ULI459U-GLOBAL POLITICAL ECONOMY
Chapter 2: Theories of International Political Economy
Introduction
IPE is a discipline that studies the way in which global economy and politics interacts and the result of that interactions. Economics is about the use of scarce resources for unlimited desires while politics is about order and public goods. The theories of economics/market are fundamentally different than theories of politics/state (and international relations). Historically though, they are not so separate in that the historical evolution of IPE can be classified into three sub-periods: classical period; the long negligence period; the rise of IPE. During the classical time, the intersection of economy and politics was the ‘political economy’. The marginal revolution of the 1870s decisively altered the way in which political economy was approached by splitting the discipline in half and paving separate ways for economics and politics, initiating what we now call the “long negligence period”. Economists became more mathematical, individualist, deductive and positivist. Politics focused on coercive authority and concerned with power, collective decision making and resolution of conflicts. That long negligence of politics and economics to each other continued until the Susan Strange’s semantic article “International Economics and International Relations: A Case of Mutual Neglect” where she urged too many academics in international relations preoccupied by far too exclusively on political and strategic relations between states while economics go far deeper into mathematics and formal modelling. Since then IPE grown into a mature discipline on its own, yet it is still a very young one in the social sciences. While IPE theories may broadly be covered under classical approaches and emerging approaches, the relatively new nature of IPE as a field places greater emphasis on classical approaches, as emerging approaches are still developing while classical approaches and their interactions are historically well understood.
Physiocrats
Physiocrats were the proponents of the new ideas of economic freedom in France. Physiocrats were generally acknowledged as having established the first systemic school of political economy even before Adam Smith. During the time of physiocrats’ rein, France was trembled by the economic and social disorder, which eventually lead to French Revolution in the later phases. In such circumstances, physiocracy was a reaction to both industrial revolution and mercantilism. Physiocrats were striving for a return to pre-industrial era. France was economically challenged due to enduring wars and political instability, and levied heavy taxes on peasants rather than aristocrats. Physiocrats opposed this and instead proposed the subsidization of capitalist agriculture – the only productive sector in their view. The term ‘net product’ is a major theoretical advance, which also inspired Marx to develop the concept of ‘surplus values’. Net product was referring the source of capital accumulation. As the only source of net-product,
agriculture is the exclusive source of a country’s wealth or the only productive occupation. Physiocrats were revolutionary in their methodological thinking of economics, yet they were stuck in the past.
Mercantilism
As the earliest systemic understanding of IPE, mercantilism goes back to the period between the sixteenth to the nineteenth centuries. Throughout that period mercantilism served both as a state policy and an economic theory. Mercantilists were also in cooperation with absolutist princes during an era of state-building out of the ashes of feudalism. Therefore, mercantilism was a strong nation-building policy as well as an economic policy. mercantilists were mere merchants, but not producers of anything. They were simply making profit out of buying goods here and there and selling somewhere else. Thus, the profits (the surplus or the source of capital accumulation) came from merchandise trade, not production itself. It is very important to note that this was one of the central tenets of mercantilism. Mercantilists in cooperation with monarchs had done several things to create a favorable balance of trade: Prioritized policies to increase export; prioritized policies to decrease import; created trade monopolies; heavily relied on state coercive powers to expand and protect economic interests. The last two were particularly important since they affected what happens in the aftermath of mercantilist era. Therefore, as the early phase of capitalism, mercantilism was a war- capitalism. Mercantilists saw international flows of goods, services, and capital in the context of geopolitics where a favorable balance of trade in the international economy serves as an important component of a favorable balance of power in the international states system. In such a context, trade just a tool for rivalry (zero-sum games) as much as military power is.
Economic Nationalism
Classic economic nationalism was also a branch of mercantilist thoughts. However, the focus given in economic nationalist economic policy was shifted towards support of the national economy for faster industrialization and growth. The origins of economic nationalism can be traced back to the work of Alexander Hamilton and Friedrich List. Hamilton saw active state intervention (or in a better word direct state involvement) as a must for the industrialization. Hamilton, therefore, endorsed protectionism of the national manufactures and agriculture with a series of trade tariffs, duties, and prohibitions. Yet his immediate policy goal differs notably from earlier mercantilist thought. His aim was to make the nation more secure by making it more self-sufficient. For List, the essence of political economy is the discovery of the means by which national economies grow and develop. According to List, the world economy was not cosmopolitan as long asserted by liberals. Trade between countries was not trade between individuals or groups that takes place in a domestic economy. Because different
nations constitute different histories, cultures and ways of governments with different levels of economic development - some advanced industrial societies, some still mainly agricultural. All require different political economies to deal with national economic progress. List suggested nurturing ‘infant industries’ until they became competitive. If the state didn’t protect them early on from the competition of more advanced industries abroad, there wouldn’t be a domestic industry at all, which at the end of the day heightens the standing of states in world affairs. The overemphasizing of nation states an important character for the economic nationalist approach.
Economic nationalism in the forms of trade protectionism have always flourished during economic crisis and recessions. Many emerging economies, especially Asian economies, have been an example of contemporary economic nationalist policies, which are generally known as “developmental states”. Developmental states applied free trade policies full of exceptions by applying tight internal control and relying on protected manufacturing industries and controlling external trade policies in order to industrialize/develop faster. Contemporary economic nationalists see state as the first and foremost actor for development. Thus, development stands as an overarching political-economic policy and is achieved by an autonomous and centralized state bureaucracy.
