t enden cy in human beings toward self-aggrandizement (Baechler , 1971). Throu gh rele ase of the market mechanism from social and politic al constraints, Western civilization has reached a level of unpr ecedent ed affluence and has set an example that other civilizat ions wish to emulate. It ha s done so, h owever, at the cost of o th er values. A s liberal economics teache s, nothin g is ever achieved with out a cost.

Critique of Economic Nationalism The foremo st stre ngth of economic nation alism is its focus on the stat e as the predominant actor in intern atio nal relation s and as an instrum ent of economic dev elopment. Alth ough many have argued t hat modern econ omic and techn o logical devel opment s have made th e nation -state an anachr onism, at the end of the twentieth century the system of n ati on -states is actua lly expanding ; societi es throu ghout th e world are seeking to create stro n g sta tes capable of organizing and managing nati onal economie s, and the num ber of states in the world is increasin g. Even in older states, th e spirit of

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nationalist sentiments can easily be inflamed, as happened in the Falkland War of 1982. Although other actors such as transnational and international organizations do exist and do influence interna- tional relations, the economic and military efficiency of the state makes it preeminent over all these other actors.

The second strength of nationalism is its stress on the importance of security and political interests in the organization and conduct of international econoi:nic relations. One need not accept the nationalist emphasis on the primacy of security considerations to appreciate that the security of the state is a necessary precondition for its economic and political well-being in an anarchic and compet- itive state system. A state that fails to provide for its own security ceases to be independent. Whatever the objectives of the society, the effects of economic activities upon political independence and domestic welfare always rank high among its concerns (Strange, 1985, p. 234).

The third strength of nationalism is its emphasis on the political framework of economic activities, its recognition that markets must function in a world of competitive groups and states. The political relations among these political actors affect the operation of markets just as markets affect the political relations. In fact, the international political system constitutes one of the most important constraints on and deter- minant of markets. Since states seek to influence markets to their own individual advantage, the role of power is crucial in the creation and sustaining of market relations; even Ricardo's classic example of the exchange of British woolens for Portuguese wine was not free from the exercise of state power (Choucri, 1980, p. 111 ). Indeed, as Carr has argued, every economic system must rest on a secure political base (Carr, 1951 [1939]).

One weakness of nationalism is its tendency to believe that international economic relations constitute solely and at all times a zero-sum game, that is, that one state's gain must of necessity be another's loss. Trade, investment, and all other economic relations are viewed by the nationalist pri- marily in conflictual and distributive terms. Yet, if

Gilpin Three Ideologies of Political Economy 199

cooperation occurs, markets can bring mutual (albeit not necessarily equal) gain, as the liberal insists. The possibility of benefit for all is the basis of the interna- tional market economy. Another weakness of nationalism is due to the fact that the pursuit of power and the pursuit of wealth usually do conflict, at least in the short run. The amassing and exercising of military and other forms of power entail costs to the society, costs that can undercut its economic efficiency. Thus, as Adam Smith argued, the mercan- til ist policies of eighteenth-century states that identified money with wealth were detrimental to the growth of the real wealth created by productivity increases; he demonstrated that the wealth of nations would have been better served by policies of free trade. Similarly, the tendency today to identify industry with power can weaken the economy of a state. Development of industries without regard to market considerations or comparative advantage can weaken a society economically. Although states in a situation of conflict must on occasion pursue mercantilist goals and policies, over the long term, pursuit of these policies can be self-defeating.

In addition, nationalism lacks a satisfactory theory of domestic society, the state, and foreign policy. lt tends to assume that society and state form a unitary entity and that foreign policy is determined by an objective national interest. Yet, as liberals correctly stress, society is pluralistic and consists of individuals and groups ( coalitions of individuals) that try to capture the apparatus of the state and make it serve their own political and economic interests. Although states possess varying degrees of social autonomy and independence in the making of policy, foreign policy ( including foreign economic policy) is in large measure the outcome of the conflicts among dominant groups within each society. Trade protectionism and most other nationalist policies result from attempts by one factor of production or another (capital, labor, or land) to acquire a monopoly position and thereby to increase its share of the economic rents. Nationalist policies are most frequently designed to redistribute income from consumers and society as a whole to producer interests.

200 Chapter8 InternationalTrade

Nationalism can thus be interpreted as either a theory of state building or a cloak for the interests of particular producer groups that are in a position to influence national policy. In their failure to appreo- ate fully or distinguish between the two possible meanings of economic nationalism, nationalists can be faulted for not applying, both to the domestic level and to the determination of foreign policy, their assumption that the political framework influences economic outcomes. They fail to take sufficient account of the fact that domestic political groups frequently use a nationalist rationale, especially that of national security, to promote their own interests.

