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Perspectives on International Political Economy

Perspectives on International Political
What Is International Political
Standing on the Precipice.
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The fate of our times is characterized by rationalization and
intellectualization and, above all, by the “disenchantment of the world.”
Max Weber
In the last few years, a number of global problems and conditions have caused
many people of different political stripes to become anxious, frustrated, and even
angry. Consider some of the dramatic and distressing upheavals in the world
The unexpected election of Donald Trump as president of the United States;
The retreat of democracy, political freedoms, and civil liberties in a number
of countries;
War and war crimes in the Middle East, particularly in Syria, Iraq, and
North Korea’s development and testing of nuclear weapons and long-range
missiles to carry nuclear warheads;
The worst global refugee crisis since World War II; and finally
The withdrawal of the United States from the Paris accord on global climate
As writers and editors of this textbook, we believe that these issues are indeed
legitimate reasons to feel anxious, if not greatly concerned or even frightened.
Although many of these sorts of conditions have occurred before in the global
political economy, what is different now is the growing feeling that rapid change
is causing political, economic, and social instability. One way to try to make
sense of things in the “age of anxiety” is to reflect on the extent to which these
developments point to the breakdown of the “postwar world order.” This term
refers to a global management structure that began in 1944 when the allies met
during World War II in Yalta to discuss the future of Europe.
For the past three-quarters of a century the world’s “Great Powers” have
avoided a nuclear war and another conventional war like World War II. At times
the two superpowers—the United States and the Soviet Union—fought “proxy
wars” indirectly against one another via surrogate states in order to limit the
possibility of engaging one another directly. The postwar order has also
promoted development in former colonies and conditioned the actions of
international organizations and businesses by gradually expanding liberal
international trade and monetary policies. Still another objective of the world
order was to allow a space for nongovernmental organizations (NGOs) and civil
society to affect issues such as political rights and liberties, education, the
environment, and labor.
We may think of the postwar order as a global regime made up of rules,
norms, and decision-making procedures. Regimes tend to sustain themselves
over a period of time because states and other actors agree to behave in a certain
manner, which becomes ingrained in policy ideas and processes. At the same
time, we know that structures are not static but are transformed over time. A
central issue this text addresses is the extent to which the third phase of the
postwar order is ending and transitioning into a new order.
We argue that the upheavals mentioned above contribute to and reflect the
unraveling of the international configuration of political and economic power
that has been in place since 1944. We divide the postwar order into three distinct
phases: 1944–1973, 1974–1991, and 1992–2017. A gradual redistribution of
wealth and power within the postwar order shifted the values and goals of
different actors within it. None of these phases has an abrupt beginning or end;
some characteristics from one phase will persist into the next. However, we
contend that there is a distinct zeitgeist and set of features in each phase.
We use an analytical approach that describes, explains and offers some
solutions to the problems mentioned above. What follows is a discussion of key
analytical tools and frameworks of analysis in IPE that can help students
describe and explain issues mentioned throughout the textbook.
When defining IPE, we make a distinction between the term “international
political economy” and the acronym “IPE.” The former refers to what we study
—a field of inquiry that focuses on actors and issues that are either
“international” (between nation-states) or “transnational” (across the national
borders of two or more states). Many analysts use the term “global political
economy” instead of “international political economy” to label the study of
problems such as climate change, hunger, and illicit markets that have spread
over the entire world. More often than not, the two terms are used
In addition to the field of study just described, the acronym “IPE” also
connotes a multidisciplinary method of inquiry. The primary objective of this
textbook is to help you understand the interconnections between political,
economic, and social topics that are not accounted for in separate disciplines.
IPE combines and synthesizes a number of concepts, methods, and insights
derived from economics, political science, and sociology. While drawing on
history and philosophical ideas, it offers a more comprehensive and compelling
explanation of global processes managed by governments, businesses, and social
forces in different geographical areas. The four dominant IPE “perspectives” are
discussed in detail below and outlined in Table 1.1.
IPE today also represents an effort to return to the kind of analysis done by
political theorists and philosophers before the study of human social behavior
became fragmented into discrete fields in the social sciences. Both Adam Smith
and Karl Marx, for example, considered themselves to be political-economists in
the broadest sense of the term. Although disciplinary specialization enhances
analytical efficiency, a single discipline offers an incomplete explanation of
global events. The tendency of disciplines is to “cram” data, ideas, and
conditions into restricted intellectual and analytical boundaries. In some cases
this results in a narrow- mindedness in which explanations lack complexity and
factors that do not fit comfortably within a discipline’s dominant framework are
What are some of the central elements of the antecedent fields of study that
contribute to IPE? First, IPE includes a political dimension that accounts for the
use of power by individuals, domestic groups, states (acting as single units),
international organizations, NGOs, and transnational corporations (TNCs). All
these actors make decisions about the distribution of tangible things in the world
such as money and products or intangible things such as security and innovation.
In almost all cases, politics involves the making of rules pertaining to how states
and societies achieve their goals. Another aspect of politics is the kind of public
and private institutions that have the authority to pursue different goals.
Second, IPE involves an economic dimension that deals with how scarce
resources are distributed in markets among individuals, groups, and nationstates. Today, markets are not just places where people go to buy or exchange
things face-to-face; markets also exist online. The market can also be thought of
as a driving force that shapes human behavior. When consumers buy things,
when investors purchase stocks, and when banks lend money, their
depersonalized transactions constitute a vast, sophisticated web of relationships
that coordinate economic activities all over the world. The political scientist
Charles Lindblom makes an interesting case that the economy is actually nothing
more than a system for coordinating social behavior. Agricultural markets shape
what people eat, labor markets shape people’s occupations and living standards,
and relaxation markets even organize what people do when they are not
working. In effect, markets often perform a social function of “coordination
without a coordinator.”2
Third, the works of such notables as Lindblom along with economists Robert
Heilbroner and Lester Thurow help us realize that IPE needs to reflect on the
societal dimension of different international problems.
3 Many IPE scholars
argue that states and markets do not exist in a social vacuum. There are usually
many different social groups within a state who share identities, norms, and
associations based on tribal ties, ethnicity, religion, or gender. Likewise, a
variety of transnational groups (referred to as global civil society) have interests
that cut across national boundaries. A host of NGOs have attempted to pressure
national and international organizations on such issues as climate change,
refugees, migrant workers, and gender-based exploitation. All of these groups
are purveyors of ideas that potentially generate tensions between them and other
groups but play a major role in shaping global behavior.
Rather than using a single political, economic, or sociological approach, IPE
employs a variety of theories and analytical tools that help us gain a more
sophisticated understanding of the complex interrelationships between the state,
market, and society in different nations. While this statement might sound a bit
formal and confusing, keep in mind that we do not think you need to be an
economics major or a finance specialist to understand the basic parameters of
major IPE issues such as the global financial crisis and trade policy. In fact, this
book is written for students who have limited background in political science,
economics, and sociology, as well as for those who want to review IPE topics in
preparation for graduate school. Those who study IPE are, in essence, breaking
down the analytical and conceptual boundaries between politics, economics, and
sociology to produce a unique explanatory framework.
Different Perspectives and Methodologies in IPE
The late political economist Susan Strange, a major force in the development of
the field of IPE, suggests that we focus on a number of common conceptual
issues and tools that cut across disciplinary boundaries. Her starting point for
studying the relationships between states, markets, and society in the
international political economy is to focus on the question of cui bono? (Who
4 We then apply her framework to four dominant perspectives in IPE:
economic liberalism, mercantilism, structuralism, and constructivism. A strict
distinction between these perspectives is quite arbitrary and has been imposed by
disciplinary tradition, at times making it difficult to appreciate their connections
to one another. Each focuses on the relationships between a variety of actors and
institutions. Each perspective emphasizes specific values, actors, and solutions to
policy problems but also overlooks some important elements highlighted by the
other three perspectives (see Table 1.1).
Economic liberalism (particularly neoliberalism—see Chapter 2) is most
closely associated with the study of markets. Later we will explain why there is
an increasing gap between orthodox economic liberals, who champion free
markets and free trade, and heterodox economic liberals, who support more
state regulation and trade protection to sustain markets. Heterodox liberals stress
that markets work best when they are embedded in (connected to) society and
when the state intervenes to resolve problems that markets alone cannot handle.
In fact, many heterodox scholars acknowledge that markets are the source of
many of these problems.
Perspectives on State-Market Relations
Many liberal values and ideas derived from such notable thinkers as Adam
Smith, David Ricardo, John Maynard Keynes, Friedrich Hayek, and Milton
Friedman are the ideological foundation of the popular globalization campaign
(see Chapter 2). The famous laissez-faire principle that the state should leave the
economy alone is attributed to Adam Smith.
5 More recently, economic liberal
ideas have been associated with former president Ronald Reagan and his
acolytes who contend that economic growth is best achieved when the
government severely limits its involvement in the economy.
Orthodox liberals assume that people behave “rationally” under pure market
conditions (i.e., in the absence of state intervention or social influences).
Individuals will naturally seek to maximize their gains and limit their losses
when producing and selling things. They have strong desires to generate wealth
by competing with others in local and international markets. Orthodox scholars
believe that people should strongly value economic efficiency—the ability to use
and distribute resources effectively and with little waste. When an economy is
inefficient, scarce resources go unused or could be used in other ways that would
be more beneficial to society.
Mercantilism (also called economic nationalism) is closely associated with
the political philosophy of realism, which focuses on state efforts to accumulate
power and wealth to protect society from physical harm or the influence of other
states (see Chapters 3 and 9). In theory, the state is a legal entity and an
autonomous set of institutions that governs a specific geographic territory and
people of a nation. Since the mid-seventeenth century, the state has been the
dominant actor in the international community based on the principle that it has
the authority to exercise sovereignty (final authority) over affairs within its
States usually employ two types of power to protect themselves. Hard power
refers to tangible military and economic assets employed to compel, coerce,
influence, fend off, or defeat enemies and competitors. Soft power is comprised
of selective tools that reflect and project a country’s cultural values, beliefs, and
ideals. Through cultural exports, information flows, and diplomacy, a state can
convince others that the ideas and values it sponsors are legitimate and should be
accepted or tolerated. Soft power can in many ways be more effective than hard
power because it rests on persuasion and mutual exchange.
Structuralism is rooted in Marxist analysis but not limited to it (see Chapter
4). Structuralist ideas continue to be extremely important, even though they are
not as politically popular as they were before the end of the Cold War.
Phenomena that structuralists examine, including class divisions, exploitation,
and imperialism, are not unique to capitalist societies. Scholars within this
perspective show how the dominant economic structure of any society affects
different social classes. They emphasize that markets have never existed in a
social vacuum. Some combination of social, economic, and political forces
establishes, regulates, and preserves these markets. As we will see in the case of
the global financial crisis, even the standards used to judge the effectiveness of
market systems reflect the dominant values and beliefs of those forces.
Constructivism is a relatively new and increasingly influential IPE
perspective (see Chapter 5). It contends that norms, ideas, and discourse play
important roles in shaping outcomes in the global political economy.
Constructivists widen the study of IPE to include numerous nonstate actors and
cultural values. They are particularly interested in how actors come to acquire
their interests and understandings of the world in which they act. Constructivists
believe that states and international organizations can change their goals as their
conception of themselves and others changes. And when states come to share
views about the nature of problems, they are likely to cooperate and ensure
protracted peace. Today, however, many societies (including democratic ones)
are becoming more polarized and authoritarian, in part as a reflection of shifting
cultural norms and values, raising the prospect of more interstate violence.
Each of the four IPE perspectives helps us understand who benefits or loses
from the international processes we observe, how actors acquire and use political
power and economic resources, and what goals actors seek to achieve. In
addition, IPE gives students the freedom to select analytical approaches that they
feel are best suited to explaining a particular issue or problem. It is important to
note that the way one explains a problem depends on the questions asked about
it, the data available, and the theoretical outlook of the analyst herself. Benjamin
J. Cohen, for example, sheds light on this issue in his discussion of the
“transatlantic divide” between IPE scholars in the United States and Great
7 U.S. scholars tend to prefer IPE theories organized around issues of
causation. Emphasis is placed on asking questions for which there is “hard” data.
The goal is to test theories with statistical techniques and empirical evidence to
determine what causes a particular “pattern of behavior.” In contrast, British
scholars tend to think of IPE in terms of problems that are not as easy to quantify
or for which statistical tests are often not very useful.
Our methods are closer to those rooted in historical and philosophical
understanding. At times we incorporate normative issues such as ethics and
social justice. Our reasoned explanations for global events and processes often
point to a number of potential causes that are interconnected. While we present
evidence from various social scientists about these causes, we do not seek to
establish definitive laws or conclusions using a model drawn from the natural
sciences. Nor do we make rigid assumptions about human behavior or causation.
Instead, we strive to show readers how to look at global issues in critical ways
and formulate plausible interpretations. We believe that what is most important
is to learn how to explore complex interactions between social phenomena and
recognize the kinds of evidence that inform scholars’ assessments of different
socio-political processes. In sum, we can say that IPE blends together distinct
perspectives to produce more holistic explanations. It is more flexible than most
disciplines because it asks the analyst to choose how something should be
studied and with what tools. Hopefully, with a multidimensional outlook we can
conduct better analysis that may result in more effective solutions to global
We recognize that it is difficult to establish a single explanation of any IPE
issue because each discipline has its own set of analytical concepts, core beliefs,
and methodologies. However, we suggest that IPE is not a hard science and it
may never establish a comprehensive theory with easily testable propositions
about cause and effect. The world is its messy laboratory. Social science has
always reflected this in its explanations of human behavior. We find that after
experiencing an IPE course, many of our students feel that they have a better
understanding of complex events and processes. They are able—metaphorically
speaking—to graft different cuttings onto a branch to produce a new hybrid.
The Four Levels of Analysis
IPE theorists commonly use different levels of analysis in their research. In his
famous book Man, the State, and War, Kenneth Waltz argues that explanations
for causes of international conflict are located in different analytical levels of
increasing complexity, ranging from individual behavior and choices (the
individual level), to factors within states (the state/societal level), to the
interconnections between states (the interstate level).
8 More recently, many have
argued that the causes of specific problems are found at a fourth global level.
Depending on which level of generalization we choose, we can come to
different explanations for global events and processes. The levels are not
mutually exclusive; a good IPE scholar will look for explanations at all the
levels. However, depending on what question is asked, one level usually
provides better answers than others.
The global level is the broadest, most comprehensive level of analysis. We
look at global economic constraints and opportunities resulting from changes
in technology, global markets, and the natural environment. Global level
factors cannot be traced to the actions of any one state, group of states,
individual, or group. For example:
Thomas Friedman proposed that globalization is a “golden
straightjacket”—investors will flee countries that fail to offer low
inflation, a strong private sector, and free trade.
The development and proliferation of standardized shipping containers
made outsourcing more viable because loading, unloading, and
transportation of manufactured goods became cheaper and easier. This
new technology helped change where production occurs in the world.
Climate change is forcing a shift to new energy sources, thereby
potentially hurting countries reliant on oil and coal while rewarding
countries that invest in solar power and other forms of clean energy.
At the interstate level, we analyze how the relationships between states
affect global outcomes. For example:
Alliances and the balance of power (distribution of power) between states
profoundly shape what actions individual states can take and what threats
they face.
The presence of a hegemon (a dominant power) gives us global public
goods like security, free trade, and a top currency, while the rise of new
powers such as China can lead to severe conflict with established powers.
States that weakly regulate transnational corporations and establish
themselves as tax havens undermine the efforts of other states to sustain
welfare programs and distribute a greater share of national income to
workers. Thus, the inability of states to cooperate on tax and regulatory
policies may spur a global “race to the bottom.”
At the state-societal level, we analyze how bureaucratic decision making
and the type of government shape outcomes. We also look at how lobbying,
electoral pressures, culture, and a country’s class structure determine foreign
policy actions. For example:
U.S. farmers have considerable political power, despite being few in
number, because each state gets two senators, magnifying the influence
of less populated agricultural states. Therefore, the U.S. Congress gives
large subsidies to American growers of cotton, corn, and other crops and
maintains significant tariffs and quotas on imported agricultural
commodities, all of which hurt farmers in poor developing countries.
Deregulated financial markets (due to the political power of Wall Street)
and a cultural belief that the American Dream includes owning a home
created systemic pressure to extend mortgages to subprime borrowers,
laying a foundation for the global financial crisis.
Whether a country has a parliamentary or presidential system affects
government stability and the ease of negotiating trade agreements.
At the individual level, we look at what individual policymakers do to cause
or influence events. We try to understand the psychology, goals, and
ideology of state leaders. Not all leaders react the same way to the same
events and information. For example:
In the worldview of former Federal Reserve chairman Alan Greenspan
and other acolytes of Ayn Rand, markets will self-regulate; thus, these
policymakers paid scant attention to inherent systemic risks in financial
systems that can trigger national and global economic crises.
The religious worldview of Iran’s leaders and their threat perceptions
shape Iran’s actions in the Middle East. Similarly, ISIS’s millenarian
beliefs shape how it fights.
The psychology of Trump profoundly influences how the United States
acts. U.S. interests and strategies in the world reflect the president’s
narcissistic, aggressive, and impulsive disposition.
The four levels of analysis help us organize our thoughts about the different
causes of, explanations for, and solutions to a particular problem. Like the four
IPE perspectives, each level pinpoints a distinct but limited explanation for why
something occurred. One of the paradoxes of the level of analysis problem is that
to get a bigger and more complex picture of a problem, one is tempted to look at
all the levels for possible answers. However, mixing the levels usually produces
no single satisfactory explanation of a problem. What to do? The level of
analysis problem teaches us to be very conscientious about how we frame
questions, what data we look at, and what we expect to find.
Figure 1.1 highlights the four levels of analysis and their connection to
another conceptual organizing device (IPE structures) that we introduce next.
The Four Levels of Analysis and Five IPE Structures.
The Five IPE Structures
In the textbook we will often refer to five structures that were first outlined by
Susan Strange: production, trade, finance, security, and knowledge. For Strange,
these structures are complex arrangements that function as the underlying
foundations of the international political economy. Each contains a number of
state and nonstate institutions, organizations, and other actors that determine the
rules and processes that govern access to production, trade, finance, security, and
knowledge. In Chapters 6 through 10, we examine the rules and norms in each
structure, how they were created, who benefits from them, and who is contesting
The “rules of the game” in each structure take the form of treaties, informal
and formal agreements, and “bargains.” They act as girders and trusses that hold
together each of these five major structures. As one might expect, each IPE
structure is often filled with tensions because different actors are constantly
trying to preserve or change the rules of the structure to better reflect their own
interests and values. For example, actors may sometimes pursue free-trade
policies and at other times erect protectionist trade barriers. Finally, issues in one
structure often impact issues in another, generating a good deal of strain and
even conflict between actors. According to Strange, many disputes arise when
states try to “shape and determine the structures of the global political economy
within which other states, their political institutions, their economic enterprises
… [and] people have to operate.”10
The five IPE structures are as follows:
The Production Structure. The issue of who produces what and on what terms
lies at the heart of the international political economy. Making things and then
selling them in world markets earns countries and their industries huge sums
of money, which ultimately can shift the global distribution of wealth and
power. As we will see in Chapter 6, in recent decades there have been
dramatic changes in international rules that have shifted the manufacture of
steel, furniture, electronics, household appliances, clothing, and other goods
out of the United States and Western Europe. Many corporations that make
these items have moved production to Mexico, China, Turkey, Poland,
Vietnam, and other countries.
The Trade Structure. International trade agreements and national regulations
shape the flows of goods and services across borders. While the rise of
globally freer trade since the 1980s has helped many countries grow more
quickly, many unions and manufacturers in Western countries have lobbied
their governments for protectionist barriers against cheap imports in order to
preserve jobs and profits. Since the 2010s a major battle over trade rules has
emerged, pitting forces that want even more liberalization against those who
want to reverse aspects of globalization.
The Finance and Monetary Structure. With perhaps the most abstract set of
linkages between nations, this structure determines who has access to money
and on what terms, and thus how capital is distributed between nations. In this
respect, money is often viewed as a means, not an end in itself. Money
generates an obligation between people or states. International money flows
pay for trade and serve as the means of financial investment in factories, land,
bonds, and other assets. Financial bargains also reflect rules and obligations,
as money moves from one nation to another in the form of loans that must be
repaid. The global financial structure (see Chapter 8) has been marked by the
movement of “hot money” chasing quick profits from one country to another,
in part because many political elites hold ideological beliefs opposed to strong
international regulation of banks and corporations. Many scholars believe that
under-regulated financial markets were in part responsible for financial crises
in the 1990s in Mexico, parts of Asia and Latin America, and Russia, as well
as for the global financial crisis. Some critics also charge that financial
deregulation has intensified poverty and conflict in some of the depressed
areas of the world.