Liberalism
Liberalism is the most dominant theory of IPE. Liberals basically argue that there is no need for state to bring together buyer and seller, set prices and quantities, or spur investment and production. The ‘invisible hand’ will find the most effective balance in the market instead of any central authority. That is, markets govern production, consumption, and exchange on its own in a best effective and efficient way. Yet, there is room for state in overseeing the proper functioning of markets, defending property rights, and for the provision of goods and services that markets couldn’t produce, such as national defense. Three fundamental developments were central to the rise of liberalism from mercantilism. Firstly, industrialization and increasing commerce reduced the price differences between regions and nations, on which mercantilism relied on. Secondly, the rise of capitalism introduced the opportunity to profit from production rather than trade, which made navigating the maze of mercantilist restrictions tedious. Lastly, a significant number of thinkers, philosophers and economists rejected the old paternalistic view of the state and state regulation and began formulating a new individualistic philosophy. In the last three decades of the eighteenth century and in the early nineteenth century, the most fundamental transformations of human life in history – the industrial revolution- started in Scotland and England. Later it spread to many parts of western Europe in the early nineteenth century. During this period, as a living observer of the time, Adam Smith had started with critique of mercantilism’s understanding of wealth. According to
him, the wealth of a nation came from the productive capacity of the national economy, not from the accumulation of gold and silver as mercantilists insisted. To make the state more resourceful and thus more powerful, statesmen should prefer free trade over protectionism. According to liberals, free trade is tenable among nations due to a harmony of interests in international trade. Portraying international trade as mutually beneficial and a positive sum game, liberals see interdependency deriving from trade relations as a major source of peaceful relations among nations
In the early 1900s, the liberal international political economy theory had been marginalized. The factors of this marginalization were the separation of international relations and economics, the former discrediting liberalism due to WWII while the latter doing so due to the Great Depression of 1929 and Keynesian economics. The resurgence of liberal theory depended on the interdependence theorists of the 1960’s and 70’s, who refined liberal theory in international relations. Referred to as neoliberalism, this new approach of liberalism argues that countries in world politics are more than just interdependent but now live in a ‘complex interdependence,’ which is the condition of the international political economy characterized by diverse social connections between and across states, an array of relatively autonomous issue areas, and the decline of the centrality and efficacy of military force. In such a world, order derives from international regimes rather than brute hegemonic force as a hegemonic stability or balance of power. This approach rejects the hegemonic stability theory that supports the notion of dominant states ensuring the stability of the international system. The emergence of a neoliberal approach that studies international regimes to explain the complex interdependence of states and their economies also brought critics, some neoliberals themselves, who argued that much of the fundamental assumptions of neoliberalism were neorealist assumptions and that liberal theory should focus on state preferences as a fundamental element of calculation rather than information and institutions. This debate around the re- emergence of classical theories in contemporary situations is called the neo-neo debate.
Marxism
Karl Marx and Adam Smith are the most influential names in the intellectual history of the IPE. Marx stated that the value of a good is the amount of labour used to make it, and that was where economic value comes from, which is known as the labour theory of value. In Marxist theory, to increase profit as much as possible, capitalists exploit labor as much as possible. In Marx’s reading of capitalism, as that exploitation became unattainable, then the proletariat would rise against the bourgeoisie. That is how capitalism would end - with a revolution, which has yet to happen. While his prediction was wrong, Marx was correct to assert that capitalism is destined to become a worldwide social order. While Marx only stated that in
their search for expanding markets, globalization would drive capitalists into establishing a single world market, other Marxist theorists focused on the expansion of capitalism, often calling it imperialism. This approach is also used to explain British colonialism, where rather than increasing the wages in Britain to increase consumption, the production surplus and consumption deficit was addressed through forced expansion.
While the revolutionary uprising envisioned by Marx never took place, there are two withstanding Marxist approaches in contemporary IPE studies: the Neo Gramscian School and the Dependency School. Bringing Antonio Gramsci’s ideas into the IR jargon, Robert Cox probably is the most cited scholar in this genre of IPE theories. Cox distinguishes historical materialist Marxism from other types of Marxism by saying that the first seeks to explain, as well as promote, change in social relations, while the contemporary approach provides a framework for the analysis of the capitalist state and society. In his analysis, the real material power is the power in production, - power that controls/dominates production process-. However, hegemony comes from a configuration of forces in historical structures (material power, ideology and institutions) that evokes notions of legitimate rule. Dependency school is another neo Marxist variant of theories of IPE that explains development processes by looking at the dominance and subordination relations taking place between core and periphery. One such well- known theory is Wallerstein’s “World System Theory” which is basically tries to analyze the dynamics of capitalist world economy as a total social system. According to Wallerstein, the division between core and periphery is fundamentally a division of labor in the world economy. The core, having a financial and technological edge, dominates capital intensive production while the periphery, lacking material and institutional requirements for development, focus on labor intensive production. As such, the relationship between the core and the periphery is a structural relationship in which the core systematically exploits the periphery.