One may conclude that the nationalists are essentially correct in their belief that the state must play an important role in economic development. A strong state is required to promote and, in some cases, to protect industry as well as to foster an efficient agriculture. Yet this active role of the state, though a necessary condition, is not a sufficient condition. A strong and interventionist state does not guarantee economic development; indeed, it might retard it. The sufficient condition for economic development is an efficient economic organization of agriculture and industry, and in most cases this is achieved through the operation of the market. Both of these political and economic condi- tions have characterized the developed economies and the rapidly industrializing countries of the contemporary international system.

· It is important to realize that, whatever its relative merits or deficiencies, economic nationalism has a persistent appeal. Throughout modern history, the international location of economic activities has been a leading concern of states. From the seventeenth century on states have pursued conscious policies of industrial and technological development. Both to achieve stable military power and in the belief that industry provides a higher "value added" than agriculture, the modern nation-state has had as one of its major objectives the establishment and protection of industrial power. As long as a conflictual interna- tional system exists, economic nationalism will retain its strong attraction.

Critique of Marxist Theory

Marxism correctly place s the economic problem- the production and distribution of material wealth-where it belongs, at or near the center of political life. Whereas liberals tend to ignore the issue of distribution and nationalists are concerned primarily with the international distribution of wealth, Marxists focus on both the domestic and the international effects of a market economy on the distribution of wealth. They call attention to the ways in which the rules or regimes governing trade, investment, and other international economic relations affect the distribution of wealth among groups and states (Cohen, 1977, p. 49). However, it is not necessary to subscribe to the materialist inter- pretation of history or the primacy of class struggle in order to appreciate that the ways in which individuals earn their living and distribute wealth are a critical determinant of social structure and political behavior.

Another contribution of Marxism is its emphasis on the nature and structure of the division of labor at both the domestic and international levels. As Marx and Engels correctly pointed out in The German Ideology, every division of labor implies dependence and therefore a political relationship (Marx and Engels, 1947 [1846]). In a market econ- omy the economic nexus among groups and states becomes of critical importance in determining their welfare and their political relations. The Marxist analysis, however, is too limited, because economic interdependence is not the only or even the most important set of interstate relations. The political and strategic relations among political actors are of equal or greater significance and cannot be reduced to merely economic considerations, at least not as Marxists define economics.

The Marxist theory of international political economy is also valuable in its focus on international political change. Whereas neither liberalism n_or nationalism has a comprehensive theory of social change, Marxism emphasizes the role of economic and technological developments in explaining the dynamics of the international system. As embodied in

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Lenin's law of uneven development, the differential growth of power among states constitutes an underly- ing cause of international political change. Lenin was at least partially correct in attributing the First World War to the uneven economic growth of power among industrial states and to conflict over the division of territory. There can be little doubt that the uneven growth of the several European powers and the conse- quent effects on the balance of power contributed to their collective insecurity. Competition for markets and empires did aggravate interstate relations. Furthermore, the average person's growing awareness of the effects on personal welfare and security of the vicissitudes of the world market and the economic behavior of other states also became a significant ele- ment in the arousal of nationalistic antagonisms. For nations and citizens alike, the growth of economic interdependence brought with it a new sense of inse- curity, vulnerability, and resentment against foreign political and economic rivals.

Marxists are no doubt also correct in attributing to capitalist economies, at least as we have known them historically, a powerful impulse to expand through trade and especially through the export of capital. The classical liberal economists themselves observed that economic growth and the accumula- tion of capital create a tendency for the rate of return (profit) on capital to decline. These economists, however, also noted that the decline could be arrested through international trade, foreign investment, and other means. Whereas trade absorbs surplus capital in the manufacture of exports, foreign investment siphons off capital. Thus, classical liberals join Marxists in asserting that capitalist economies have an inherent tendency to export goods and surplus capital.

This tendency has led to the conclusion that the nature of capitalism is international and that its internal dynamics encourage outward expansionism. In a closed capitalist economy and in the absence of tech- nological advance, underconsumption, surplus capital, and the resulting decline in the rate of profit would eventually lead to what John Stuart Mill called "the stationary state" (Mill, 1970 [1848], p. 111 ). Yet, in an open world economy characterized by expanding

Gilpin Three Ideologies of Political Economy 201

capitalism, population growth, and continuing improvement in productivity through technological advance, there is no inherent economic reason for economic stagnation to take place.