The Security Structure. Feeling safe from the threats of other states and
nonstate actors is perhaps one of the most significant concerns of nation-states
and the people within them. At the global level, the security structure is
comprised of those persons, states, international organizations, and NGOs that
seek to provide safety for all people everywhere. In Chapter 9 we will discuss,
among other things, the impact of the election of Donald Trump on the global
security structure. Today many scholars are concerned that Trump is
abandoning efforts by the United States to maintain a cooperative global
multilateral order. Other scholars are troubled by the rising economic and
military power of China and its territorial claims against India and countries
around the South China Sea.
The Knowledge Structure. Knowledge and technology are sources of wealth
and power for those who use them effectively. The spread of information and
communications technologies has fueled industrialization in emerging
countries and empowered citizens living under authoritarian regimes, as seen
during the Arab Spring. International agreements and rules governing access
to industrial technology related to such things as scientific discoveries,
medical procedures, and new green energy often place low-income countries
at a disadvantage. Increasingly in the world today, the bargains made in the
security, trade, and finance structures depend on access to knowledge in its
several forms. The knowledge structure includes institutions affecting
intellectual property, technology transfers, and migration opportunities for
skilled workers. The connection between technology and conflict has grown
tighter in recent years, as is evident in the use of cyber weapons and drones
and the efforts by North Korea to develop long-range nuclear weapons. New
technologies have revolutionized strategic and conventional weapons.
The Rise of Populism and Nationalism
Today we are witnessing the re-emergence of nationalism and a loss of faith in
globalization. In the past decade there has been growing mass support for
“populist-nationalist” parties and rulers in Russia, France, Hungary, Turkey,
Egypt, Brazil, the Philippines, Venezuela, and most recently in the United States
with the election of Donald Trump.
By the early 2000s both globalization and globalism (its supporting ideology)
had come under attack for benefitting rich elites much more so than the working
class and poor nearly everywhere.
11 Income inequality has risen significantly in
many developed countries since the mid-1980s, including Germany and
Denmark, and reached very high levels in Italy, the United Kingdom, and the
United States by 2014.
12 For many middle-class and lower-class workers,
average real wages have barely grown since at least the early 2000s. Wages
actually fell in many places after the global financial crisis. For more than two
decades many low-skilled and blue-collar workers have suffered as
manufacturing jobs have moved to developing countries and automation has
expanded. Moreover, a rising proportion of workers in developed countries are
turning to self-employment or can only find temporary or part-time jobs that
provide little security. There were at least two important effects of these
developments: first, leaders and the masses focused more on issues such as jobs,
border control, and preservation of socio-cultural values and identities; and
second, xenophobia, racism, and fear of other religions increased. Problems that
had been smoldering inside the state and society caught fire, threatening an end
to the postwar order.
The IPE perspective of constructivism (see Chapter 5) helps us understand the
rising popularity of populist-nationalism. It is also important to consider factors
at the individual and state-societal levels of analysis. International affairs analyst
Fareed Zakaria suggests that the new populism could pose a threat to democracy
and western ideals.
13 It reflects a shift in soci-ety’s values and culture such that
individuals see themselves as under threat from external and internal forces.
Many people have become suspicious of and hostile toward elites, mainstream
politics, and established institutions.
14 The traditional left-right economic
division in politics has been quietly shifting toward gender, religious,
educational, and rural-urban divisions. Meanwhile, demographic changes and
the digital revolution have helped sharpen social tensions.
A good reason to give more attention to what goes on inside the nation-state is
that the domestic identity of people shapes the foreign policy of their country.
The common sense of the masses—their belief systems and understandings of
their own context—shapes and constrains how they and elites behave. And as
political scientist Ted Hopf explains, how a state understands its own identity
affects how it understands and behaves toward other states.
The Communications Revolution
Recent changes in how information is produced and communicated have
contributed to the rise of populist-nationalism. Television channels and websites
frequently add ideological commentary to reports. Social media in particular
makes it easier to distort facts and generate stories that are untrue.
During the 2016 U.S. presidential election, the term “fake news” entered
popular discourse in response to a slew of fictional articles that quickly spread
throughout social media, mostly concerning presidential nominees Donald
Trump and Hillary Clinton. From mid-2016 to early 2017, mainstream and leftleaning media often referred to alt-right news sources such as Breitbart News,
Before It’s News, and The Drudge Report as purveyors of fake news. Candidate
Trump cited several stories from fake news sources during the election
campaign. Once in office, members of the new administration sometimes
distributed fake news stories to the public from the White House. However,
alternative news outlets—and even Donald Trump and his former press secretary
Sean Spicer—often described the mainstream media and politicians who speak
publicly about the flaws of the new administration as spreading fake news.
Online articles that mimic the format of those from reputable news sources but
have content that is partially or completely fabricated cause consternation for
mainstream news outlets and social media companies. In November 2016
Buzzfeed reported that at least 140 political websites reporting fake news related
to the U.S. election were being operated out of the town of Veles in Macedonia.
Of those site controllers who were contacted, most said that their main
motivation was to make money from advertisements via services such as
Google’s AdSense. In contrast, NPR interviewed Jestin Coler, the owner of
several fake news sites operating out of Los Angeles, who said that he was a
liberal, drawn to the work for its commentary on the gullibility of conservative
Fake news is often successful because many readers are not savvy enough to
question the authenticity of the source. Stanford researchers have found that a
majority of middle school, high school, and college students in twelve U.S.
states are unable to distinguish sponsored content from real news, unable to
identify biases in articles and tweets, and unable (or unwilling) to investigate
further the credibility of online sources. They also found that students tend to
trust pictures at face value.
Cyber hacking is another method of distorting stories. A major controversy
developed around the extent to which Russia hacked computer systems of both
the Democratic and Republican election campaigns in order to help Trump
prevail over Hillary Clinton. The FBI, Special Counsel Robert Mueller, and two
congressional committees are investigating whether President Trump and/or his
associates had knowledge of the hacking or were complicit in the effort. In 2017
some European governments accused Russia of hacking websites and spreading
fake news before national elections.
Less Democracy and Fewer Rights
While shunning left-right labels and steering away from political dogmatism,
populist leaders have nonetheless emphasized their own political power and
authority. Most populist movements today are on the political right—often
referred to as the “alt right.” These parties and their leaders are often portrayed
as illiberal and extremist because of their ideology and the “strong arm” tactics
of state officials.
17 Even though Marine Le Pen, the leader of France’s populist
National Front, lost to Emmanuel Macron in the second round of the 2017
French presidential election, her party’s popularity significantly increased. A
few of the notable populist-nationalist parties on the left are Syriza in Greece
and Podemos in Spain.
Table 1.2 lists the biggest populist parties in Europe, their leaders, and the
percentage of seats they control in national legislatures (as of October 2017).
These parties have gained strength since 2010, causing alarm for supporters of
European integration.
Many people in the European Union and the United States support and respect
the populist-nationalist movements. However, others are anxious about the
movements because they seem to be pushing aside liberal democratic values and
beliefs by drawing on people’s fears, disillusionment with democratic systems,
and exposure to fake news.
18 As a result of this development, state officials and
the masses have been turning inward to focus on employment and preservation
of their socio-cultural values. Likewise, there has been a rather dramatic rise in
fear of immigrants from other nation-states.
Another feature of rising populist-nationalism has been “strongman politics,”
understood at the first level of analysis. Populist leaders have always played a
big role in history. Most often they:
Promote new political, social, and economic ideas;
Offer themselves as symbols of the body politic;
Plan and strategize with disdain for democratic accountability; and
Nurture a cult of personality.
Major Populist Parties in Europe, October 2017
Country Party Party Leader Percentage of
Seats in National
Percentage of the
Popular Vote in
Most Recent
Austria Freedom Party (FPO) HeinChristian
21 26
Denmark Danish People’s Party (DPP) Kristian
12 21
France National Front (FN) Marine Le
1 9
Germany Alternative für Deutschland
Frauke Petry 13 13
Hungary Hungarian Civic Union
Viktor Orbán 67 45
Netherlands Party for Freedom (PVV) Geert
13 13
Poland Law and Justice Party (PiS) Jarosław
38 51
Switzerland Swiss People’s Party (SVP) Albert Rösti 33 29
UK Independence Party
Paul Nuttall 0 2
Leaders such as Hitler, Stalin, and Mao managed relations with other states in
ways that reflected their totalitarian interests and values. Their personal character
traits were tied closely to their foreign policies. Alt-right populist leaders today
tend to have authoritarian proclivities, intolerance of criticism, and illusions of
grandeur. They often tolerate racism and scapegoat immigrants and foreigners.
However, they also appeal to mainstream voters by criticizing globalization and
elite politics, calling for protectionism, promising jobs growth, and stressing the
need to recover national sovereignty.
What are the effects of populist-nationalism on society today? Fareed Zakaria
is interested in the impact on democracy. He maintains that democracy means
more than elections or majority rule; it requires independent institutions such as
the judiciary and the media to protect individual freedom and liberties. Zakaria
also decries the recent decrease in the number of nations with democratic
In its 2017 annual report, the watchdog organization Freedom House noted
that 2017 was the eleventh consecutive year in which there was a decline in
global freedom. In 67 countries freedom declined, while in 36 it made gains.
For example, Russian and Chinese leaders have targeted journalists, authors, and
those promoting labor and women’s rights. Hungary and Turkey are also two
notable populist-nationalist countries in which there has been a decline in
individual rights and freedoms along with increasing power of the leader of the
nation. Hungary’s Prime Minister Viktor Orbán declared his government to be
an “illiberal” one and has weakened the role of the legislature and the courts. In
2015 Hungary and a few other EU countries (see Chapter 12) partially or
completely closed their borders to immigrants. Orbán has forced immigrants
waiting for a ruling on their asylum application to be held in sites that look
astonishingly like concentration camps.
In Turkey, President Recep Tayyip Erdog˘an won a constitutional referendum
in April 2017 that will eliminate the office of prime minister and transfer all
executive power to the president, allowing him to appoint half the members of
the highest court. Since an attempted coup in 2016, Erdog˘an has had tens of
thousands of people arrested, some of whom have been sent to prison. He has
also cracked down on Kurds in the southeast, reigniting violence.
During his presidential campaign, Donald Trump appealed to those who
dislike or are afraid of immigrants. He promised to build a “beautiful” wall along
the southern border to keep out “murderers and rapists.” As president he
imposed a ban on people from seven Middle-Eastern countries coming into the
United States, and he tried to reimpose the ban after the courts overturned it.
Trump has attacked judges, implying that they were putting the United States in
grave danger. Some argue that Trump has intentionally violated the U.S.
constitution’s emoluments clause, which bars presidents from accepting gifts
from foreign sources, because he will not fully divest from his businesses
scattered all over the world. Finally, Trump has violated the spirit of the law by
appointing family members as personal advisers while they profit from their
many businesses.
Anti-immigration policies have had consequences for local communities—and
particularly for Muslims. In many countries there have been attacks on mosques,
harassment of school children and their parents, and illegal discrimination. In
France and some other EU countries, Muslim women have been barred from
wearing face coverings and headscarves in some public spaces (see Box 1.1).
Trump: Character and Personality
The individual level of analysis provides a guide to some aspects of U.S. foreign
policy and demonstrates the influence even one key leader can have on the
global order. We have chosen to discuss the character and behavioral traits of
Donald Trump because he is unlike any other U.S. president. He is admired by
few outside the United States and disliked—if not loathed—by many. Soon after
he assumed the presidency, The Economist depicted him on the cover of its
magazine getting ready to toss a Molotov cocktail (a bottle with a lit, gasolinesoaked rag in it) with the heading “An Insurgent in the White House.”21
During the election campaign, Trump promised to “shake up” the world order.
In the first 100 days of his administration, he:
Pulled the United States out of the Trans Pacific Partnership (TPP), a trade
deal that the United States had negotiated with eleven other nations along the
Pacific Ocean;
Withdrew the United States from the Paris Accord on climate change;
Declared NATO obsolete, then after meeting with the Director General of
NATO, declared that it was no longer obsolete;
Fired 59 cruise missiles at a Syrian base from which jets had flown to drop
chemical weapons on a rebel-held town;
Accused North Korea of continuing to develop nuclear weapons and
threatened that if China did not do something about it, the United States
As the European Union’s refugee crisis continues and concern over Islamic
extremism increases, far-right political parties such as the Alternative for
Germany and France’s National Front have gained strength and more public
recognition. A recent dispute in France shows the influence of rising rightist
sentiments. In 2010, France instituted a controversial “burqa ban” with a
€150 fine for anyone wearing clothing that covered the face in public. Some
twenty French municipalities followed this up in July and August 2016 by
passing restrictions on the burkini, a bathing suit that covers the entire body
except for the face, hands, and feet. For many in France, the burkini is a
symbol of the oppression of women and might damage French values of
gender equality if worn publicly. Some officials claimed that the
restrictions were only designed to protect recent Muslim immigrants from
harassment and to help them integrate into society. Legally, the restrictions
were based on the principle of laïcité (secularism), which is enshrined in
the French constitution.
However, several local French courts later overturned some of the
burkini bans, arguing that in order to invoke the principle of laïcité, an
activity must pose “proven risks to public order,” which some courts said
the burkini did not. In response to the claim that such laws would reduce
extremism among immigrants, France’s Council of State said that the
emotions resulting from terrorist attacks, such as the one carried out in Nice
in July 2014, “do not suffice to legally justify the ban.” Additionally, many
humanitarian and social groups in France and abroad have harshly criticized
the municipalities for creating a climate of mistrust that discriminates
against Muslims and fosters extremism.
Other European countries have also passed laws restricting face
coverings and headscarves worn by some Muslim women.
b In Germany,
however, anti-immigrant sentiments have not made their way into
legislation in the same way. In 2016 Germany began debating a ban on the
public wearing of the full-face veil. After World War II, Germany’s system
of government made it hard for the state to accumulate power, which may
be why it has not been as easy as in France to pass draconian restrictions on
religious clothing. However, in 2017 Germany’s parliament banned
government employees from wearing a face covering at work and
prohibited the wearing of facial coverings while driving.
In 2016 the Bulgarian parliament instituted a nationwide ban on the
wearing of full-face veils in public, despite the fact that only a small
number of Roma Salafists in the city of Pazarjik were known to wear the
garment. In Denmark there have been a number of attempts to legally
restrict Islamic activities. Municipal governments have tried to require
students to eat pork, ban women-only hours at swimming pools, and allow
officials to strip valuables from incoming refugees in order to fund their
relocation effort. Sweden and Denmark are both known for having a high
level of social services in exchange for high taxes, a delicate system that
many fear is being exploited by recent immigrants. The European Court of
Justice waded into the controversy over clothing worn by Muslims when it
ruled in March 2017 that European employers can bar workers from
wearing Islamic headscarves, but only as part of a wider policy of banning
the wearing of all religious or political signs.
aThis box was written by Sam Phillips-Corwin and edited by Bradford Dillman.
bAn overview of European “burqa bans” is at Liam Stack, “Burqa Bans: Which Countries Outlaw
Face Coverings?” New York Times, October 19, 2017, at www.nytimes.com/2017/10/19/world/-
Academic and government critics of Trump often ask the questions: “Why is the
president like this?” and “What is he trying to do?” Many find no rational pattern
to his ideas, policies, and behavior as president. In Chapter 9 we look in more
detail at Trump’s role in the global security structure. Here we note some of the
personal character traits and behavioral tendencies that social psychologists
believe explain his behavior.
Supporters believe that, among other things, he:
Gets things done;
Focuses on the big picture and doesn’t micromanage;
Is a successful businessman with an extroverted personality; and
Is tough but pragmatic and likeable underneath.
Detractors claim that he:
Is politically inexperienced and frames everything as a business “deal”;
Has superficial knowledge about issues and doesn’t focus on strategy;
Is an insecure and impulsive narcissist with a volatile temper;
Frequently exaggerates, brags, and lies;
Compulsively tweets without considering the implications of his words; and
Likes to threaten and bully others in order to try to get his way.
Officials and experts are concerned about his policies and actions because,
among other things, he:
Is a “daring and ruthlessly aggressive decision maker who desperately
desires to create the strongest, tallest, shiniest, and most awesome result—
and who never thinks twice about the collateral damage he will leave
Impulsively makes decisions and then reverses himself, leaving officials
and the public baffled but also nervous about his intentions and ability to
follow through on a policy;
Frightens people with his assertions that war with Islam and China are on
the horizon;
Refutes basic scientific knowledge, such as by claiming that “global
warming is an expensive hoax!”
We have reviewed some of the claims about Trump’s personal disposition
because his character traits help explain some of the actions he took early in his
presidency and policies he might pursue in the years to come. As we discuss in
coming chapters, President Trump has intentionally upset long-standing
international relationships and promoted some values that are profoundly at odds
with prevailing global norms. However, it is important to keep in mind that
scholars study forces at the other three levels of analysis that can constrain or
even counteract the efforts of an individual leader. Domestic politics, democratic
checks and balances, the international balance of power, and global economic
forces—to name just a few factors—might ensure continuity in many aspects of
international relations. The structures of production, trade, finance, security, and
knowledge are like trees with deep roots—not easily knocked down by the winds
of individual politicians or the storms of nationalist-populism. Readers of this
textbook should consider all levels of analysis when forecasting the international
political economy.
Having read our introduction to IPE structures and our brief application of the
first and second levels of analysis to some of the notable issues that are
discussed more fully in the rest of the textbook, you now have a sense of how
IPE scholars examine the complex interrelationships in the world today. As you
plunge into the chapters ahead, the terminology, concepts, and countries that still
seem unfamiliar will become clearer, and you will become much more fluent in
the specific language of IPE. There are many theoretical and policy issues that
you will encounter, so we introduce here some main political economy questions
that are highlighted in the text:
In what ways are political structures and markets embedded in society and its
cultural institutions?
With the rise of global production, how have the gains from trade and growth
been distributed between different social groups and countries?
How do states balance their domestic political needs with their international
How do social groups and ideas influence markets and states?
What political, economic, and social forces underlie the recent increase in the
number of authoritarian leaders and populist-nationalist groups all over the
What are the causes and consequences of inequality between and within
How is the rise of China, India, Russia, and Brazil reshaping the global
What do financial crises reveal about the nature of capitalism and challenges
of market regulation?
Are states losing power relative to illicit markets and transnational
How do technological changes affect political and economic processes?
To what extent can hegemons and international institutions provide global
governance and systemic order in the face of social and political resistance?
What are the analytical and policy linkages between energy and the
The postwar order that emerged between the late 1940s and the early 1970s is
coming to an end. The redistribution of global wealth and power has impacted
states and societies in ways unimagined even thirty years ago. In 1989 few could
foresee that the Berlin Wall would soon fall and that the Soviet Union would
dissolve a year later, let alone that the European Union would grow to 28
members. China was still a blip in global manufacturing and trade, and the key
rising power was Japan, which some IPE scholars suggested would exercise
global financial hegemony alongside U.S. military hegemony.
Since the 9/11 attacks on the Twin Towers and the Pentagon, the postwar
global security structure has been undergoing a major transformation away from
the peace and stability provided by the major powers—the United States, Russia,
China, France, the United Kingdom, and Japan. As part of his “America First”
campaign, President Trump has purposefully challenged traditional security
policies by weakening U.S. opposition to Russia and taking the world closer to
the edge of nuclear war than it has been in more than a generation by threatening
to attack North Korea. Traditionally strong U.S. relationships with NATO,
Mexico, and South Korea are fraying, leaving a leadership vacuum for China,
Russia, and the European Union to fill. Many see another cold war looming
between China, Russia, the United States, and their allies.
We also see signs of the end of the postwar order in the European Union,
which used to be a model of an integrated community of states but is now
threatened by Greek economic troubles and the British vote to leave the union.
Authoritarian-nationalist parties and populist leaders in Europe and the United
States are promoting anti-immigration and anti-globalization policies. Clearly,
the global financial crisis of 2008–2009 increased skepticism towards free
markets and imposed major costs on different social groups, many of whom are
demanding a democratic role in shaping globalization’s rules and rewards. To
the dismay of traditional U.S. allies, Trump has raised the specter of a return to
malevolent trade protectionism and has sought to roll back regulations on the
banking industry put in place after the financial crisis. More broadly, many
realists and economic liberals are critical of Trump’s rejection of the post-World
War II role the United States has played as an economic hegemon that ensures
stability and an open global economic system.
The Middle East continues to experience terrorist attacks and major wars with
no end in sight. The interventions of the United States, Russia, Saudi Arabia, and
Iran have exacerbated social and religious divisions in the region. Hundreds of
thousands of soldiers and civilians have been killed and injured in wars that have
contributed to a global refugee crisis. At the same time, public officials are
coming to grips with the idea that the war on terrorism may not be “winnable”
because it is bound up with other intractable socioeconomic and political
problems. Other important causes of national and personal insecurity have
emerged, including cyber weapons, epidemic diseases, and climate change.
In just one generation hundreds of millions of people have been lifted out of
abject poverty in countries such as China, India, and Brazil, and many of them
can aspire to join the middle class. Social mobility and rising consumption have
changed many people’s lives for the better in the developing world. However,
many heterodox liberals and structuralists argue that progress in development
may stall in the face of pressures on the earth’s resources. A more realistic goal
for many developing societies might be “sustainability,” which implies scaling
back consumption of some types of goods and services.
The rise of India and China is shifting the international balance of power even
faster than expected and in ways that could increase North–South tensions.
Rising powers have interests that international institutions have yet to
accommodate. Long-term negotiations with Brazil, Russia, China, and India may
convince developed countries to reform the liberal world order, but there are also
many signs of intransigence on both sides that point to more threats to world
Because of the interconnectedness of states and markets, international
institutions must play some role in solving global problems. Paradoxically,
precisely at a time when more collaboration between states is necessary, states
seem less willing to cooperate in providing global governance. Changes in ideas
at the social level have created tensions between many groups, including those
who reject globalization and those who embrace social justice. At the same time,
global climate change activists, refugee relief organizations, and other nongovernmental organizations have become important purveyors of new ideas and
Anti-austerity movements in many countries, marches for women’s rights and
racial justice, and protests against authoritarianism remind us of the salience of
moral values in the global political economy. Historically, these struggles have
occurred primarily through collective action of political parties, unions, and
movements; meaningful change rarely comes from individual consumers making
“better” choices in the marketplace or powerful elites voluntarily holding
themselves to higher standards. Technological improvements and business
innovations also do not suffice to prevent us from falling over the precipices we
stand before, whether those are climate change or development bottlenecks.
We believe that state leaders will need to re-negotiate security, finance, trade,
and knowledge rules in order to mitigate leading global problems. In addition,
they will need to redistribute more income and wealth that has concentrated in
the top 10 percent of many societies. Already, rising inequality is limiting social
mobility and undermining the legitimacy of democracy. Moreover, modern
society will be prone to more severe crises unless it can reverse the trend toward
precariousness in employment, old age, and education. None of these changes
will occur without political-economic conflicts that you will necessarily be
involved in, whether directly or indirectly.
We end this chapter with two hopes that we have for you. We hope that you
will help humanity find a way to raise standards of living without destroying the
earth’s environment, climate, and biodiversity. We also hope that as you devise
solutions to contentious economic and political problems, you show compassion
for the most vulnerable people in the world.
regime 3
international political economy 4
economic liberalism 5
globalization 8
mercantilism 8
realism 8
nation 8
state 8
sovereignty 8
hard power 8
soft power 8
structuralism 8
constructivism 8
level of analysis 10
IPE structures 12
global governance 21
Pick a recent news article that focuses on an international or global
problem, and give examples of how states, markets, and societies interact
over this problem. How hard is it to determine the analytical boundaries
between the state, market, and society in this case?
Review the basic elements of the four main IPE theoretical perspectives, the
five IPE structures, the levels of analysis, and the types of power. Discuss
the connection between each of the four IPE theoretical perspectives and
your own values.
Choose a global event or process that you know something about and
identify at least one factor at each level of analysis that helped cause it and
shape its trajectory.
Based on what you have learned in this chapter and from reading
newspapers, explain whether or not you believe that the world is standing
on the edge of many precipices. Which of the global issues presented in this
chapter are you most concerned about and why?
Benjamin J. Cohen. International Political Economy: An Intellectual History. Princeton, NJ: Princeton
University Press, 2008.
Robert Gilpin. Especially chap. 1 in The Political Economy of International Relations. Princeton, NJ:
Princeton University Press, 1987.
Dani Rodrik. Straight Talk on Trade: Ideas for a Sane World Economy. Princeton, NJ: Princeton University
Press, 2018.
Susan Strange. States and Markets, 2nd ed. New York: Continuum, 1994.
Kenneth N. Waltz. Man, the State, and War: A Theoretical Analysis. New York: Columbia University
Press, 1959.
Max Weber, “Science as a Vocation,” in From Max Weber: Essays in Sociology, ed. and transl. Hans
H. Gerth and C. Wright Mills (New York: Oxford University Press, 1958), pp. 155–156.
See Charles Lindblom, The Market System_ What It Is, How It Works, and What To Make of It (New
Haven, CT: Yale University Press, 2001), p. 23.
See Robert Heilbroner and Lester Thurow, “Capitalism_ Where Do We Come From?” in their
Economics Explained: Everything You Need to Know about How the Economy Works and Where It’s
Going (New York: Simon & Schuster, 1994).
See Susan Strange, States and Markets, 2nd ed. (New York: Continuum, 1994), pp. 121, 136, and
Adam Smith, The Wealth of Nations (London: Methuen & Co. Ltd., 1904).
For a detailed discussion of soft power and its utility in the international political economy, see
Joseph Nye, Soft Power: The Means of Success in World Politics (New York: Public Affairs, 2006).
See Benjamin J. Cohen, “The Transatlantic Divide: Why Are American and British IPE so
Different?” Review of International Political Economy, 14 (May 2007), pp. 197–219.
Kenneth N. Waltz, Man, the State, and War: A Theoretical Analysis (New York: Columbia
University Press, 1959). Waltz wrote about three “images” rather than three “levels,” and both terms
are used in discussions of this concept.
See Bandy X. Lee, The Dangerous Case of Donald Trump: 27 Psychiatrists and Mental Health
Experts Assess a President (New York: Thomas Dunne Books, 2017).
See Susan Strange, States and Markets: An Introduction to International Political Economy (New
York: Basil Blackwell, 1988), pp. 24–25.
For example, see Joseph Stiglitz, Globalization and Its Discontents (New York: W.W. Norton, 2004).
OECD, Understanding the Socio-economic Divide in Europe (Paris: Organisation for Economic Cooperation and Development, 2017), p. 8, at www.oecd.org/els/soc/cope-divide-europe-2017-background-report.pdf.
See Fareed Zakaria, “Populism on the March: Why the West Is in Trouble,” Foreign Affairs
(November/December 2016).
Ted Hopf, “Making It Count: Constructivism, Identity, and IR Theory,” in Making Identity Count:
Building a National Identity Database, 1810–2010, ed. Ted Hopf and Allan Bentley (New York:
Oxford University Press, 2016), 11.
See Stanford History Education Group, “Evaluating Information: The Cornerstone of Civic Online
Reasoning” (Executive Summary), November 2016, at https://sheg.stanford.edu/upload/V3LessonPlans/Executive%20Summary2011.21.16.pdf.
See Sheri Berman, “Populism Is Not Fascism,” Foreign Affairs (November/December 2016), 39.
See David Brooks, “The Crisis of Western Civ,” New York Times, April 21, 2017.
For an insightful article on fear and identity related to the immigration crisis in Europe, see Claudia
Postelnicescu, “Europe’s New Identity: The Refugee Crisis and the Rise of Nationalism,” Europe’s
Journal of Psychology 12 (2016): 203–209.
Freedom House, Freedom in the World 2017, 2017, at https://freedomhouse.org/sites/default/files/-
See The Economist, February 4–10, 2017.
Many of these traits are discussed in Dan P. McAdams, “The Mind of Donald Trump,” The Atlantic
Magazine (June 2016), at www.theatlantic.com/magazine/archive/2016/06/the-mind-of-donald-trump/480771/.
Laissez-Faire: The Economic Liberal
Demonstrators near the site of the USA Republican National Convention, July
Source: Shutterstock/EPA/Justin Lane.
A man’s right to work as he will, to spend what he earns, to own property, to
have the state as servant and not as master. […] They are the essence of a
free economy. And on that freedom all our other freedoms depend.
Margaret Thatcher
Like many other terms in international political economy (IPE), the generic term
“liberalism” suffers from something of a personality disorder. The term means
different things in different contexts. In the United States today, for example, a
liberal is generally regarded as one who believes in an active role for the state in
society, such as helping the poor and funding programs to address social
problems. Since the mid-1980s, someone who has been thought of more
narrowly as an economic liberal believes almost (but not exactly) the opposite.
For economic liberals (also referred to as neoliberals), the state should play a
limited role in the economy and society. In other words, today’s economic
liberals have much in common with people who are usually referred to as
“conservatives” in the United States, Europe, Canada, and Australia.
This chapter traces the historical rise of economic liberalism in eighteenthand nineteenth-century England and in the United States and Europe since the
Great Depression. We outline some of the basic tenets of capitalism, a focal
point of liberal thought. Throughout the chapter, we also discuss the views of
some of the most famous liberal political economists: Adam Smith, David
Ricardo, John Maynard Keynes, Friedrich Hayek, and Milton Friedman. We
then contrast the views of orthodox and heterodox liberals regarding the 2007–
2008 financial crisis and globalization.
There are four main theses in this chapter:
First, economic liberal ideas continue to evolve as a reflection of changes in
the global economy and the power of different actors and institutions.
Second, economic liberalism gained renewed popularity due to its association
with the policies of the Reagan and Thatcher administrations, culminating in
the globalization campaign of the 1990s.
Third, orthodox liberalism has increasingly come under attack for its failure
to predict or sufficiently deal with such things as the financial crisis and the
effects of globalization.
Fourth, we argue that, although weakened, laissez-faire ideas and policies are
likely to remain popular in the United States and many other nations.
Essentially, the broad term “liberalism” means “liberty under the law.”2
Liberalism focuses on the side of human nature that is competitive in a
constructive way and is guided by reason, not emotions. Although liberals
believe that people are fundamentally self-interested, they do not see this as a
disadvantage because competing interests in society can engage one another
constructively. This contrasts with the mercantilist view, which, as we will see in
Chapter 3, dwells on the side of human nature that is more aggressive,
combative, and suspicious.
Classical economic liberalism is rooted in reactions to important trends in
Europe in the seventeenth and eighteenth centuries. François Quesnay (1694–
1774), who led a group of French philosophers called the Physiocrats or les
Économistes, condemned government interference in the market, holding that,
with few exceptions, it brought harm to society. The Physiocrats’ motto was
laissez-faire, laissez-passer, meaning “let be, let pass,” but said in the spirit of
telling the state, “Hands off! Leave us alone!” This became the theme of Adam
Smith (1723–1790), a Scottish contemporary of Quesnay who is generally
regarded as the father of modern economics. Smith and many since him,
including David Ricardo, Friedrich Hayek, and Milton Friedman, admire the
market, even while recognizing its abusive potential.
In his famous book The Wealth of Nations, Smith opposed the mercantilist
state of the eighteenth century, established on the principle that the nation is best
served when state power is used to create wealth and national security (see
Chapter 3). He criticized Britain’s Parliament for representing the interests of the
landed gentry and monopolistic trading corporations, not those of the
entrepreneurs and citizens of the growing industrial centers. Not until the 1830s
was Parliament reformed enough to redistribute political power more widely.
For classical economic liberals, individual freedom in the marketplace leads to
an efficient allocation of resources and helps reduce potentially abusive state
power. Most importantly, a “commercial society” (in Smith’s parlance) should
produce rising standards of living for all members of society.
Smith believed in the cooperative, constructive side of human nature. For him,
the best interest of all of society is served by (rational) individual choices, which
when observed from afar appear as an invisible hand that guides the economy
and promotes the common good. He wrote:
He [the typical citizen] generally, indeed, neither intends to promote the
public interest, nor knows how much he is promoting it. By preferring the
support of domestic to that of foreign industry, he intends only his own
security; and by directing that industry in such a manner as its own produce
may be of the greatest value, he intends only his own gain, and he is in this, as
in many other cases, directed by an invisible hand to promote an end which
was no part of his intention.
Smith was writing at a time when the production system known as capitalism
was replacing feudalism. What follows is a brief overview of some of the ideals
and tenets of capitalism based on Smith’s work—or at least the way many
economic liberals today interpret his work.
The Dominant Features of Capitalism
The five main elements of capitalism are as follows:
Markets coordinate society’s economic activities.
Extensive markets exist for the exchange of land, labor, commodities, and
Consumer self-interests motivate economic activity, while competition
regulates economic activity.
Individuals have the freedom to start up new business enterprises without
state permission.
Individuals have the right to private property and are entitled to the income
that flows from their property.
The first three tenets address the nature and behavior of markets. In the modern
market, products and services are commodified—that is, a market price is
established for goods and services as a result of producers setting prices for their
goods and buyers paying for them. Another feature of capitalism is the existence
of markets for land, labor, and money. The economic historian and
anthropologist Karl Polanyi wrote extensively about how modern capitalism
gradually came about in seventeenth-century Great Britain when land was
privatized, people moved off the countryside and into small factories, and trade
generated capital (money). Land, labor, and capital were all commodified, which
provided the financial foundation and labor for the industrial revolution and the
society that today we recognize as capitalist.
When economists say that competition regulates economic activity, they are
referring to the ways in which markets convert the pursuit of consumer selfinterests into an outcome that inevitably benefits all of society. According to
Smith, the pursuit of individual self-interest does not lead to civil disorder or
even anarchy; rather, self-interest serves society’s interests. Smith famously said,
“It is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner, but from their regard to their own interest. We address
ourselves, not to their humanity but to their self-love, and never talk to them of
our necessities but of their advantages.”5
In a capitalist economy, self-interest drives individuals to make rational
choices that best serve their own needs and desires. However, it is competition
that constrains and disciplines self-interest and prevents it from becoming
destructive to the interests of others. Under ideal circumstances, producers must
compete with others, which forces them to charge reasonable prices and provide
quality goods to their customers, or lose their business. Consumers also face
competition from other consumers who may be willing to pay more for a
product. Even if producers might want to push prices high and buyers might
want to push prices low, the force of competition keeps the pursuit of selfinterest from going to the extreme.
Capitalism assumes that price competition also results in the efficient
allocation of resources among competing uses. When economists say that
markets coordinate society’s economic activity, they generally mean that no one
(especially the state) should be in charge of how resources are allocated. Market
coordination entails a decentralized (spread out) resource allocation process
guided by the tastes and preferences of individual consumers.
For capitalists, government intervention in the market generally distorts
resource reallocation and frustrates the coordination function we have described.
Competition also requires firms to produce efficiently, in the sense that it pays to
adopt cost-saving innovations and to remain on the cutting edge of product and
process innovation, the delivery of services, and the management of resources.
The leaders of even the most powerful firms such as Microsoft, Ericsson, or
Petrobras must keep one step ahead of technologically audacious newcomers if
they wish to retain their share of the market.
The last two tenets of capitalism deal with the role of the state in establishing
freedom of enterprise and private property. Freedom of enterprise means that
businesses can easily channel resources to the production of goods and services
that are in high demand while simultaneously intensifying competitive pressures
in these industries. When individuals are free to make their own career choices,
they naturally prepare for and seek out careers or lines of employment in which
they are likely to be most productive. Likewise, as economic circumstances
change, labor resources will be rapidly redeployed to growing sectors of the
economy as individuals take advantage of new opportunities.
The income of those who own capital is usually in the form of profits (as
opposed to wages). Capital goods—plants, equipment, and tools that workers
need—are the important subset of all commodities that are required to produce
other commodities. In a capitalist economy, the owners pay for the costs of
production—the wages of the workers, the raw materials, and all intermediate
goods used in production—and then sell the finished commodities on the market.
Whatever is left over, the difference between the revenue and the costs, belongs
to the capitalist owners. This is a legal right of ownership, referred to as
capitalist property rights. A capitalist may completely own a business, a local
bar, or a high-tech start-up, for example. In contrast, the owners of a corporation
are those who own its stocks, which can be bought and sold on a stock market.
When property rights are less clear, the incentive to use resources efficiently
diminishes. Private property—clear title to land, for example—also encourages
the owner to make investments in improving the land and provides the owner the
collateral with which to obtain the credit necessary to do so. Consequently, the
resource owner makes every effort to ensure that the resource is used efficiently
(i.e., profitably).
Freedom of enterprise allows entrepreneurs to test new ideas in the
marketplace. In a dynamic world of changing tastes and preferences, the
availability of resources and new technologies foments product and production
process innovation. In such an environment, entrepreneurs must rapidly redeploy
their resources to changing circumstances when new opportunities arise.
Freedom of enterprise also allows firms to increase or reduce their labor force as
necessary. Because firms can easily expand and contract, the associated risk of
changes is minimized, and competition is consequently enhanced.
What Smith is most known for, then, is the view that ideally a capitalist
economy is largely self-motivating, self-coordinating, and self-regulating.
Consumers determine how resources will be allocated; self-interest motivates
firms and their workers to produce the goods and services consumers desire; the
market coordinates economic activity by communicating the ever-changing
tastes and preferences of consumers to producers; and competition ensures that
the pursuit of self-interest serves social (consumer) interests.
Smith, the Cynic and Moralist
Smith is a complex, nuanced philosopher. In fact, some of the ideas in his other
major work, The Theory of Moral Sentiments, appear to contradict the more
orthodox liberal ideas with which he is most often associated, such as the
metaphor of the “invisible hand.” In this section we present some of Smith’s
lesser-known ideas about the role of the state, moral behavior, and the interests
of market actors.
Smith recognized that the state has some necessary and legitimate functions in
society, such as defending the country, policing, building public works,
preventing the spread of diseases, enforcing contracts, and helping to achieve
individual rights. Smith was also quite adamant in his distrust of businesspeople.
One of his famous quotes is that “people of the same trade seldom meet together,
even for merriment and diversion, but the conversation ends in a conspiracy
against the public, or in some contrivance to raise prices.”6 The pursuit of selfinterest by a monopoly producer, for example, often leads to restricted output,
higher prices for goods, and a consequent loss of social welfare. Smith also
distrusted bankers and noted that employers always sought to keep wages low:
“When the regulation … is in favor of the workmen, it is always just and
equitable; but it is sometimes otherwise when in favor of the masters.”7
Smith believed that merchants and trading companies often had
disproportionate influence over the Parliament and could press their “private
interests.” They easily influenced the legislature to establish licenses, franchises,
tariffs, and quotas that restricted competition. Often, their trading companies
gained the sole right to sell products, keeping market prices above the natural
We see a similar dynamic today in the success of corporations in pushing
governments to strengthen patents, which are legal, temporary monopolies on
inventions allowing their owners to prevent others from using their inventions
without their permission. Because patents limit competition, corporations can
sometimes reap exorbitant profits from goods covered by them. For example,
during the period 1996 to 2010 when Pfizer had a patent on Lipitor, one of the
world’s most popular drugs, cumulative sales of this cholesterol-fighting statin
reached an astonishing $118 billion. Similarly, from just 2014 to 2016, Gilead
Sciences had sales of $45 billion from just two extremely expensive patented
drugs, Solvaldi and Harvoni, that are effective against Hepatitis C. Large firms
are more likely to invest in costly new products if they are guaranteed captive
markets through patents and other forms of intellectual property rights. Thus,
corporations hire major lobbying firms to press for legislation that helps preserve
their competitive advantage over other companies.
While Smith opposed having the state try to direct investments because it
might be counterproductive and unnecessary, he supported the state exercising
vigilance, enforcing competition policies, and helping the market work properly.
Today we would say that in capitalist economies Smith opposed rent-seeking
(the manipulation of the market to reward powerful business interests). For
Smith, the market’s invisible hand cannot work for the benefit of all society if
there isn’t competition. He viewed the state (the visible hand?) as necessary to
prevent capitalists themselves from destroying the market, and he also
recognized that powerful political interests could use the state to create an unfair
In his often-overlooked book The Theory of Moral Sentiments, Smith argued
that in a properly structured market, commercial activity would produce
righteous and prudent people. Even as people pursue their self-interests, their
passions are restrained by competition that induces them to best serve the
interests of others, to behave honestly, and to gain a reputation for fairness. In a
world of intense competition, commercial society was a way to channel selfinterest into a less morally corrupt society than during feudalism. Smith believed
that as the labor force grew in size, the welfare of “servants, laborers, and
workmen of different kinds” should be the prime concern of economic policy.
Sounding a bit like Marx, he insisted that “no society can surely be flourishing
and happy, of which the far greater part of the members are poor and
miserable.”8 Smith was convinced that a commercial society (what we today call
capitalism) with competition, a division of labor, and good governance would
tend to produce “universal opulence” such that even the lowest classes would
have a significantly higher standard of living.
Adam Smith’s writings were part of a broader intellectual movement that
engendered intense economic and political change in society. Classical liberals
at the time included John Locke (1632–1704) in England and Thomas Jefferson
(1743–1826) in the United States. Economic theorists tend to think of laissezfaire in terms of markets. However, this philosophy also implies that citizens
need to possess certain negative rights (freedoms from state authority, such as
freedom from unlawful arrest), positive rights (which include inalienable rights
and freedoms to take certain actions, such as freedom of speech or freedom of
the press), and the right of democratic participation in government, without
which positive and negative freedoms cannot be guaranteed.