On the other hand, a communist or socialist economy has no inherent economic tendency to expand internationally. In a communist economy, investment and consumption are primarily deter- mined by the national plan and, moreover, the state has a monopoly of all foreign exchange. A commu- nist economy may of course have a political or strategic motive for exporting capital, or it may need to invest abroad in order to obtain vital sources of raw materials. A Marxist regime may also find it profitable to invest abroad or to engage in other commercial transactions. Nevertheless, the incen- tive structure of a communist society with its stress on prestige, power, and ideology is unlikely to encourage the economy's expansion abroad. The tendency is rather for economics to be subordinated to politics and the nationalistic goals of the state (Viner, 1951).

Marxists are certainly correct that capitalism needs an open world economy. Capitalists desire access to foreign economies for export of goods and capital; exports have a Keynesian demand effect in stimulating economic activity in capitalist economies, and capital exports serve to raise the overall rate of profit. Closure of foreign markets and capital outlets would be detrimental to capitalism, and a closed capitalist economy would probably result in a dramatic decline in economic growth. There is reason to believe that the capitalist system ( certainly as we have known it) could not survive in the absence of an open world economy. The essential character of capitalism, as Marx pointed out, is cosmopolitan; the capitalist's ideology is international. Capitalism in just one state would undoubtedly be an impossibility.

In the nineteenth and twentieth centuries the dominant capitalist states, Great Britain and the United States, employed their power to promote and maintain an open world economy. They used their influence to remove the barriers to the free flow of goods and capital. Where necessary, in the

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202 Chapter 8 International Trade

words of Simon Kuznets, "the greater power of the developed nations imposed upon the reluctant partners the opportunities of international trade and division of labor" (Kuznets, 1966, p. 335). ln pursuit of their own interests, they created international law to protect the property rights of private traders and investors (Lipson, 1985). And when the great trading nations became unable or unwilling to enforce the rules of free trade, the liberal system began its steady retreat. Up to this point, therefore, the Marxists are correct in their identification of capitalism and modem imperialism.

The principal weakness of Marxism as a theory of international political economy results from its failure to appreciate the role of political and strategic factors in international relations. Although one can appreciate the insights of Marxism, it is not necessary to accept the Marxist theory that the dynamic of modem international relations is caused by the needs of capitalist economies to export goods and surplus capital. For example, to the extent that the uneven growth of national economies leads to war, this is due to national rivalries, which can occur regardless of the nature of domestic economies-witness the conflict between China and the Soviet Union. Although competition for markets and for capital outlets can certainly be a cause of tension and one factor causing imperialism and war, this does not provide an adequate explanation for the foreign policy behavior of capitalist states.

The historical evidence, for example, does not support Lenin's attribution of the First World War to the logic of capitalism and the market system. The most important territorial disputes among the European powers, which precipitated the war, were not those about overseas colonies, as Lenin argued, but lay within Europe itself. The principal conflict

leading to the war involved redistribution of the Balkan territories of the decaying Ottoman Empire. And insofar as the source of this conflict was economic, it lay in the desire of the Russian state for access to the Mediterranean (Hawtrey, 1952, pp. 117-18). Marxism cannot explain the fact that the three major imperial rivals-Great Britain, France, and Russia-were in fact on the same side in the ensuing conflict and that they fought against a Germany that had few foreign policy interests outside Europe itself.

In addition, Lenin was wrong in tracing the basic motive force of imperialism to the internal workings of the capitalist system. As Benjamin J. Cohen has pointed out in his analysis of the Marxist theory of imperialism, the political and strategic conflicts of the European powers were more important; it was at least in part the stale- mate on the Continent among the Great Powers that forced their interstate competition into the colonial world (Cohen , 1973). Every one of these colonial conflicts (if one excludes the Boer War) was in fact settled through diplomatic means. And, finally, the overseas colonies of the European powers were simply of little economic conse, quence. As Lenin's own data show, almost all European overseas investment was directed to the "lands of recent settlement" ( the United States, Canada, Australia, South Africa, Argentina, etc.) rather than to the dependent colonies in what today we call the Third World (Lenin, 1939 [1917], p. 64). In fact, contrary to Lenin's view that politics follows investment, international finance during this period was largely a servant of foreign policy, as was also the case with French loans to Czarist Russia. Thus, despite its proper focus on political change, Marxism is serious flawed as a theory of political economy.

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of

ard

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