9 These classical
liberal political ideas are embedded firmly in the U.S. Declaration of
Independence and the Bill of Rights, which were becoming well known about
the same time as Adam Smith’s notion of consumer freedom.
Economic liberals expect that nation-states will find it worthwhile to act
cooperatively and peacefully through harmonious competition. As we will see in
Chapter 7, international trade is seen as being mutually advantageous, not
merely cutthroat competition for wealth and power. What is true about
individuals is also true about states. As Smith wrote, “What is prudence in the
conduct of every family can scarce be folly in that of a great kingdom. If a
foreign country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our industry,
employed in a way in which we have some advantage.”10 Although Smith
opposed most state restrictions on international markets, he did support the
mercantilist Navigation Acts that protected British industries by requiring their
goods be shipped to British colonies in British vessels.
David Ricardo (1772–1823) followed Smith in adopting the classical
economic liberal view of international affairs. He was a particular champion of
free trade, which made him part of the minority in Britain’s Parliament in his
day. He opposed the Corn Laws (see Box 2.1), which restricted agricultural
trade. As one of the first to explore some of the precepts of a natural (scientific)
law about trade, Ricardo argued:
Under a system of perfectly free commerce, each country naturally devotes its
capital and labour to such employments as are most beneficial to each. The
pursuit of individual advantage is admirably connected with the universal
good of the whole. By stimulating industry, by rewarding ingenuity, and by
using most efficaciously the peculiar powers bestowed by nature, it distributes
labour most effectively and most economically: while, by increasing the
general mass of productions, it diffuses general benefit, and binds together, by
one common tie of interest and intercourse, the universal society of nations
throughout the civilized world.
For Ricardo, free commerce produces efficiency, a quality that liberals value
almost as highly as liberty. Like Smith, he believed that individual success is
“admirably connected” with “universal good.” The free international market
stimulates industry, encourages innovation, and creates a “general benefit” by
raising production. In IPE jargon, economic liberals view the outcomes of state,
market, and society relations as a positive-sum game, in which everyone can
potentially get more by making bargains with others as opposed to not trading
with them. Mercantilists, on the other hand, tend to view economic transactions
as a zero-sum game, in which gains by one person or group necessarily come at
the expense of others (see Chapter 3).
Britain’s Parliament enacted the Corn Laws in 1815, soon after the defeat
of Napoleon ended twelve long years of war. The Corn Laws were a system
of tariffs and regulations that restricted grain imports into Great Britain.
The battle over the Corn Laws, which lasted from their inception until they
were finally repealed in 1846, is a classic IPE case study of the conflict
between liberalism and mercantilism.
Why would Britain seek to limit imports of grain? The “official”
argument was that Britain needed to be self-sufficient in food, and the Corn
Laws were a way to ensure that it did not become dependent on uncertain
foreign supplies. This sort of argument carried some weight at the time,
given Britain’s wartime experiences (although Napoleon never attempted to
cut off food supplies to Great Britain).
There were other reasons for Parliament’s support of the Corn Laws,
however. The right to vote in Parliament was not universal, and members
were chosen based on rural landholdings, not on the distribution of
population. As a result, Parliament represented the largely agricultural
interests of the landed estates, which were an important source of both
power and wealth in the seventeenth and eighteenth centuries. The growing
industrial cities were not represented in Parliament to a proportional degree.
Seen in this light, it is clear that the Corn Laws were in the economic
interests of the members of Parliament and their allies. They were
detrimental, however, to the rising industrial interests in two ways. First, by
forcing food prices up, the Corn Laws indirectly forced employers to
increase the wages they paid to their workers. This increased production
costs and squeezed profits. Second, by reducing Britain’s grain imports
from other countries, the Corn Laws indirectly limited Britain’s
manufactured exports to these markets. The United States, for example,
counted on sales of agricultural goods to Britain to generate the cash to pay
for imported manufactured goods.
Clearly, the industrialists favored repeal of the Corn Laws, but they
lacked the political power to achieve their goal. This changed, however,
when the Parliamentary Reform Act of 1832 revised the system of
parliamentary representation, reducing the power of the landed elites and
increasing the power of manufacturers in emerging industrial centers.
In an act of high political drama, the Corn Laws were repealed in 1846,
which changed the course of British trade policy for a generation. Although
this repeal is often seen as the triumph of liberal views over old-fashioned
mercantilism, it is perhaps better seen as the victory of the masses over the
agricultural oligarchy. Britain’s population had grown quickly during the
first half of the nineteenth century, and agricultural self-sufficiency was
increasingly difficult, even with rising farm productivity. Crop failures in
Ireland (the potato famine) in the 1840s left Parliament with little choice:
either repeal the Corn Laws or face famine and food riots.
Cheaper food and bigger export markets helped fuel a rapid expansion of
the British economy. Britain embraced a liberal view of trade for the rest of
the century. Given its place in the global political economy as the workshop
of the world, Britain found that liberal policies were the most effective way
to build its national wealth and power. Other nations, however, felt
threatened by Britain’s power and adopted mercantilist policies in selfdefense.
The Corn Laws illustrate how changes in the wealth-producing structure
of the economy (from farm to industry, from country to city) led eventually
to a change in the distribution of state power. The case also shows that the
market is not apolitical; it is put in service of those groups that control the
state and have the most social and cultural power.
Ricardo argued that these positive-sum payoffs of trade bind together the nations
of the world by a common thread of interest and intercourse. As is often argued
by those who support globalization today, free individual actions in the
production, finance, and knowledge structures create such strong ties of mutual
advantage among nations that military hostilities between them become much
more unlikely.
The liberal view has evolved over the years as the nature of state–market–society
interaction has changed. John Stuart Mill (1806–1873), who inherited the
liberalism of Smith and Ricardo, helped redefine it in his textbook Principles of
Political Economy with Some of Their Applications to Social Philosophy (1848)
(published the same year as Marx and Engels’ Communist Manifesto).
Mill held that the liberal ideas behind European capitalism had been an
important destructive force in the eighteenth century—even if they were also the
intellectual foundation of the revolutions and reforms that weakened central
authority and strengthened individual liberty in the United States and Europe. He
developed a philosophy of social progress based on “moral and spiritual progress
rather than the mere accumulation of wealth.”12 Mill doubted that the
competition and economic freedom inherent in capitalism would automatically
translate the pursuit of self-interest into society’s welfare. At the time he was
writing, many people were working in factories but living in more wretched
conditions than those that existed in Smith’s and Ricardo’s times. Whole
families worked six days a week for more than eight hours a day. Many were
routinely laid off with little notice.
Mill acknowledged the problems created by the market’s inherent inequality
of outcomes. He proposed that the state should take definitive action to
supplement the market, correcting for its failures or weaknesses. He advocated
selective state action in some areas, such as assisting the poor, when individual
initiative might be inadequate in promoting social welfare. He supported more
decentralization of government and argued that parents should be required to
educate their children, if necessary with support from the state.
Mill’s views on social issues reflect the evolution of liberalism in his time.
The guiding principle was still laissez-faire, but in some circumstances limited
government actions were desirable. The two key questions for Mill, as for liberal
thinkers since his time, are:
When is the government justified in using its visible hand to assist or replace
the invisible hand of the market?
How far can the state go before its interference with individual rights and
liberties becomes abusive?
One of the most influential political economists of the twentieth century was
John Maynard Keynes (1883–1946)—pronounced “canes”—who developed a
subtle and compelling strain of liberalism called Keynesianism. Like Mill,
Keynes was concerned with the negative impact of markets on society. His ideas
were especially popular from the 1930s through the early 1970s. The 2007–2008
financial crisis caused many experts to become more critical of laissez-faire
ideas and look back to Keynes for an explanation of why crises occur and how to
resolve them.
A civil servant, writer, farmer, lecturer, and Director of the Bank of England,
Keynes refuted some of the principles of classical economic liberalism. He
believed that the Great Depression was evidence that the invisible hand of the
market sometimes errs in catastrophic ways. As early as 1926, he wrote:
Let us clear from the ground the metaphysical or general principles upon
which, from time to time, laissez-faire has been founded. It is not true that
individuals possess a prescriptive “Natural liberty” in their economic
activities. There is no “compact” conferring perpetual rights on those who
Have or on those who Acquire. The world is not so governed from above that
private and social interest always coincide. … Nor is it true that self-interest
generally is enlightened; more often individuals acting separately to promote
their own ends are too ignorant or too weak to attain even these. Experience
does not show that individuals, when they make up a social unit, are always
less clearsighted than when they act separately.
Keynes argued that the market does not always translate the rational and selfish
behavior of individual actors (consumers, workers, and firms) into an outcome
that is socially optimal. He did not believe that the market is a self-correcting
institution wherein deviations from full employment—something that resulted
from an outside “shock” to the system—set in motion changes in prices, wages,
and interest rates that quickly restore full employment.
In Keynes’s view, individuals tend to make decisions that are particularly
unwise when they are faced with situations in which the future is uncertain and
there is no effective way to share risks or coordinate otherwise chaotic actions.
Keynes emphasizes that it is possible for individuals to behave rationally and in
their individual self-interest and yet for the collective result to be both irrational
and destructive—a clear failure of the invisible hand. The stock market crash of
1929, the Asian crisis of 1997, and the 2007–2008 global financial crisis
demonstrate what can happen when investors are spooked and stampede out of
the market (see Chapter 8).
In these conditions, people often predict a very bleak future or at least find it
difficult to “think rationally” about the future, leading to what Keynes calls a
paradox of thrift. What is the rational thing to do when one is threatened by
unemployment? One rational response to uncertainty about your future income is
to spend less and save more, to build up a cushion of funds in case you need
them later (just as many people did during the 2007–2008 financial crisis). But if
everyone spends less, then less is purchased, less is produced, fewer workers are
needed, and income declines. Furthermore, the recession and unemployment that
everyone fears will come to pass is in fact sustained by the very actions that
individuals take to protect themselves from this eventuality. Keynes also worried
about speculation in the international economy and the damage it could do if it
was not regulated in some fashion. These conditions, then, make financial
markets fragile and prone to economic disaster.
For Keynes, constructive state action enhances economic stability. He argued
that organs of the state should regulate “many of the inner intricacies of private
business” yet “leave private initiative and enterprise unhindered.”15 Within the
system of capitalism, he envisioned working out “a social organization which
shall be as efficient as possible without offending our notions of a satisfactory
way of life.”16
During the Great Depression, many states used monetary and fiscal policies to
sustain wages for labor and to stimulate economic growth. Because businesses
were afraid to invest, states needed to run a deficit temporarily—without
worrying about inflation—in order to encourage production and consumption. In
the United States, President Franklin Roosevelt adopted many other Keynesian
policy suggestions including public works projects to stimulate employment,
unemployment insurance, bank deposit insurance to improve investor confidence
in banks, and social security.
Keynes also made clear that the state should use its power to improve the
market, but not along the aggressive, nationalistic lines of mercantilism. He
worried that under the strain of the Great Depression people could easily turn
toward an ideology like Fascism or Nazism for solutions to their problems. He
viewed the Soviet regime’s repression and disregard for individual freedom as
intolerable. He argued that a liberal system is one that respects individual
freedom, not one that limits it for the sake of security. Beyond all else, Keynes
was a moral humanist who wanted to get beyond the problem of accumulating
wealth, which he viewed as “a somewhat disgusting morbidity,” to a society
where most people could instead spend their leisure time contemplating and
living a good life.
Embedded Liberalism: Reconciling Domestic and International
Keynes is also noted for the role he played in helping to reconstruct Western
Europe after World War II and establish the new international economic order.
At a meeting of the Allied nations at Bretton Woods, New Hampshire, in 1944,
two new institutions were created to manage the postwar economy: the IMF and
the World Bank. Three years later, the General Agreement on Tariffs and Trade
(GATT) was created to manage international trade. Keynes headed the British
delegation at Bretton Woods, and the institutional result, though not his plan,
certainly reflected many of his ideas.
One of the problems that arose from the meeting was how to square two
objectives that the Allies agreed were necessary to restore stability and economic
growth in the international economy while helping states recover from the war.
On the one hand, Keynes believed that on the domestic front government action
was both useful and necessary to deal with problems that the invisible hand did
not solve. On the other hand, he envisioned an open international system in
which market forces and free-trade policies would play major roles. The way to
reconcile these two objectives was through creating a system that John Ruggie
calls embedded liberalism in which strong international markets would be
subject to political restraints and regulations that reflected domestic priorities.
In other words, the democratic state would intervene in the domestic economy
and place some limits on international markets in order to protect society, but it
would also support a broadly liberal market economy and relatively free trade.
On the international level, embedded liberalism was reflected in the Bretton
Woods institutions through which states managed economic exchanges with
peaceful cooperation. States agreed to work together to gradually reduce their
trade and finance regulations so as to open their national economies as they
recovered and became more competitive. Between the 1940s and the 1970s,
tariffs and other barriers to free trade were progressively lowered. In order to
avoid excessive exchange rate fluctuations, Western states set up a system of
fixed exchange rates whereby currencies were pegged to the dollar and the dollar
was pegged to gold. Importantly, states maintained capital controls to restrict the
movement of capital across borders. A cornerstone of this system was
multilateral cooperation to manage international economic relations.
Embedded liberalism was also based on a set of policies at the domestic level
of each country. Broadly speaking, these policies rested on what has been called
the Keynesian compromise—a sort of class compromise whereby owners of
capital would share gains from growth and rising productivity with workers in
the form of rising wages and benefits, while workers maintained social peace
and accepted the legitimacy of the liberal capitalist system. Both sides accepted
significant state intervention in the market economy to stabilize and strengthen
it. Governments would use spending in times of recession to ensure full
employment and increase demand, and they would expand social welfare
programs to redistribute more income to the lower and rising middle classes,
ensuring that these classes could consume the growing output of factories and
fuel growth that brought profit to owners of capital.
The system of embedded liberalism relied on the government to protect
society from the excesses of the market. Greater regulation of businesses, higher
taxes on the wealthy, and greater state spending made capitalism more
compatible with domestic stability and democratic demands. The state tried to
compensate those groups that were hurt by trade liberalization and eventually
freer flows of capital across borders. In the early days of the Cold War,
economic productivity and GDP grew rapidly, as did international trade. The
1950s to the 1970s were regarded as a “golden age” of capitalism in both the
United States and Western Europe. In places such as Great Britain, France, West
Germany, and Sweden, the role of the state was emphasized to a greater degree,
creating something akin to a democratic-socialist system. In the United States,
state policy became much more activist than in previous decades. The U.S.
federal government intervened in the economy at home and abroad in various
ways, such as by exploring space, promoting civil rights, implementing the Great
Society antipoverty programs, helping the elderly with Medicare medical
insurance, and regulating corporations.
Many political economists argue that this post-World War II system worked
well because the United States bore the costs of maintaining the global monetary
system and providing for the defense of its allies. As a result, Japan and Western
Europe could spend more for their recovery while benefiting from a system of
open trade, sound money, and peace that stimulated the growth of markets
everywhere. More generally, hegemonic stability theory is the idea that
international markets work best when a hegemon (a single dominant state)
accepts the costs associated with keeping them open for the benefit of both itself
and its allies by providing them with certain international public goods at its
own expense.
But as time went on, U.S., West European, and Japanese interests changed,
and as they did, hegemony gradually became more expensive for all involved to
sustain (or put up with, depending on one’s perspective). By the late 1960s,
economic growth was gradually shifting wealth and power away from the United
States and toward Western Europe and Japan, changing the fundamental
(cooperative) relationship of the United States to its allies. At the same time, the
United States felt strongly that the costs of fighting the war in Vietnam were
becoming prohibitive without more allied financial and political support.
In the late 1960s, President Nixon and others attacked Keynesianism and the
cost of President Johnson’s Great Society program, seeking to put more
emphasis on economic growth instead of stability. As we discuss in Chapter 8, in
1973 the United States replaced its fixed exchange rate system with a flexible
exchange rate system, which led to increased currency speculation and more
money circulating in the international economy. That same year the oil price
hikes by the Organization of the Petroleum Exporting Countries (OPEC) led to
an economic recession in the industrialized nations, but also the recycling of
massive amounts of OPEC’s earnings into Western banks. Meanwhile, Western
Europe, Japan, Taiwan, and South Korea were competing with the United States
for new markets. Keynesian policies to deal with the recession generated
stagflation—a combination of low growth and high inflation, which were not
supposed to occur together.
In this environment of low economic growth and increasing competitiveness,
Keynes’s ideas were gradually replaced by those of the Austrian Friedrich
Hayek (1899–1992) and the American Milton Friedman (1912–2006). Their
orthodox liberal values favored “minimally fettered” capitalism—or a limited
state role in the economy. Their increasingly popular ideas laid the intellectual
groundwork for what became a distinct variation of economic liberalism called
Hayek’s most influential work, The Road to Serfdom, explored growing state
influence that he felt represented a fundamental threat to individual liberty. In
his view, allowing more government intervention to provide greater economic
security was the first step on a slippery slope to socialism or fascism. He warned
against reliance on “national planners” who promised to create economic utopias
by supplanting competition with a government-directed system of production,
pricing, and redistribution. Drawing on pre-Keynesian theories of economic
liberalism, Hayek argued that the only way to have security and freedom was to
limit the role of government and let the market provide opportunities to free
Contrasting the “collectivist” ideas of socialism with the virtues of an
economy with real freedom, he wrote:
The virtues which are held less and less in esteem … are precisely those on
which Anglo-Saxons justly prided themselves and in which they were
generally recognized to excel. These virtues were independence and selfreliance, individual initiative and local responsibility, the successful reliance
on voluntary activity, noninterference with one’s neighbor and tolerance of
the different, and a healthy suspicion of power and authority. Almost all the
traditions and institutions which … have molded the national character and
the whole moral climate of England and America are those which the progress
of collectivism and its centralistic tendencies are progressively destroying.
Hayek warned that when a state overspends or prints too much money, it can
easily cause inflation that destroys an economy.
20 He chided social democrats
for being unwilling to recognize that the price of a large welfare system is more
government debt. A healthy economy requires that the state not interfere in
private economic decisions. Instead of worrying about employment, the state
should balance its budget, manage the money supply to control inflation, and
encourage people to save. To do so requires taking control of the money supply
out of the hands of politicians—lest liberty be lost when the majority pressures
the government to spend more than it has.
Echoing Hayek’s foundation, Milton Friedman wrestled with the problem of
keeping government from becoming a “Frankenstein that will destroy the very
freedom we establish it to protect.” According to Friedman, government “is an
instrument through which we can exercise our freedom; yet by concentrating
power in political hands, it is also a threat to freedom.”21 In his book Capitalism
and Freedom, he consciously returns to the classical liberalism of Adam Smith,
stressing that capitalism preserves and protects liberty by naturally diffusing
In the early 1980s, Prime Minister Margaret Thatcher of Great Britain and
U.S. president Ronald Reagan became the chief practitioners of policies derived
from the ideas of Hayek and Friedman. Keynesianism was out of fashion.
Thatcher’s motto was TINA—“There Is No Alternative” to neoliberal economic
policies. Neoliberalism emphasizes economic growth over stability. President
Reagan promoted “supply-side economics,” which is the idea that lower taxes
rather than increased government spending will increase investment and spur job
creation, thus generating higher demand and economic growth. The top income
tax rate in the United States was cut in stages from 70 percent in 1980 to 33
percent in 1986.
Deregulation and privatization were also important elements of neoliberalism
in the 1980s. Regulations on banking, energy, and investment were weakened or
removed in order to promote greater competition and efficiency. Many national
telecommunications, airline, and trucking industries were privatized (sold off to
wealthy individuals or corporations) to allow for greater competition and
freedom to set prices. Some public housing in Britain was privatized, and
welfare programs in both the United States and Great Britain were “rolled back”
(shrunk). Many neoliberals argued that the state was too big and had been
captured by powerful special interests. They believed that a free market would
redistribute income to those who are most efficient, innovative, and hard
working. Although these policies might lead to greater income inequality,
economic growth at the top of society would gradually “trickle down” to benefit
labor and society’s masses. Finally, the rule of thumb for both Reagan and
Thatcher was that the state should lessen its interference in all areas of public
policy except security, where both advocated a strong anticommunist stance.
It should be noted that many of Hayek’s and Friedman’s neoliberal views—
and the ideals espoused by Reagan and Thatcher—are echoed by contemporary
economic liberals such as Paul Ryan, who became the Speaker of the U.S. House
of Representatives in 2015. Writing in 2011 in the conservative Wall Street
Journal, Ryan argued that high-taxing, high-spending, highly indebted European
states should not serve as models for good government. Rather, he believes that
American freedom could best be ensured by, among other things, limiting the
size of the state and relying on “families, communities, churches and local
institutions—and [on] the government only as a last resort.”22 “Paternalistic
government,” Ryan asserted, “will stand in the way of the pursuit of happiness
and the good life.”
While neoliberalism was spreading in the mid-1980s, the United States and other
industrialized nations began promoting globalization—the extension of
economic liberal principles the world over—as a process that would boost
economic growth and bring democracy to those nations integrated into this
capitalist structure. Emphasizing the role of unfettered markets (unchained by
the state), globalization promised to enhance production efficiency, spread new
technologies, and generate jobs in response to increased demand.
A confluence of changes in the world created a ripe environment for
globalization to spread. A dramatic reduction in transportation costs boosted
industrial outsourcing and trade. New digital technologies such as the Internet
and fiber optics revolutionized communications and work processes, allowing
information to move across borders quickly. Speed and the death of distance
were becoming major features of end-of-the-century communications,
commerce, and innovation. Moreover, holders of large pools of capital were
searching for investment opportunities in new markets that promised higher rates
of return than in the mature industrialized economies.
Along with these changes, the fall of the Berlin Wall caused a shift from a
predominately Cold War world order (1947–1990), where states were
preoccupied with territorial security and military power, to something more akin
to a pluralistic world order in which economic issues dominated the global
agenda. With the collapse of many communist regimes in the late 1980s, new
governments in Eastern Europe and in newly independent countries of the
former Soviet Union replaced centralized state planning with more marketoriented strategies and opened their economies to foreign investment and trade.
In the late 1980s and throughout the 1990s, many of the newly industrializing
states in east and southeast Asia grew quickly, adopting export-led growth
strategies and integrating themselves into the new “global economy” through
trade. And some leaders in Latin America began to support more market-friendly
policies following crippling debt crises in the 1980s.
By the first half of the 1990s, many governments were implementing
deregulation and privatization. Neoliberalism seemed to be practically and
theoretically “triumphant.” The Clinton administration also promoted
globalization, negotiating a plethora of free-trade deals such as North American
Free Trade Agreement (NAFTA) and helping create the WTO (see Chapter 7).
Some Central and Eastern European states became members of the European
Union’s single market. Mexico, India, and China all adopted pro-market
reforms, encouraged foreign investment, and massively boosted trade with the
United States.
Many of the economic liberals who were analyzing the dizzying changes in
the global economy in this period ascribed to globalization some combination of
these characteristics:
An economic process that reflects dense interconnections based on new
technologies and the mobility of capital;
The integration of national markets into a single global market;
A political process that weakens state authority;
A cultural process leading to complex cultural interconnections; and
A process that benefits everyone economically and helps spread democracy
in the world.
New York Times columnist Thomas Friedman articulated the beliefs of many
globalization enthusiasts, tying free trade and capital mobility to production
efficiency and individual empowerment. In his popular book The Lexus and the
Olive Tree, Friedman asserts that globalization often requires a “golden
straightjacket”—a set of sovereignty-limiting, economic liberal policies that
must be implemented if states want to realize globalization’s benefits.
24 He
believes that intensely competitive global capitalism drives individuals, states,
and TNCs to continually produce new and better products. In his book The
World Is Flat, he argues that new technological developments are leveling the
global playing field, giving individuals in places like Bangalore and Beijing the
ability to compete with and collaborate with individuals in Boston and Silicon
As early as the 1990s, anti-globalization activists and heterodox economic
liberal scholars began pointing to mounting problems and unintended
consequences that stemmed from neoliberal-inspired globalization. They
proposed different solutions but shared the idea that markets need to be
embedded in social and political institutions in order to have legitimacy and to
resolve fundamental human problems. In the short run, unfettered global markets
were hurting some of the world’s poorest people and destroying the
environment. In the long run, through outsourcing and environmental
degradation, they might even undermine the prosperity of developed countries.
The Anti-Globalization Movement
As globalization grew in popularity, so did resistance to many of its effects. The
political scientist Benjamin Barber argued that the forces of “McWorld”
(globalization) were arrayed against the forces of “Jihad” that wanted to preserve
national sovereignty and national solidarity.
26 Some critics saw globalization as
merely a shibboleth of free-market champions—a wildcat version of capitalism
that promised higher standards of living but increased the misery or
marginalization of many people. Marxist political scientists Leo Panitch and
Sam Gindin described globalization (driven in part by the U.S. Treasury and the
Federal Reserve) as a process of spreading U.S. economic practices and
institutions to foreign countries: “It was the immense strength of US capitalism
which made globalization possible, and what continued to make the American
state distinctive was its vital role in management and superintending capitalism
on a worldwide plane.”27 According to Ignacio Ramonet, the former editor-inchief of Le Monde diplomatique, economic and social Darwinism was driving
society, causing excessive competition and consumption and forcing people to
adapt to market conditions, at the risk of becoming social misfits and slowing the
global economy.
Anti-globalization protestors gained momentum in the 1990s. Much of their
focus was on negative consequences of globalization, such as sweatshop
conditions in poor countries, damage to the environment, and maldistribution of
29 Protesters denounced policies of the WTO, the IMF, and the World
Bank that supposedly reflected an ideological obsession with neoliberal-ism and
minimization of controls on transnational corporations. Many of these groups
formed coalitions with labor, environmental, and peace activists and held
massive demonstrations in cities around the world, capped by the violent “Battle
of Seattle” at the WTO meetings in the spring of 1999. Even the 1989 prodemocracy protests in Beijing’s Tiananmen Square and the 2011 Arab Spring
can be interpreted as reactions to the imposition of globalization-oriented
policies by authoritarian regimes. Major recessions in Mexico in 1994, Russia in
1998, and throughout much of Southeast and East Asia in 1997 and 1998 led
some officials in developing countries to question the merits of weakening
regulations and encouraging massive capital flows across borders. Nevertheless,
overall support for globalization among Western policy makers, business elites,
and mainstream economists remained strong.
Liberal Critiques of Globalization
As we have emphasized in this chapter, economic liberal ideas have evolved
over time as new scholars grapple with new problems. Many economic liberals
who are inspired by Keynes disagree with elements of neoliberalism. While
generally supporting globalization, they started to address the potential problems
resulting from rapidly growing flows of goods and money across borders. By the
mid-2000s, these critics, whom we label as “heterodox economic liberals” to
distinguish them from neoliberalism-supporting “orthodox economic liberals,”
argued that globalization should be managed better. For example, Joseph
Stiglitz, the former chief economist of the World Bank and Nobel Prize winner
in Economics, criticizes IMF policies for making it difficult for many developing
nations to get out of debt and benefit from globalization.
30 Economist Dani
Rodrik points out that unchecked economic integration and free trade can
threaten democratic politics. Markets, he argues, have to be “embedded in nonmarket institutions in order to work well.”31 They will not be viewed as
legitimate unless they reflect individual countries’ national values, social
understandings, and political realities.
While arguing that open markets and technological change were bringing
unprecedented opportunities to middle classes in China and India, Thomas
Friedman acknowledged that globalization would generate opposition if it
widened the rich–poor gap. In his 2008 book Hot, Flat and Crowded, he also
discusses globalization’s costs to the environment, including loss of biodiversity,
climate change, and energy shortages. Sounding more like a mercantilist, he
suggests that governments need to create incentives for technological innovation
leading to widespread renewable energy.
32 In fact, in a chapter called “China for
a Day (But Not for Two),” he muses that the United States should have a day of
authoritarian government to force the country to adopt good energy policies and
energy efficiency standards—and then revert back to democracy and free-market
Another scholar who recognizes unsustainable consequences of global
neoliberalism is David Colander, an economist at Middlebury College. He
argues that in a global economy, the operation of what economists call the “law
of one price” means that wages and prices in the world in the long run will
become more equalized as technology and capital spread more production to
other countries. As a result, the United States will gain less and less from trade,
wages will inevitably go down, and growth will decline as the United States
loses its comparative advantage in most industries. Moreover, Colander believes
that trade and outsourcing—which have benefited the majority in the short run—
will soon cause the United States “to enter into a period of long-run relative
structural decline, which will be marked by economic malaise and a continued
loss of good jobs.”33
The deep global recession in 2008 and 2009 seemed to shake the faith of even
some of the most ardent proponents of unfettered capitalism. Before the crisis,
Alan Greenspan, the Chairman of the U.S. Federal Reserve, regularly assured
Congress that financial markets were relatively self-regulating and that rational,
profit-maximizing financial actors would take all necessary precautions to
ensure that excessive risk-taking and insufficient due diligence (regarding
mortgage lending) would not be tolerated (although in 1996 he had famously
cautioned about “irrational exuberance” in the stock market). In contrast, in
testimony before Congress in October 2008, the clearly shaken former Chairman
admitted that his faith in the self-regulating nature of financial markets had been
misplaced—that “those of us who have looked to the self-interest of lending
institutions to protect shareholders’ equity, myself included, are in a state of
shocked disbelief.”34 Greenspan blamed his state of incredulity on a “flaw in the
[economic] model” “that defines how the world works.”
The global financial crisis that started in 2007 brought to a head differences of
opinion between orthodox and heterodox economic liberals about globalization,
the causes of the crisis, and how best to respond to it. The crisis produced the
most severe economic collapse since the Great Depression, convincing a number
of policy makers that neither more globalization nor incremental, piecemeal
reforms to globalization were enough to resolve contradictions that
neoliberalism had created. This section focuses on the ideological debate
between neoliberals and heterodox liberals, and not the specifics of the financial
crisis itself. Before reading this section, instructors and students may want to
read the more detailed coverage of the crisis in Chapter 8.
Biases in Free-Market Theories
As noted earlier, Keynes was adamant that markets are prone to failure, with the
Great Depression being a prime example of that reality. Since his time, many
governments became better at dealing with recessions that were considered a
normal part of the business cycle. Using a variety of fiscal and monetary tools,
they could tinker with supply and demand to right the economy through choppy
In contrast, Milton Friedman and other economists associated with
neoliberalism’s Chicago School emphasized that the nation’s money supply was
the key to inflation and that the market is a self-correcting mechanism. A
companion theory, the “Efficient Market Hypothesis,” claimed that “at every
moment, shares price themselves in the market through attracting the input of all
information relevant to their value.”35 The implication of this theory was that
policy makers should not worry about speculative bubbles or excessive risktaking by big market actors because an efficient market with rational investors
would tend to make these problems unlikely. And the general bias among
economists in American universities has been toward an acceptance of rationalchoice assumptions and a belief in the benefits of free trade and free markets.
Policies based on these neoliberal outlooks seemed to work for some time in
the developed countries. The period from the early 1990s to 2007 was dubbed
“The Great Moderation” because there was low inflation, low economic
volatility, and stable growth in advanced industrialized countries. However, after
the crisis The Economist, an economic liberal magazine, accused economists of
being “seduced” by models that assume equilibrium in markets when in fact (as
Keynes had maintained) many markets exhibit uncertainties (or
37 The models encourage the mistaken belief that markets can
carefully manage risk. According to The Economist, macroeconomists in
academia and within central banks have been too preoccupied with fighting
inflation and too cavalier about recurring asset bubbles in markets. Heterodox
economic liberals also argued that free-market theorists have underestimated
distortions in markets, overestimated markets’ ability to self-adjust, and failed to
account for the long-term problems resulting from markets’ short-term
Despite heterodox criticisms, neoliberal ideas remained popular, especially
among elites. Why? Part of the reason may be that free-market models have
focused on economic growth instead of relative equality of income distribution.
Ironically, the promise of greater wealth, faster growth, better jobs, and cheaper
prices has been easier for the public to buy into than the alternatives of higher
taxes for more social programs, slower growth for environmental sustainability,
and collective sacrifice today to benefit future generations.
Moreover, the wealthy, who dominate the media and fund political parties and
think tanks throughout the industrialized democracies, heavily promote laissezfaire policies. Simon Johnson, a former Chief Economist for the IMF, labels the
private firms and actors who call the shots in Washington a “financial
oligarchy”—an interconnected group of politically powerful people who move
back and forth between Wall Street and Washington (and some university
offices), “amassing a kind of cultural capital—a belief” that “large financial
institutions and free-flowing capital markets were crucial to America’s position
in the world.”38 Chrystia Freeland, a former global editor at Reuters who became
Canada’s Foreign Minister in 2017, describes the same group and its global
counterparts as a “plutocracy”—a class of super-rich oligarchs benefitting from
tax breaks, government subsidies, and taxpayer-financed bailouts.
We Are All Keynesians Now
Despite the financial crisis, orthodox economic liberals prefer to keep the main
laissez-faire characteristics of the free market, subject to a few more reforms.
They propose to:
Limit government support for banks, infrastructure projects, and social
welfare programs;
Decrease regulation of the economy;
Cut taxes of the wealthy and middle class to stimulate economic growth; and
Foster more globalization, which is good for the United States and the world.
Many orthodox liberals blame the government, not banks, for the crisis. They
claim that the Federal Reserve created the housing bubble beginning in 2001 by
decreasing the cost of borrowing through interest rates. This put more money
into the hands of homebuyers who could not afford payments in the long run.
Orthodox liberals also argue that the crisis was an exceptional event in the
history of capitalism, one that occurs very infrequently—due more to flaws in
human nature than flaws in capitalism itself. They believe that governments need
to cut budget deficits by imposing austerity, with the goal of reducing the trade
deficit and increasing national savings. They fear that big stimulus spending by
governments will generate inflation and more debt that future generations will
have to pay off (by consuming less).
More broadly, orthodox liberals support what IPE scholars call the “new
constitutionalism,” which entails removing some sensitive economic issues
from the realm of politics and placing their governance in the hands of
independent bodies and the private sector. Once the rules are set for governing
these issues, they become difficult for governments to change. For example,
removing control over monetary policy from the executive or the legislature and
lodging it in an independent central bank has meant that central banks tend to
focus on keeping inflation low and prioritizing the needs of investors rather than
implement Keynesian policies that often benefit workers. Similarly, the WTO is
the institutional home of rules on trade and intellectual property; once states
negotiated these technical rules in the GATT and TRIPS agreements, they are
hard to change, and they make it hard for WTO members to reverse their freetrade obligations. Liberals like this because it locks in an open, rules-based,
liberal world order. They believe that this “constitutionalization” is beneficial
because it creates stable expectations for market actors and forces governments
to stick to policies with long-term benefits rather than cave in to short-term
political pressures.
In contrast, heterodox economic liberals gained a greater voice in public
debates after the financial crisis. They propose that the state should:
Spend more to grow the economy and create jobs, without worrying too
much about inflation;
Invest more in renewable energy, infrastructure, education, and health care;
Break up big banks and impose tougher regulations on them; and
Better manage globalization, but without stopping it.
Drawing on Keynes, heterodox liberals want a strong state, but not one that
stifles the profit motive, economic freedom, and individual liberty. They are not
opposed to globalization per se, but they would like to redistribute more wealth
to the masses in industrialized nations and poor people in developing nations.
They recognize the need to reform institutions like the World Bank, the IMF,
and the WTO to get away from a “one-size-fits-all mentality” of how economies
should be run. Related to this is a new emphasis on creating “policy space” for
developing countries (at least in the short run) to be more protectionist, restrict
capital flows somewhat, and have more lax rules on intellectual property rights.
They emphasize that developed countries should stop subsidizing their own
industries, drop their remaining protectionist barriers to key LDC exports like
textiles and agricultural goods, and accept more immigrants from poorer
Many heterodox economic liberals prefer the kind of state–market relationship
found in social democracies in Western Europe (see Box 2.2). For example,
Nordic countries have high openness to the international economy (measured by
the ratio of trade to GDP) and high public expenditures on social programs
(measured by the ratio of spending to GDP), demonstrating that globalization
and big government are compatible. Heterodox liberals also want to maintain
different models of national capitalism within a broader global free-market
economy, instead of trying to harmonize all major regulations across developed
countries. When it comes to designing global institutions and rules, Dani Rodrik
stresses the need for maintaining “escape clauses” and “opt-outs” so that
individual countries can benefit from globalization in ways that are most
consistent with their political realities, cultural needs, and resource constraints.
By the 1920s, economic liberalism in Europe, particularly in Germany’s
post-World War I Weimar Republic, had come to be associated with
economic chaos, political corruption, and the exploitation of the working
b In response to this perception and to Hitler’s consequent rise to
power, a small group of academics at Freiburg University developed a new
conception of liberalism they called ordoliberalism. Walter Eucken (1891–
1950), Franz Böhm (1895–1977), and Hans Grossman-Doerth (1894–1944)
founded this school of thought. Ordoliberals believe that the failings of
liberalism resulted from the failure of nineteenth- and twentieth-century
laissez-faire policy makers to appreciate Adam Smith’s insight that the
market is embedded in legal and political systems.
Ordoliberal thought reflects the humanist values of classical liberalism,
including the protection of human dignity and personal freedom.
Ordoliberals believe that private decision making should guide resource
allocation, that competition is the source of economic wellbeing, and that
economic and political freedom are inextricable. Like classical liberals,
they also believe that individuals must be protected from excessive state
power and that political power should be dispersed through democratic
processes that maximize participation in public decision making. They want
to prevent special privileges and monopolies that rig markets in favor of
dominant firms.
Ordoliberals do not believe that markets are naturally self-regulating or
that deregulation is sensible policy. Instead, they stress that the state must
establish and enforce appropriate rules in property law, contract law, trade
law, and competition policy to govern the market process. With such a
framework in place, the efforts of powerful firms to subvert the market
process (via price controls, import restrictions, subsidies, restrictive
licenses, etc.) will be deemed “unconstitutional.” Politicians will be in a
strong position to resist the special pleadings of powerful interest groups. A
privilege-free economy that supports liberal values will be the highly
desirable result.
Ordoliberalism does have an inherent ethical stance. Within an
appropriate legal and political framework, market outcomes will likely be
nondiscriminatory, privilege-free, and just.
c Ordoliberals recognize,
however, that some income redistribution will likely be called for, given the
limited productivity of some individuals—often due to circumstances
beyond their control.
Other German intellectuals, principally Alfred Müller-Armack (1901–
1978), accepted key ordoliberal principles but argued that supplemental
“social” policies are necessary to ensure that market outcomes will indeed
be consistent with a “good” society. Müller-Armack is credited with
developing the basis of the “social” market economy that characterizes
many modern European states.
Ordoliberal thought has had a profound influence on economic and
political policy in the European Union. Current European competition
policy and enforcement of antitrust regulations clearly incorporate
ordoliberal principles. By maintaining open markets, European competition
authorities hope to foster economic freedom in the form of freedom of
entry, thereby enhancing economic opportunity, promoting competition,
and diffusing economic and political power.
Ordoliberal ideals have strongly shaped German policies toward the
European Union and the Eurozone crisis. The belief in “sound money” has
translated into an emphasis in the European Central Bank on controlling
inflation rather than reducing unemployment and a German insistence that
EU members be constitutionally bound to strictly control government
budget deficits. In addition, a strong emphasis on personal responsibility (or
liability) has made Germany reluctant to bail out banks or states that have
engaged in risky behavior or reckless borrowing.
e When it has accepted
bailouts for Eurozone countries, Germany has insisted that they abide by
strict conditions and undertake painful reforms.
aRoss Singleton is the primary author of this text box.
bThe discussion of ordoliberalism in this box is based largely on David J. Gerber,
“Constitutionalizing the Economy: German Neo-Liberalism, Competition Policy and the ‘New’
Europe,” The American Journal of Comparative Law 42 (1994), pp. 25–88.
cVictor J. Vanberg, “The Freiburg School: Walter Eucken and Ordoliberalism,” Walter Eucken
Institute, Freiburg Discussion Papers on Constitutional Economics, November 2004, p. 2.
eMathias Siems and Gerhard Schnyder, “Ordoliberal Lessons for Economic Stability: Different
Kinds of Regulation, Not More Regulation,” Governance 27:3 (July 2014): 382, 385.
This chapter has explained how the ideas and values associated with the
economic liberal perspective have evolved to reflect major political, economic,
and social developments. Political economists Smith, Ricardo, Mill, Keynes,
Hayek, Friedman, and others have debated the relationship of the state to society
as capitalism has spread over large parts of the world, profoundly shaping global
production and distribution.
During the Great Depression, a split emerged between Keynesians who
supported a positive role for the state in the economy and orthodox liberals who
saw the state’s role in the economy as decidedly negative. In the 1980s, the
chasm widened even more. The Reagan and Thatcher administrations
implemented neoliberal policies, emphasizing economic growth alongside cuts
in domestic welfare programs. Globalization and the current financial crisis have
led to criticisms of neoliberal faith in markets. Many heterodox liberals maintain
that some state intervention serves the public interest, especially when it protects
social groups and countries from the negative effects of the seemingly
Darwinian global economy. Orthodox liberals believe that austerity will lay a
foundation for sustainable recovery.
Both orthodox and heterodox liberals ultimately believe that capitalism is a
desirable system to maintain, despite the differences in how they propose to
reform globalization and tackle the problems arising from trade and inequality.
In that sense, they both place their faith in the ability of markets to promote the
interests of most people in the world.
economic liberalism 26
rent-seeking 30
Corn Laws 31
positive-sum game 31
zero-sum game 31
Keynesianism 33
paradox of thrift 34
Keynesian compromise 35
embedded liberalism 35
hegemonic stability theory 36
public goods 36
neoliberalism 37
heterodox economic liberals 40
orthodox economic liberals 40
new constitutionalism 43
ordoliberalism 44
What roles do self-interest, competition, and the state play in Adam
Smith’s views of the market?
Is Adam Smith the economic liberal many people assume he is?
Explain how the Corn Laws debate in nineteenth-century Britain
illustrates the conflict between mercantilist and economic liberal views of
international trade. Which side of the debate do you favor? Explain.
John Stuart Mill and John Maynard Keynes thought that government could
play a positive role in correcting problems in the market. Discuss the
specific types of “market failures” that Mill and Keynes perceived and the
types of government actions they advocated.
Given the critiques of globalization, what kinds of changes to economic
liberal policies would you recommend?
Compare and contrast orthodox and heterodox liberals in terms of values,
ideas, and policies. Which do you favor?
Based on what you know about the 2007–2008 financial crisis, do you
agree with the suggestion that it seriously undermined economic liberal
ideas and policies?
Thomas L. Friedman. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar,
Straus and Giroux, 2005.
Douglas Irwin. Free Trade under Fire. 4th ed. Princeton, NJ: Princeton University Press, 2015.
Robert Skidelsky. Keynes: The Return of the Master. New York: Public Affairs, 2009.
Manfred B. Steger. Globalization: A Very Short Introduction. 4th ed. New York: Oxford University Press,
Joseph Stiglitz. The Great Divide: Unequal Societies and What We Can Do about Them. New York: W. W.
Norton, 2015.
Cited in Niall Ferguson, “Margaret Thatcher: Punk Savior,” New York Times, April 9, 2013, at
Ralf Dahrendorf, “Liberalism,” in John Eatwell, Murray Milgate, and Peter Newman, eds., The
Invisible Hand: The New Palgrave (New York: W. W. Norton, 1989), p. 183.
Adam Smith, The Wealth of Nations (New York: The Modern Library, 1937), p. 400.
Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston,
MA: Beacon Press, 1944).
See Smith, The Wealth of Nations, p. 114.
Ibid., p. 117.
Cited in David Leonhardt, “Theory and Morality in the New Economy,” The New York Times Book
Review, August 23, 2009.
Cited in ibid., p. 64.
Michael W. Doyle, The Ways of War and Peace (New York: W. W. Norton, 1997), p. 207.
Smith, The Wealth of Nations, p. 401.
David Ricardo, The Principles of Political Economy and Taxation (London: Dent, 1973), p. 81.
Alan Ryan, “John Stuart Mill,” in The Invisible Hand, ed. John Eatwell, Murray Milgate, and Peter
Newman (London: The Macmillan Press, 1989), p. 201.
Ibid., p. 208.
John Maynard Keynes, “The End of Laissez-Faire,” in Essays in Persuasion (New York: W.W.
Norton, 1963), p. 312.
Ibid., pp. 317–318.
Ibid., p. 321.
See John Ruggie, “International Regimes, Trans actions, and Change: Embedded Liberalism in the
Postwar Economic Order,” International Organization 36:2 (1982): 379–415.
U.S. economist Charles Kindleberger is generally credited as the originator of the hegemonic stability
theory. See his Money and Power: The Economics of International Politics and the Politics of
International Economics (New York: Basic Books, 1970).
Friedrich Hayek, The Road to Serfdom (Chicago, IL: University of Chicago Press, 1944), pp. 127–
Robert Lekachman and Borin Van Loon, Capitalism for Beginners (New York: Pantheon Books,
Milton Friedman, Capitalism and Freedom (Chicago, IL: University of Chicago Press, 1962), p. 2.
Paul Ryan “America’s Enduring Ideal,” Wall Street Journal, October 1, 2011.
For a more detailed discussion of globalization, see Manfred Steger, Globalisms: The Great
Ideological Struggle of the Twenty-First Century, 3rd ed. (Lanham, MD: Rowman & Littlefield,
See Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York:
Farrar, Straus & Giroux, 1999).
Thomas Friedman, The World Is Flat: A Brief History of the Twenty-First Century (New York:
Farrar, Straus and Giroux, 2005).
Benjamin Barber, McWorld vs. Jihad: How Globalism and Tribalism Are Reshaping the World (New
York: Ballantine Books, 1996).
Leo Panitch and Sam Gindin, The Making of Global Capitalism: The Political Economy of American
Empire (New York: Verso, 2012), p. 1.
See Thomas Friedman and Ignacio Ramonet, “Dueling Globalization: A Debate between Thomas
Friedman and Ignacio Ramonet,” Foreign Policy 116 (Fall 1999), pp. 110–127.
For example, see Robin Broad, ed., Global Backlash: Citizen Initiatives for a Just World Economy
(Lanham, MD: Rowman & Littlefield, 2002).
See Joseph Stiglitz, Globalization and Its Discontents (New York: W. W. Norton, 2002).
Dani Rodrik, “Feasible Globalizations,” in Michael Weinstein, ed., Globalization: What’s New?
(New York: Columbia University Press, 2005), p. 197.
Thomas L. Friedman, Hot, Flat, and Crowded: Why We Need a Green Revolution—And How It Can
Renew America (New York: Farrar, Straus and Giroux, 2008).
David Colander, “The Long Run Consequences of Outsourcing,” Challenge, 48:1 (January/February
2005), p. 94.
Edmund Andrews, “Greenspan Concedes Error on Regulation,” New York Times, October 24, 2008.
See Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American
Capitalism (New York: Viking, 2008), p. 74.
See Daniel Drezner, The Ideas Industry (New York: Oxford University Press, 2017), pp. 108, 112;
and Patricia Cohen, “Ivory Tower Unswayed by Crashing Economy,” New York Times, March 4,
See “The Other-Worldly Philosophers,” Economist, July 18, 2009, p. 66.
Simon Johnson, “The Quiet Coup,” The Atlantic (May 2009).
Chrystia Freeland, Plutocrats: The Rise of the New Global Rich and the Fall of Everyone Else (New
York: Penguin Press, 2012).
Dani Rodrik, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth
(Princeton, NJ: Princeton University Press, 2007).
Wealth and Power: The Mercantilist
Trade protectionism puts the U.S. behind a different kind of wall.
Source: Shutterstock
The United States desperately needs politicians with the courage to swim
against the tide of popular rhetoric and outline a bolder vision for the State’s
dynamic role in fostering the economic growth of the future.
Mariana Mazzucato1
How often have you heard people say that they believe in free trade, but still
support some state intervention in the economy? Politically, it makes sense for
the state to assist businesses in certain cases, such as when farmers are hit by an
unexpected drought. But is there an equally compelling case for the government
to compensate manufacturing workers whose jobs move to Mexico? This was
the question in March 2016, when 14,000 employees at Carrier, a manufacturer
of heating and air-conditioning systems, were notified suddenly that the
company was moving production to Mexico, where wages were lower.
2 Workers
were furious that they would have to find new jobs in the U.S. Rust Belt, a
region where good-paying manufacturing jobs have been disappearing since the
During the U.S. presidential election campaign in 2016, both Democratic
Senator Bernie Sanders and Republican entrepreneur Donald Trump mentioned
situations like this one, arguing that U.S. free-trade policy—which was once
popular among voters and still enjoys some bipartisan support in Congress—
hurts U.S. workers. Trump called for high tariffs on imported goods made by
U.S.-owned businesses in Mexico. Sanders blamed corporate elites for moving
jobs to developing countries under pressure from profit-hungry investors.
Contrary to those who argue that the state should not intervene in the economy,
both Sanders and Trump insisted that the U.S. government should do more to
protect U.S. workers who had lost their jobs.
Throughout the world, farmers, car manufacturers, steel producers, start-ups,
and other private enterprises often receive some type of state economic support.
Usually it does not bother us unless we notice that inefficient businesses are
supported by state subsidies or other protectionist measures. We tend to believe
that it is appropriate for the government to help displaced workers, support
businesses to become more internationally competitive, or protect companies
that are vital to national security.
This chapter looks at the IPE perspective of mercantilism, which explains the
compulsion of nation-states to use power to protect themselves and generate
wealth for their citizens. Although neoliberal ideas replaced mercantilist ideas in
popularity after the 1970s, mercantilism has made a comeback in recent years.
Governments and populist-nationalist movements that criticize globalization
often draw on mercantilist thought. Mercantilism emphasizes using the economy
to help protect the nation-state from any number of real and imagined threats. As
we discuss in Chapter 9, realism complements mercantilism, but emphasizes
political and military instruments to achieve state security.
Classical mercantilism (from the sixteenth until the nineteenth centuries)
focused on state efforts to generate trade surpluses by promoting exports and
limiting imports. It was widely believed that trade surpluses strengthen a
nation’s economy, thereby contributing to its security and protecting certain
public and private groups within society. Because no state could count on other
states to guarantee its own territorial security, each state had to look to its own
military power for protection, supported by its economy and wealth. State
security and other political interests largely determined a country’s economic
policies. These harsh conditions imposed on states a potentially destabilizing
zero-sum outlook whereby absolute gains by one state were interpreted as
absolute losses for other states.
Because protectionist policies played a major role in escalating interstate
tensions and violence that culminated in World War I and World War II,
governments after 1945 placed a premium on defending the state and national
firms without resorting to force. Beginning in the 1970s, scholars used the term
“neomercantilism” to describe many defensive economic policies that states use
to safeguard their societies in an interdependent and intensely competitive
international political economy.
This chapter chronologically covers the evolution of ideas about mercantilism
in the international political economy from the sixteenth century until today. We
then explore why developed and developing nations have increasingly used
neomercantilist policies in the face of globalization. We also examine how states
are using a host of sophisticated technologies to defend their economies in an era
when it has become increasingly difficult to determine whether or not
competitors intend to physically harm one’s state and its businesses.
The chapter has five theses:
The history of mercantilism demonstrates that states have always been
compelled to regulate markets, whether in pursuit of state security, to
counteract some of the undesirable consequences of market operations, or to
help markets grow in a stable manner.
States promote open markets and free trade to the extent that these liberal
economic policies further the economic interests of the state and dominant
Paradoxically, because globalization has entrenched and exacerbated the
insecurities of states and many social groups, it has increased the tendency of
states to implement protectionist policies.
In response to a growing number of international trade, finance, and
industrial problems, states are likely to adopt a “managed” mix of both
neoliberal and protectionist policies.
Complex linkages between major international problems are making it more
difficult for states to resolve disputes through intricate negotiations.
For both mercantilists and realists, the nation-state is the primary unit of
analysis. A nation is a collection of people who, on the basis of ethnic
background, language, and history, define themselves as members of an
extended political community.
3 The state is the legal identity of the nation,
monopolizing the means of physical force in society and exercising sovereignty
within a given territory.
4 Around the fifteenth century, the rulers of small
European fiefdoms decided to consolidate their territories into larger domains in
order to better protect themselves against enemies.
5 These new domains would
become nation-states—France first, soon to be followed by England, Holland,
Spain and Sweden. Germany and Italy would not be consolidated into national
entities until later in the nineteenth century.
The economic historian Charles Tilly emphasizes that the constant need to
prepare for war was the primary factor that motivated monarchs and other
officials to organize their societies and to adopt measures that would help secure
the nation.
6 In nation-states all across Europe, governments pushed harder and
harder to extract income and resources from towns and cities to finance the
state’s growing demand for military security. Warrior-kings created bureaucratic
agencies that performed a variety of functions related to keeping a budget, using
money, and collecting taxes.
7 Many kings gave absolute property rights to
nobles in return for their support in staffing the king’s armies and collecting
Maintaining and expanding strong armies and navies was every nation-state’s
highest priority, but also very expensive. Thus, accumulating wealth and
manipulating the economy and trade policy to maximize revenue became a key
security strategy for any state. Mercantilism represented a set of ideal policies
for achieving this. For example, the British Tudor monarch Henry VII tried to
maximize the profitability of trade by taxing all imported wool products and
subsidizing British wool exporters. His aim was to capture control of the woolen
industry from Holland. For the next 100 years, England used these tactics to
compete with and intentionally ruin woolen manufacturing in Belgium and the
Mercantilist efforts dramatically altered the economic hierarchy of production
in many societies. Whereas agriculture had constituted the dominant source of
income for state treasuries, it was no longer enough. The state increasingly
looked to merchants and their trade as a larger source of tax revenue. To
promote economic growth, state bureaucracies connected small regional markets
by promoting infrastructural development and establishing common currencies
and weights. Along the way merchants acquired more property rights and rose to
a higher social position.
Mercantilism and Colonialism
To many historians, mercantilism is synonymous with the first wave of
exploration and imperialism from 1648 to the end of the Napoleonic Wars in
1815. Monarchs sent adventurers and conquerors on searches for gold and silver
bullion to fill state coffers. They also established colonies as a means to control
trade and generate wealth and power. Colonies served as exclusive markets for
the goods of the mother country and as sources of raw materials and cheap labor.
To promote the development of their colonial empires, states often subsidized
import and export merchants, who in turn favored a strong state that would
protect their interests. Many states gave favored merchants monopolies over
their industries. Dutch and British rulers also created charter companies and
supported new manufacturing technologies to boost production in urban centers.
Economic historians Kenneth Pomeranz and Steven Topik have studied how
the colonial powers used these mercantilist policies to move up the international
economic hierarchy.
9 The dominant powers regularly used violence and
occupation to harness advantages for their own traders and chartered companies.
Slavery was integral to their strategy of building cheap labor forces to extract
raw materials such as cotton, sugar, and tobacco from the New World. To help
balance its trade deficit with India, Great Britain forced China to open itself to
opium exports from India. European powers competed with each other to control
access to raw materials like cocoa, rubber, tea and coffee. They also deliberately
spread production of these commodities to areas under their control in order to
tax them. To gain more territory and commercial advantages, they also
committed genocide against indigenous peoples in the Americas and the Belgian
Congo. For Pomeranz and Topik the spread of the free market via commerce
depended on a “historic foundation of violence” where “bloody hands and the
invisible hand often worked in concert; in fact, they were often attached to the
same body.”10
Even while pursuing economic growth through trade and colonialism,
England’s Prime Minister Robert Walpole (1721–1742) continued efforts to
promote British demand for British-made goods such as wool in order to boost
state revenue. The British wool and textile industries increased the profitability
of land and generated taxable consumer goods. To protect British manufacturing
interests, the government banned competitive imports into Great Britain from its
colonies, which destroyed Irish mills and delayed the emergence of the U.S.
textile industry. All of these efforts were directed at enhancing state wealth and
power in an economically competitive and politically hostile international
environment. Without these protectionist measures, Great Britain would not
have been able to support its growing imperial power.
The Economic Liberal Challenge to Mercantilism
Between the 1840s and 1870s, economic liberal ideas attributed to Adam Smith
and David Ricardo became more popular in Great Britain, gradually replacing
mercantilism as this European power’s core political-economic philosophy.
Many policy makers accepted the idea that markets were self-adjusting and that
the state should limit its interventions in the market. What accounts for the rise
of these economic liberal ideas that challenged mercantilism?
Adam Smith’s The Wealth of Nations, published in 1776, attacked
mercantilism for causing production inefficiencies by restricting economic
competition. But it wasn’t until the end of the Napoleonic Wars in 1815, when
Great Britain had become the most efficient producer of manufactured goods,
that officials and influential thinkers began to press for free trade. England
finally adopted a free-trade policy in 1840, but did not completely eliminate its
trade tariffs until 1860.
Contrary to conventional wisdom, Adam Smith was not a doctrinaire defender
of free enterprise. He did champion individual (consumer) liberty and worried
that state interventions could make an economy less productive, but he also had
a protectionist side. He supported certain taxes, tariffs, and interventionist laws.
Both Smith and Ricardo viewed free trade as a policy that, ideally, would benefit
British manufacturers by forcing them to make their goods more competitive and
thus more profitable internationally. Ricardo accepted exceptions to free trade
“within narrow limits” until they were no longer necessary.
Clearly, then, free trade was not an ideological end in itself. By the late 1870s,
in the face of rising European and American competition, wealthy British
financiers and manufacturers actually joined working class groups in a
movement against open market policies and in favor of trade protection. As
more citizens gained the right to vote, the state came under pressure to provide
them with more benefits. Finally, by the end of the century, economic
nationalism (a people’s sense of economic loyalty to their nation-state) became
even more entrenched in international relations, which in turn helped generate a
second wave of imperialism when Germany, Japan, Italy, and the United States
began acquiring their own colonies.
Overlooked U.S. Protectionism
In the nineteenth century, emerging powers such as the United States and the
German principalities protected themselves from what they perceived as
Britain’s aggressive economic liberal policies. Two important contributors to
mercantilist thought at the time were the American Alexander Hamilton (1755–
1804) and the German Friedrich List (1789–1846). In his Report on the Subject
of Manufactures to the first U.S. Congress, Hamilton argued—in opposition to
the ideas of Thomas Jefferson—that free-trade policies were not in the best
interest of a young nation. Unless the U.S. government imposed taxes on
imports, America’s infant industries could never compete with Britain’s mature
industries in manufacturing all the goods and services that Americans
11 And unless the government subsidized American exports (and thus
gained a trade surplus), the United States could not raise enough revenue to
finance investments in infrastructure and the military. Hamilton also favored
export subsidies because they offset subsidies that foreign states granted to their
own domestic companies.
The nineteenth-century German political economist Friedrich List was an
even more vigorous proponent of mercantilist policies. Exiled from his home—
ironically, for his radical free-trade views—List came to the United States in
1825 and witnessed firsthand the results of Hamilton’s economic nationalist
policies: The United States was building up its independence and security. In
“The Theory of the Powers of Production and the Theory of Values,” List argued
that “the power of producing [is] infinitely more important than wealth itself.”12
In other words, it is more important to invest in the future ability to produce than
to consume the fruits of today’s prosperity.
Free-trade proponents, including Thomas Jefferson, believed that the United
States could raise money quickly by specializing in agriculture, taking advantage
of the new territory’s abundant natural resources. But for List, the production of
a wide variety of goods, along with investments in education and the
development of new technology, was more important than investment in
agriculture alone. List wrote that manufacturing and other occupations “develop
and bring into action an incomparably greater variety and higher type of mental
qualities and abilities than agriculture” and that “manufactures are at once the
offspring, and at the same time the supporters and the nurses, of science and the
Hamilton and List shared a spirit of patriotic economic nationalism—a
reaction to Great Britain’s economic liberal ideas and free-trade policies. List
argued that because Britain had more advanced technology and more efficient
labor than the rest of Europe, its goods were more attractive to Europeans than
locally produced goods. List also argued that in a “cosmopolitan” world there
could be no free trade until states could compete with one another on an equal
footing. He recommended that until the United States and Europe had “caught
up” with Great Britain, they should protect their infant industries, gradually
climbing to a level playing field with the British. Finally, according to
Cambridge economist Ha-Joon Chang, to the extent that Great Britain fought
against mercantilist policies in other countries, it was “kicking away the ladder”
for those countries, opposing their use of the same policies Great Britain itself
had used to achieve its wealth and power.
Political scientist Mark A. Martinez also notes that markets and trade in the
United States were never all that free.
15 During the War of 1812, Congress
doubled tariffs on all goods, and high tariffs remained integral to U.S. economic
development until World War II. The U.S. government practiced mercantilism
when it expanded the nation’s territory between 1800 and 1848 through a series
of land treaties, wars, and negotiations. It brutally cleared new territories of
native Indian tribes and incorporated the Louisiana Territory, Florida, Oregon,
Texas, and the Mexican concession into the young republic. Later it encouraged
explorers and settlers to cultivate these new lands to fulfill their Manifest
Destiny. The Homestead Act of 1862 granted 160 acres to anyone who would
clear and farm the land for five years. The federal government later sponsored
the building of railroads and highways, a banking system, land-grant colleges,
and many other infrastructure projects to expand economic prosperity.
By 1925 the United States was one of the fastest-growing economies in the
world. Other countries—like Germany, Austria, Sweden and France—were also
growing behind tariff walls. At the onset of the Great Depression, the SmootHawley Tariff Act raised average U.S. tariffs to a record high of 48 percent.
When many other nations adopted similar policies to protect their own
industries, it was inevitable that conflicting protectionist policies would lead to
global trade stagnation. It is easy to see why many economists blame these high
tariffs for contributing to the Great Depression (and, as a consequence, to World
War II).
Keynes, the Great Depression, and the Postwar Order
In 1929 many people blamed banks and speculators for the stock market crash
and the Great Depression (1929–1941), which subsequently increased
unemployment and poverty in many parts of the world. Over the next decade
many states erected high tariff barriers, boycotted other states’ exports, and even
went to war, partially in response to what were considered other states’
aggressive mercantilist trade policies. Many lost faith in market capitalism,
which led to increasing support for fascism in Europe and for revolutionary
movements in Europe, Latin America, and Asia.
Recall from Chapter 2 that in the 1930s the ideas of John Maynard Keynes
became popular because of pressure on the state to respond to the needs of more
voters with higher expectations. This rendered laissez-faire ideology no longer
politically acceptable. Keynes believed not only that markets sometimes fail, but
that recessions and depressions can last a long time. To restore confidence in the
capitalist system and weaken popular support for authoritarian leaders, he
recommended that state officials deal with the negative social effects of the
depression head-on and stimulate employment by injecting money into the
President Franklin Roosevelt’s New Deal reflected Keynesian ideas.
Government-sponsored welfare programs that helped the United States recover
from economic depression included: farm support measures that guaranteed high
prices for major crops; a bank insurance policy; and the Works Progress
Administration (WPA) and the Civilian Conservation Corps (CCC), which
employed many Americans. After the war Congress passed the Employment Act
of 1946, which made the federal government responsible for promoting
“maximum employment” and “free competitive enterprise.” The G.I. Bill also
made education and home mortgages more affordable for millions of returning
Keynes’s idea of a strong welfare state also gained traction in Europe. After
the war, Britain’s Labour Party developed a National Health Service to provide
lifelong free healthcare for all and implemented plans for the New Towns Act to
develop low-cost housing for the poor. The British government also nationalized
many of its biggest industries to ensure high employment— something Keynes
considered essential to a stable, functioning economy.
Despite its popularity, Keynesianism did not mean the end of “free market”
ideology and policies. At the end of World War II, forty-four victorious Allied
states gathered at the Bretton Woods conference to negotiate a new system of
international economic cooperation. Keynes’s ideas shaped the values, design,
and role of the three Bretton Woods institutions that emerged from the
conference: the General Agreement on Tariffs and Trade (GATT), the
International Monetary Fund (IMF), and the World Bank. In what came to be
known as the “Keynesian compromise,” the major Western powers encouraged
economic recovery in their post-war economies by employing various
mercantilist policies that promoted employment and enhanced the purchasing
power of the working class. However, officials were cautious about pushing
Europe and Japan to open up too quickly to international competition, lest such a
move jeopardize their recovery and allow communism to gain traction in their
countries. Significant reductions in trade-related protectionist measures would
have to wait until Europe and Japan recovered enough to be able to compete on a
“level playing field” with the United States. In addition, the IMF allowed
governments to engage in currency discrimination until 1958. “Capital controls”
that restricted the movement of money in and out of countries would survive into
the early 1970s.
The Bretton Woods system’s economic objectives complemented the political
and military objectives of the United States and its allies. Western industrialized
nations and Japan sought to preserve capitalism within their bloc while also
“containing” international communism and restricting trade with Soviet bloc
countries. There would also be no western economic liberal order without
military power to back it up. The United States provided the preponderance of
strategic military resources (including atomic bombs) to deter the Soviet Union
from attacking Western Europe or Japan. The United States also provided other
collective goods to its allies to earn their support for U.S. Cold War objectives.
Marshall Plan financial assistance, food aid, and reduced import tariffs on
Europe’s exports helped U.S. allies’ economies grow.
IN THE 1970S AND 1980S
A significant shift in the international security structure in the 1970s and 1980s
caused several major changes in the international political economy:
More use of neomercantilist tools to protect states and international
businesses from a variety of economic threats;
Increased political saliency of international economic interdependence and
dependence on oil and natural resources;
Greater importance of international finance and trade agreements, especially
to developing nations; and
Increased investment in and attention to technological and information
After withdrawing most U.S forces from Vietnam in 1973, the Nixon
administration attempted to reconfigure the bipolar (East–West) international
security structure into a multipolar pentagonal balance of power system (see
Chapter 9). The United States recognized the People’s Republic of China (PRC)
as one of the five major powers in a new international security structure where
economic power took on as much importance as military power. The United
States and the Soviet Union entered into a détente or period of “peaceful
coexistence,” putting less emphasis on major security issues. This restructuring
of the security structure provided new investment opportunities for multinational
corporations and opened the door to more trade and cultural exchanges between
the West and the Soviet bloc countries.
Another major systemic transformation in 1973 gave developing nations a
much stronger role in the international political economy. Members of the
Organization of Petroleum Exporting Countries (OPEC) raised the price of oil
dramatically, embargoed oil shipments to the United States and the Netherlands,
and reduced oil shipments to the rest of the world by 25 percent. Prices hikes—
which OPEC repeated in 1979—plunged the world into a prolonged recession.
This crisis gave OPEC great political and economic leverage over the West.
All oil-importing states were more vulnerable to external economic threats than
they had imaged themselves to be. The shift in control over oil prices and
production levels suddenly became a major economic and security problem for
NATO alliance members (who split over how to manage the crisis). The United
States and its NATO allies considered but then ruled out a military response to
OPEC’s actions because they did not want to risk starting a war with the Soviet
Union or a broader conflict in the Middle East.
With a new sense of power related to their control over a scarce resource (oil),
the developing countries formed the “Group of 77” in the United Nations and
demanded a New International Economic Order (NIEO). Among other things,
they sought to gain more control over their own resources, end Northern trade
practices that discriminated again Southern states’ agricultural exports, and
provide more aid to oil-importing states. However, the United States, Europe,
and Japan resisted changing the Bretton Woods system, and few of the NIEO
reforms were ever implemented internationally.
By the end of the 1970s, increased interdependence (interconnections)
between nations had left many of them feeling insecure and more economically
vulnerable to the policies of natural resource exporters and the actions of
multinational corporations. To reduce the United States’ dependence on OPEC
oil, President Jimmy Carter initiated a defensive-mercantilist campaign that
included the creation of a “strategic petroleum reserve” and the development of
the North Slope oil fields in Alaska. Congress also imposed fuel mileage
requirements on automobile manufacturers to push them to design more fuelefficient cars. Despite efforts like these, the oil-importing countries had little
choice but to adjust their economies to the high price of oil while trying to
decrease oil consumption to protect economic growth and jobs.
In the face of the declining utility of military weapons and violent conflict for
advancing national economic interests, developed countries increasingly turned
to neomercantilist finance, trade, and development policies to defend their
economies and enhance the competitiveness of their domestic firms.
Neomercantilism included efforts to generate economic growth, control the
business cycle, and eliminate unemployment. Many governments increased
spending on various social programs, imposed new regulations on industries,
introduced some capital controls, and manipulated interest rates. Also, state
industrial policies included subsidies for state-owned corporations and funding
for research and development in the private sector. Some nations employed
export subsidies to lower the price of goods, making them more attractive to
importers overseas.
These neomercantilist policies were intended to reduce the vulnerability of
states and international businesses to international competition without
undermining a commitment to freer trade under the GATT. However, many of
the sophisticated measures that states adopted caused tensions with trade
partners. For example, the United States and the European Community countries
heavily subsidized farm production and then used export subsidies to reduce
their commodity surpluses and grab larger shares of export markets. Some states
employed nontariff barriers (NTBs) such as complex health and safety standards,
licensing and labeling requirements, and domestic content requirements to limit
imports of certain commodities and manufactured goods. Similarly, some
countries imposed import quotas to control the quantity of a particular product
that could be imported. To this day the United States and the European Union
still apply import quotas on many agricultural items to help their domestic
producers compete with foreign producers. Yet another way to limit imports was
through a Voluntary Export Agreement (VEA) whereby an exporter
“voluntarily” complies with an importer’s “request” that it limit exports, for fear
that the importer might impose a more costly form of protection on the
exporter’s goods.
Japan Inc. and Reagan’s Neomercantilism
The economic success of Japan also boosted use of neomercantilist policies and
instruments in the 1970s and 1980s. After World War II, Japan adopted a model
of capitalism in which the state intervened proactively in the economy. The
Ministry of International Trade and Industry (MITI) cooperated with business
leaders and Liberal Democratic Party (LDP) members to carefully guide the
development of many industries.
16 Selected companies received state and bank
subsidies to make them more competitive with U.S. and European firms. During
the post-war “economic miracle,” Japanese companies also expanded their
investment overseas.
Clyde Prestowitz argues that Japan did more than support its most competitive
industries. Lacking a natural comparative advantage in the manufacture of
certain products, it adopted a “strategic trade policy” to intentionally create
competitive industries that could thrive in open international markets.
17 In
addition, Robert Wade argues that Japan’s “developmental state” strategy was
later imitated by the Asian Tigers (South Korea, Hong Kong, Singapore, and
Taiwan) and China.
The increased use of neomercantilist policies became a major issue during the
long Tokyo Round of GATT negotiations (1971–1978). The final agreement
reduced tariff rates significantly and recommended that states limit the use of
protectionist trade measures. Nevertheless, many Western states still felt
pressure to limit imports and help domestic companies boost their exports.
As a reflection of greater interdependence, economic liberal ideas became
more popular in the 1980s, setting the stage for a globalization campaign to
integrate states into a global capitalist system. UK Prime Minister Margaret
Thatcher and U.S. president Ronald Reagan reduced regulations on businesses,
touted the benefits of free trade, and promoted democracy overseas. However,
Reagan pragmatically employed trade embargoes against some countries and
gave military aid to rebels called the Contras trying to overthrow the socialist
Nicaraguan regime. To advance U.S. security interests, he also successfully
pressured the IMF and World Bank to bail out countries such as Mexico and
Brazil that experienced severe debt crises.
The United States also intervened indirectly in the economies of developing
countries through IMF and World Bank Structural Adjustment Policies (SAPs)
that required borrowers to implement neoliberal policies such as cutting
spending on social programs. Many structuralists viewed SAPs as mechanisms
for the United States, Europe, and Japan to increase their wealth and power in a
growing capitalist empire. In many cases these neomercantilist policies made
socioeconomic conditions worse in heavily indebted developing countries.
With globalization came greater political sensitivity to trade, which accounted
for a growing proportion of GDP in many countries. The policies that states
adopted in response to this sensitivity provoked disputes amongst trading
partners. IPE scholar Robert Gilpin suggested that it is difficult for states to
select the appropriate counter-responses in such disputes without knowing what
other states’ intentions are. He made a useful distinction between malevolent
and benign mercantilism. The former is a more hostile version of economic
warfare that nations employ to expand their territorial base or political influence
at the expense of other nations. In contrast, benign mercantilism is more
defensive in nature, as “it attempts to protect the economy against untoward
economic and political forces.”19 Of course, the problem is how to distinguish
between the two in an environment where the difference seems to be a matter of
degree rather than of kind.
For example, Reagan mixed economic liberal and mercantilist objectives at
the start of the Uruguay Round of multilateral trade negotiations (1986–1994).
One goal of the round was to “level the playing field” by cutting NTBs and other
trade restrictions so that states could compete economically with one another
following the same set of rules and policies. At the time, the United States and
the European Community blamed their large trade deficits on Japan’s aggressive
export-led growth strategy and import restrictions. In its defense, Japan
maintained that it sought only to strengthen its own national security through the
use of benign neomer-cantilist industrial policies.
President Reagan threatened to punish Japan and Brazil for dumping their
products on the market and using export subsidies to unfairly compete with the
United States. U.S. officials pressured Japan and many of the newly emerging
countries to lower their trade barriers and open their markets to more foreign
(especially U.S.) investment. Washington and Tokyo had a series of trade
disputes over items such as automobiles, rice, beef, and semiconductors. What
one state regarded as a benign policy, another might interpret as malevolent
behavior, especially when the policy of the first hurt “special interests” in the
society of the second. And yet the United States often found itself limited in the
amount of pressure it could put on its most important allies. For example, it
needed Japan to invest in U.S. Treasury bonds and securities in order to help
finance U.S. federal government spending. (Today, the United States depends
heavily on China and Japan to purchase Treasury securities.)
The end of the Cold War in 1990 led to an intensification of the globalization
campaign and a tightening of connections between domestic and foreign policy
issues. During the Clinton administration (1993–2001), many Westernheadquartered corporations sought resources, markets, and cheap labor in places
such as China and Southeast Asia. It was economically efficient and rational for
companies to “outsource” production to Asia. Globalization complemented U.S.
foreign policy objectives by integrating China and other developing countries
into the global capitalist system and by increasing the likelihood that more
countries would become democratic. By spreading the use of computers, the
Internet, fiber optics, and other technologies of the digital revolution,
globalization also contributed to advances in communications, travel, and
consumer culture. At the same time, new technologies made it easier for
countries and companies to engage in industrial espionage and theft of
intellectual property.
There were still numerous trade disputes in the 1990s. An interesting case
occurred in 1993 when the EU restricted imports of bananas from anywhere but
British and French colonies in the Caribbean. The United States brought the case
before a Dispute Settlement panel of the WTO in 1995 and 1997, which found
that EU policies violated WTO rules by restraining imports of bananas from
countries in Latin America where U.S.-owned multinational corporations
dominated the banana sector. When the EU would not comply with the WTO
finding, President Clinton imposed a WTO-authorized duty of 100 percent on
imports of cashmere sweaters, cheese, wine, fruit, and toys from the EU. The
dispute ended in 2009 when the EU agreed to gradually reduce tariffs on Latin
American bananas.
The GATT Uruguay Round, which finally ended in 1994 and led to the
creation of the World Trade Organization, produced some agreement on
acceptable forms of retaliation against countries that were found to have violated
WTO trade rules. However, this did not prevent a major dispute between the
United States, the EU, and developing nations over genetically modified (GM)
crops. In the 1990s the United States approved roughly 40 different GM crops
for commercial use in food products. Advocates of GM crops in the World
Health Organization, the UN Food and Agriculture Organization, and national
science academies in China, the United Kingdom, and United States argued that
GM crops were safe for human consumption, could increase global food
production, and could help reduce use of toxic herbicides and insecticides.
Nevertheless, in 1998 the EU placed a moratorium on imports of GM crops
and banned GM seeds and organisms from entering Europe. The EU argued that
agriculture and food are intrinsic to European culture and that genetic
modification corrupts the DNA of a crop, potentially undermining its quality and
taste. Furthermore, there was no way to know what effects GM foods would
have on human health over the long term. Likewise, the EU protested that
widespread adoption of GM crops would cause a loss of biodiversity. In support
of the EU’s policy, some African states let U.S. food aid rot in locked
warehouses. The EU and most developing states are signatories of the 2000
Cartagena Protocol on Biosafety that allows countries to ban imports of
genetically modified crops if there is not a scientific consensus that they cause
no serious harm to the environment or people’s health.
Supported by a number of Asian countries, U.S. agribusinesses and
biotechnology firms argued that restrictions on GM crops limited consumer food
choices and that there was no evidence that GM foods hurt consumers. The
United States filed a formal complaint in the WTO seeking to overturn the EU’s
ban on genetically modified organisms. Furthermore, the United States argued
that the EU ban was a form of trade protection that violated WTO agreements.
American officials feared that EU restrictions would limit the growth of U.S.
agricultural exports and reduce profits of American farmers and agribusinesses.
In contrast, EU officials claimed that imports of GM grains would hurt both EU
and African farmers by undermining local production.
Toward the end of the 1990s, globalization was reaching the apex of its
popularity. Many developing countries wanted better terms of trade with the
developed countries. They also expected to use subsidies and other exportenhancing measures to help their domestic companies compete better in the
global economy. While many neoliberals proclaimed that globalization helped
maximize economic efficiency, many neomercantilists (and structuralists as
well) contended that globalization was undermining itself.
20 Just days before the
1999 WTO ministerial meeting in Seattle, President Clinton seemed to
acknowledge that globalization was causing harm when he tempered his support
for a free-trade agenda with a proposal to incorporate labor and environmental
standards into future WTO agreements.
The “hyper-globalized” and “wired” international economy in the 2000s was
transformed by high-speed telecommunications systems, high-frequency
banking and trading, and the continued miniaturization of electronic goods and
military weapons. These digital innovations have rendered state borders more
porous and left countries more susceptible to external threats such as
cyberattacks that were unimaginable only a decade earlier. The emergence of
new, more subtle neomercantilist intimidations in this context has also made it
harder to determine the intentions of states and assess the effects of their
measures on other states’ economic and national security.
By the early 2000s, cyber weapons were being used routinely, especially
against military targets. The United States, China, and Russia built up the
strongest cyber capabilities in the world; Great Britain, Germany, and France
used their offensive cyber capabilities less frequently than the other Great
Powers. States, terrorist groups, and criminal hackers used digital tools to steal
valuable information from international banks, major corporations, and utility
companies. Adam Segal points out that for many industrialized states,
“economic and technological sophistication are … sources of vulnerability.”21
Therefore, governments have to coordinate policies with private companies in
the telecommunications, information technology, banking, energy, and
transportation sectors in order to protect the economy as a whole.
The 9/11 attacks on the World Trade Center in New York and the Pentagon in
Washington, DC profoundly influenced government policies toward information
technology in the 2000s. Soon after the attacks, the United States invested
billions of dollars to build a giant “Military-Internet Complex” designed to
protect the United States from terrorist attacks and protect the U.S. economy and
global businesses.
22 Since 2001 there have been many cyberattacks on states and
businesses around the world. For example, in June 2013 a group called Citadel
planted malware on some five million personal computers and used an army of
“botnets” to attack the computer servers of major banks around the world and
steal an estimated $500 million from bank accounts. Microsoft worked with law
enforcement in dozens of countries to help wipe out Citadel.
23 To be clear, like
many other states, the United States itself has routinely carried out cyber
missions to steal information from foreign businesses, disrupt criminal
organizations, and harm the economies of specific rival states.
The advanced industrialized nations face the challenge of competing with one
another in high-tech, knowledge-based industries while trying to stem the loss of
manufacturing industries to emerging economies with abundant, low-cost labor.
In contrast, many developing countries struggle to secure a place for themselves
in the hyper-competitive international economy. They must work within
ideological and political constraints imposed on them by major powers and
neoliberal institutions like the WTO, the World Bank, and the IMF. And yet
many have still continued to use tried-and-true neomercantilist policies like
quotas, tariffs, and plain old arm-twisting. As we discussed earlier in the chapter,
many of today’s advanced industrialized nations used to be very protectionist. In
light of this history, developing nations point out that developed nations are
hypocritical when they command emerging countries to “do as we say, not as we
did (and sometimes still do)!”
In this section we survey a variety of neomercantilist industrial, infrastructural,
and strategic resources policies in developed countries, bearing in mind that
many developing countries also have similar policies.
Industrial Policies
Today many nations adopt relatively benign industrial and infrastructure policies
to enhance the competitiveness of their domestic industries and protect their
economy from the perceived malevolent policies of other states. Industrial
policies are usually acceptable to the international community; most experts
agree that one of the state’s primary jobs is to physically protect and encourage
its economic growth.
National innovation projects are central features of industrial policies. They
are often designed to encourage large-scale domestic manufacturing of cuttingedge products such as passenger airplanes. Many governments help fund R&D
by domestic private companies. In the United States, the Department of
Defense’s Defense Advanced Research Projects Agency (DARPA) played an
important role after 1957 in funding and promoting new technologies integral to
computers, airplanes, civilian nuclear energy, lasers, and biotechnology.
DARPA has helped coordinate academic researchers, venture capitalists, and
government officials to develop new technologies, many of which have military
uses. Early in its history DARPA helped fund the development of
semiconductors, computer chip fabrication, and technologies for the personal
computer. Beyond funding basic research, DARPA has also helped
commercialize many new innovations. Today it remains involved in research in
military weapons but also in fields such as robotics and human-machine
symbiosis that it anticipates could play a major role in both the economy and the
The Australian economists Linda Weiss and Elizabeth Thurbon emphasize
how the U.S. government and others use procurement policies to create
“national champions”—big, globally competitive companies like Boeing,
Lockheed, Motorola, IBM, and Microsoft—that rely on the government to
purchase their products. Even though it pressures other countries to open up their
public works projects to U.S. companies, the United States implemented its own
“buy national” procurement policy in the 2009 stimulus bill. The Australian
economists conclude that “although subject to multilateral discipline,
government procurement offers a powerful tool for national economic promotion
in an era of economic openness.”25
Another important component of industrial policy in many states is
restrictions on foreign direct investments (FDI). Typically, states restrict what
sectors of the economy foreign businesses can invest in and what maximum
ownership share foreigners can have in domestic companies. The purpose of
such restrictions is often to prevent foreign control of strategically important or
sensitive industries such as mining, banking, utilities, telecommunications, and
mass media. For security reasons, many states do not want foreign businesses
and investors involved in manufacturing weapons or high-tech goods used by the
military. The restrictions can also give an advantage to domestic companies and
domestic investors by limiting competition from foreigners.
States can also place various conditions on foreign companies, such as
requiring them to form joint ventures with domestic manufacturers or mandating
that they buy certain inputs from domestic companies. These policies are
designed to provide domestic companies access to new foreign technology and
increase their sales. States also sometimes impose conditions on foreigners’
access to land and real estate. For example, in 2017 New Zealand barred
foreigners from purchasing existing houses because foreign demand had already
driven up prices so high that many New Zealanders could no longer afford to
buy a house.
Depending on a variety of circumstances, industrial policies such as funding
for innovation, government procurement, and limits on FDI are often viewed as
more malevolent than benevolent protectionist measures. The United States–
China spat over China’s industrial policy (see Box 3.1) demonstrates that one
state’s proactive role in developing new technologies and thriving industries is
another’s national security issue!
Beginning in 2009, U.S. and Chinese officials held annual talks called the
“Strategic and Economic Dialogue” (S&ED). During the 2016 S&ED
discussions, Obama administration officials complained that China’s
industrial policies caused overproduction of steel, aluminum, and other
products that were being dumped on the international market. Several
months earlier the U.S. government had slapped high tariffs on imported
Chinese steel and pressed Beijing to let the renminbi’s exchange rate
fluctuate. In the talks U.S. Treasury Secretary Jacob Lew alleged that
China’s malicious industrial policies hurt other countries and that its
overproduction had a “damaging and distorting effect” on global markets.
U.S. solar panel companies, aluminum manufacturers, unions, and
politicians including both Donald Trump and Bernie Sanders also
complained publicly about the flood of cheap Chinese goods into the
United States. Officials in Spain, Belgium, and other countries had a similar
message: industries were laying off thousands of workers because they
could not compete with Chinese goods.
In response to these complaints, President Xi Jinping said China would
cut down production of steel and coal as part of an effort to reform the
economy. Chinese leaders gave few specifics of how they would reduce
industrial overcapacity, but they pointed to the need to increase China’s
own internal demand. China’s finance minister Luo Jiwei noted that much
of the overcapacity was due to Chinese government spending right after
2008 to help the global economy recover from the global financial crisis.
He suggested that if reform was pushed too fast, it would generate massive
unemployment and cause worker protests.
Encouraged by the Chinese government, Chinese state and private
companies have been ramping up their overseas investments, including
acquiring Western companies with technology that China wants to access.
The Chinese FDI helps offset the huge U.S. balance of trade deficit, but it
has also raised concerns among U.S. officials about security risks.
Both China and the United States have to tread lightly in the longrunning dispute over industrial policy. For one thing, the United States has
been dependent on China to continue purchasing and holding onto U.S.
Treasury bonds and dollars. Obama calculated that pushing too hard on
China would cause it to take an ever-harder line against the United States
and its allies in East and Southeast Asia. China has reason to fear that U.S.
protectionism could harm its export industries and lower its growth rate.
For both countries, industrial policy is hard to separate from other economic
and security issues.
Limits on FDI are usually acceptable if connected to what are perceived as
legitimate security concerns. Ha-Joon Chang points out that the United States,
Japan, and many countries in Europe had a wide variety of restrictions on
foreign investments in the nineteenth century and in some cases into the 1960s.
During its “economic miracle” after World War II, Japan prohibited FDI in vital
industries and limited foreign ownership in many industries at 50 percent.
Instead of favoring foreign takeovers of local companies, it pressured foreign
companies to license technology to local companies so that the Japanese could
learn to manufacture products themselves. Finland had draconian restrictions on
FDI until the 1980s: among other things, foreigners could not own more than 20
percent of a company, and foreign banks were completely prohibited. Despite
economic liberal insistence on unfettered capital inflows, clearly the Japanese
and Finnish models of economic success owed almost nothing to FDI.
Finally, Canadian political-scientist Patricia Goff reminds us that the purpose
of helping one’s own companies and industries is not necessarily just to save
jobs, boost exports, or hurt foreigners.
27 In fact, the purpose may be much more
defensive than anything else. Goff has examined how Canada and the European
Union have both strongly protected their cultural industries—music, television,
radio, film, and magazine publishing—from a U.S. onslaught over the last sixtyfive years. They use public ownership of some culture industries (like public
television), tax incentives for local private investment in movie production,
public loans and grants for artists, minimum local content requirements (on TV
and radio programming), and ownership rules to preserve and nurture domestic
culture producers. Canada and the EU have these policies not so much to keep
out foreign cultural products as to promote their own distinct national identity,
cultural diversity, and social cohesion. Preserving “cultural sovereignty” in the
face of globalization’s homogenizing effects is an eminently political goal, vital
for nurturing a democratic citizenry that is well informed about its own history
and values.
Strategic Resources
Access to and control over strategic resources has been a top concern of
industrialized nations for many decades. They fear that being “cut off” from
energy, minerals, and metals will cripple their economies and weaken their warfighting ability. Because complex interdependencies between states are not
always symmetrical (felt equally), dependence on any resource or vulnerability
to a supplier is usually regarded as a national security threat. For example, for a
period in 1973 and 1974, Arab members of OPEC placed an embargo on oil
exports to the United States, the Netherlands, and Denmark, causing severe oil
shortages and plunging most Western countries into recession. And as we
discuss in Box 3.2, China recently used its near-monopoly control over rare earth
minerals as leverage in a maritime dispute with Japan, stoking security fears in
many Asian countries and causing the world’s major importers of rare earths to
seek new non-Chinese sources of these critical minerals.
Many industrialized states seek to minimize the risks of cutoffs or other
supply disruptions by developing political and military alliances with
governments that control important resources—even if those governments are
undemocratic and seriously violate human rights. At the same time, many states
have established stockpiles of resources and encouraged the expansion of
domestic mining and hydrocarbons extraction by offering subsidies to national
companies and leasing public lands to them at a low cost. In the 1970s the U.S.
government built a costly Strategic Petroleum Reserve that can cover national oil
needs for 90 days. More recently it started stockpiling tantalum (a key ingredient
in cell phones and electronic equipment) and dozens of other minerals and
metals used in electronics and weaponry. Even the U.S. Centers for Disease
Control and Prevention manages a Strategic National Stockpile, a repository of
medicines and vaccines for use in case of a national emergency such as an
epidemic or bioterrorist attack.
In the last two decades, China has signed long-term oil supply agreements
with countries in Africa and Latin America as a way of getting “first dibs” on
global commodities instead of buying them through short-term contracts in
futures markets. As we discuss in Chapter 13, Chinese companies have also
significantly expanded investment in resource exploration and production in
many developing countries. Like China, many industrialized nations encourage
their national companies to diversify suppliers overseas, buy foreign resourceextracting companies, and purchase concessions (exploration and production
rights) in other countries. In recent years, foreign oil companies have been
scrambling to buy concessions to explore offshore West Africa, where many
think vast oil deposits may exist.
When the Japanese coast guard seized a Chinese fishing trawler in
September 2010 near disputed islands in the East China Sea, little did
Tokyo know that it would lead to a global dispute over rare earth metals—
more than a dozen minerals used in electronics, wind turbines, electric cars,
and weapons systems. Beijing responded by temporarily cutting off rare
earth exports to Japan—which had relied on China for 90 percent of its rare
earth imports—sending Japanese manufacturers into a panic and
dramatically pushing up prices for rare earths in global markets. Beginning
in 2011 the Chinese government established export quotas on the minerals,
a violation of WTO trade rules. Japan and the United States scrambled to
find new sources and institute recycling programs in order to reduce
dependence on China, which produced 97 percent of the world’s supply in
Many analysts interpreted China’s moves as a classic form of malevolent
mercantilism whereby a state uses control of strategic resources to punish
its rivals. According to Jane Nakano, the dispute “severely reduced Japan’s
comfort with China as a trade partner … and transformed Sino-Japanese
economic relations from a mutually prosperous rivalry to one with an
undertone of mistrust.”a By reserving more rare earths for its domestic
producers, Beijing seemed intent on forcing overseas manufacturers that
needed the minerals to move some of their factories to China—thereby
facilitating a transfer of technologies to China from these high-tech
companies and boosting Chinese production of key components used in the
electronics and clean energy industries.
Japan and the United States interpreted China’s manipulation of rare
earth markets as a potential threat to national security and an early warning
of how this rising power might defy trade norms in the future. They
responded with their own defensive neomercantilist countermeasures. The
Japanese government funneled huge subsidies to corporations to help them
develop new rare-earth recycling processes and signed new agreements
with the likes of Vietnam, Australia, and Kazakhstan to jointly develop new
mines. In the United States, the mining company Molycorp reopened a
huge rare-earth mine in Mountain Pass, California that has been closed in
2002 for environmental reasons (although it shut down again in 2015). The
Department of Energy funded research at the Critical Materials Institute to
find more efficient ways to use rare earths and to create substitutes for
them. Together with Japan and the European Union, the United States filed
a formal complaint with the WTO, which ruled in 2014 that China’s export
quotas violated GATT rules. China eliminated the quotas in 2015.
Private market actors around the world are moving rapidly to diversify
supplies of rare earths like neodymium and beryllium, on land and from the
seabed, to destroy China’s monopoly.
c By 2016, growth of production in
countries such as Australia, Russia, Brazil and Canada had lowered China’s
share of global production to 83 percent. However, when China started
cracking down on illegal mining in 2017, prices of rare earths rose sharply
again, raising new concerns that Beijing could use control of supplies for
geopolitical purposes.
The minerals dispute can be seen as part of a wider struggle among East
Asian nations to control the East and South China Seas. In recent years,
China has asserted ownership over numerous small islands in these waters
that are also claimed by Japan, Taiwan, the Philippines, and Vietnam. The
trawler incident occurred near the Senkaku Islands, controlled by Japan
since 1895. Chinese nationalists seized on rare earths as a way to try to
weaken Tokyo’s position on the islands. When the Japanese government
bought the Senkaku Islands from their private Japanese owners in
September 2012, street protests erupted in China, and Japan sent many
coast guard vessels to the waters to warn off Chinese Navy ships near the
e An informal Chinese boycott of Japanese goods in late 2012
caused sales of Nissan, Toyota, and Honda cars in China to plunge, and
Panasonic estimated that the boycott would cause billions of dollars in
profit losses—the second worst yearly losses in the Japanese company’s
f The rare earths story reminds us that states worry deeply about
strategic resources and are willing to play risky games of brinksmanship to
advance their economic interests and security.
a Jane Nakano, “Rare Earth Trade Challenges and Sino-Japanese Relations: A Rise of Resource
Nationalism?” National Bureau of Asian Research Special Report 31 (September 2011): 65.
b R. Colin Johnson, “Rare Earth Supply Chain: Industry’s Common Cause,” EETimes, October 24,
2010, at www.eetimes.com/electronics-news/4210064/Rare-earth-supply-chain–Industry-s-common-cause.
c Tim Worstall, “Why China Has Lost The Rare Earths War: The Power of Markets,” Forbes, June
24, 2012, at www.forbes.com/sites/timworstall/2012/06/24/why-china-has-lost-the-rare-earths-war-thed Mayuko Yatsu, “Revisiting Rare Earths: The Ongoing Efforts to Challenge China’s Monopoly,”
The Diplomat Magazine, August 29, 2017, at https://thediplomat.com/2017/08/revisiting-rare-earths-the-ongoing-efforts-to-challenge-chinas-monopoly/.
e Martin Fackler, “Chinese Patrol Ships Pressuring Japan over Islands,” New York Times, November
3, 2012.
f Jonathan Soble, “Nissan Cuts Forecast after China Boycott,” Financial Times, November 6, 2012;
Bruce Einhorn, “Panasonic Feels Pain of Chinese Backlash,” Bloomberg Businessweek, October
31, 2012, at www.businessweek.com/articles/2012-10-31/panasonic-feels-pain-of-chinese-backlash.
National conservation programs and a switch to domestic alternatives to
imported strategic resources are also ways that states reduce dependence on
foreign resources. During the Obama administration, the rapid spread of fracking
allowed the United States to increase oil and gas production dramatically. U.S.
businesses also began investing more in solar and wind power as market
conditions for these sources of power improved (see Chapter 16). In contrast,
Japan has not been successful in diversifying or reducing its energy imports.
Although it invested heavily in energy efficiency and nuclear power beginning
in the 1970s, more than 80 percent of its energy needs are met by imported oil,
most of which still comes from the Middle East. After the 2011 Fukushima
nuclear disaster, the share of Japan’s domestic energy coming from nuclear
power fell from 30 percent to less than 10 percent.
As the Arctic ice cover slowly disappears, countries with territory inside the
Arctic Circle and who make up the Arctic Council—Canada, the United States,
Russia, Sweden, Denmark, Norway, Iceland, and Finland—are eager to develop
its potentially lucrative offshore and onshore oil and natural gas fields.
28 As
expected, environmental groups and supporters of alternative energy in many of
these states have been fighting against these plans to expand hydrocarbons and
mineral extraction in the Arctic. As Russia and Norway have moved swiftly
ahead with oil and gas development to their north, President Obama and
Canadian Prime Minister Justin Trudeau announced in late 2016 that they would
bar new oil and gas exploration in their respective countries’ Arctic territorial
waters. In contrast, President Trump has discussed the need to reduce U.S.
dependence on Middle East petroleum and has expressed hope that the United
States will become a major oil exporter in the future. His administration believes
that the federal government should continue to subsidize domestic oil and
natural gas production.
Trump and the State
It is easy to assume that U.S. president Donald Trump is a mercantilist because
he likes to frame negotiations and deals in zero-sum terms: one side wins, the
other loses. However, it is not at all clear that Trump can deliver foreign policy
“wins” for the United States that enhance its national security. Many realist
critics believe that his approach to international relations is actually threatening
U.S. security. As we discuss further in Chapter 16, most energy experts now
argue that, because energy markets are shifting away from oil and coal towards
renewables, it does not make much sense for Washington to try to prop up
inefficient domestic oil and coal industries that are unlikely to create many new
jobs. Moreover, the carbon emissions from these old industries are a major cause
of climate change, which will physically hurt not only all Americans but
everyone else in the world.
Trump’s views of the state sometimes align with those of neomercantilists, as
when he stresses the need for the state to protect domestic companies from
foreign competition, modernize the military, and massively increase spending on
infrastructure. In many other ways, Trump’s views are not mercantilist. During
the election campaign, he castigated the U.S. government as inefficient and even
malicious. He often characterized Washington as a swamp of entrenched
bureaucrats and privileged elites which needed to be drained. As president, he
has been slow to appoint senior administrators to manage key government
agencies. His rhetoric suggests that, unlike mercantilists, he views the
government apparatus with suspicion, not as an instrument to attain lofty
national goals for the environment, health, or innovation.
Finally, Trump’s outlook on the U.S. state has affected the way other states
view him and the United States—as malevolent agents who only care about
winning instead of reaching compromises that are acceptable to all parties. This
is also reflected in Trump’s expressed contempt for some international
organizations and his willingness to withdraw the United States from
painstakingly negotiated international agreements such as the Trans Pacific
Partnership and the Paris climate accord.
Mercantilism has evolved over the years and adapted to changing conditions in
the international political economy. Classical mercantilism focused on threats to
a nation’s security by foreign armies and how states often resist the influence of
foreign firms and international institutions. It also presumed that states would
seek to generate trade surpluses as a means of supporting military power. Both
mercantilists and their realist cousins assert that states can and should use the
economy, either legally or illegally, as a means to generate more wealth and
The onset of complex interdependence between states in the 1970s and the
spread of globalization in the 1980s and 1990s tightened the connections
between domestic and global policy issues. Today, all states routinely use
protectionist measures to assist some of their manufacturing, agricultural, and
service sectors. Ironically, to some extent the success of globalization helped
undermine the openness of the international political economy. As national
industries have become more sensitive to and dependent on foreign markets,
they have lobbied their governments for protection from the new vulnerabilities
and competition they face.
Voters and citizens want to be shielded from the excesses of the market at the
same time that they want competitive markets to work better! Thus, managing
the international economy remains a complicated task that befuddles politicians
and academics alike.
As examinations of policies related to trade, national security, cyber security,
the environment, and health policy demonstrate, states are finding more
sophisticated ways of protecting themselves and domestic groups from foreign
pressures. However, it is often difficult for states to determine who initiated a
cyberattack and how badly they were damaged.
The spread of populist-authoritarian governments and more intense global
interdependence portends increased tensions and violence between states. For
both mercantilists and realists today, globalization, financial crises, and the
industrialized nations’ dependence on foreign natural resources show that selfregulating markets cannot adequately protect society. And yet state
interventionist policies often fail to accomplish their objectives and can
sometimes cause great damage to a society. Nevertheless, the state can still be an
agent for positive change in the global political economy, depending on who
controls the levels of power.
mercantilism 50
classical mercantilism 50
zero-sum 50
neomercantilism 50
nation 51
state 51
economic nationalism 53
infant industries 53
Keynesian compromise 55
malevolent and benign mercantilism 58
industrial policies 62
procurement 62
strategic resources 64
Each of the IPE perspectives has at its center a fundamental value or idea. What is the central idea of
mercantilism? Explain how that central idea is illustrated in the mercantilist period of history and in
recent neomercantilist policies.
What is the difference between benign and malevolent mercantilism in theory? How could you tell the
difference between them in practice? Find a newspaper article that demonstrates the tensions between
these ideas, and explain how the issue is dealt with by the actors in the article.
What potential political and economic drawbacks are there with governments “picking winners” and
providing loans and subsidies to strategic industries?
Explain four or five ways that globalization has changed the face of mercantilism and neomercantilism.
Ha-Joon Chang. Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. New York:
Bloomsbury Press, 2008.
Alexander Hamilton. “Report on Manufactures,” in George T. Crane and Abla Amawi, eds., The
Theoretical Evolution of International Political Economy: A Reader. New York: Oxford University
Press, 1991, pp. 37–47.
Friedrich List. The National System of Political Economy. New York: Augustus M. Kelley, 1966.
Harris Shane. War@: The Rise of the Military-Internet Complex. New York: Houghton Mifflin Harcourt,
Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, rev. ed.
(New York: Public Affairs, 2015), p. 2.
See Nelson D. Schwartz, “Good Jobs, Goodbye,” New York Times, March 20, 2016.
The concepts of nation and nationalism are the focus of Hans Kohn’s classic work The Idea of
Nationalism (New York: Macmillan, 1944) and Eric J. Hobsbawm’s Nations and Nationalism Since
1780, 2nd ed. (Cambridge: Cambridge University Press, 1992).
This classic definition of the state comes from Max Weber, who emphasizes the state’s administrative
and legal qualities. See Max Weber, The Theory of Social and Economic Organization (New York:
The Free Press, 1947), p. 156.
See Mark A. Martinez, The Myth of the Free Market: The Role of the State in a Capitalist Economy
(Sterling, VA: Kumarian Press, 2009), pp. 106–110.
Charles Tilly, “War Making and State Making as Organized Crime,” in Bringing the State Back In,
ed. Peter Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge: Cambridge University
Press, 1985), pp. 169–191.
Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New
York: Bloomsbury Press, 2008), pp. 40–43.
Ibid., especially Chapter 2.
See Kenneth Pomeranz and Steven Topik, The World That Trade Created: Society, Culture, and the
World Economy, 1400 to the Present, 3rd ed. (Armonk, NY: M.E. Sharpe, 2013).
Ibid., pp. 152, 161.
For a detailed account of Hamilton’s works, see Henry Cabot Lodge, ed., The Works of Alexander
Hamilton (Honolulu, HI: University Press of the Pacific, 2005).
Friedrich List, The National System of Political Economy (New York: Augustus M. Kelley, 1966), p.
144. Italics added.
Ibid., pp. 199–200.
Ha-Joon Chang, Kicking Away the Ladder: The Myth of Free Trade and the Secret History of
Capitalism (New York: Bloomsbury, 1993).
See Martinez, The Myth of the Free Market, especially Chapter 6.
See, for example, Chalmers Johnson, “Introduction: The Idea of Industrial Policy,” in his The
Industrial Policy Debate (San Francisco, CA: ICS Press, 1984), pp. 3–26.
See Clyde Prestowitz, Trading Places: How We Allowed Japan to Take the Lead (New York: Basic
Books, 1988).
Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian
Industrialization, 2nd paperback ed. (Princeton, NJ: Princeton University Press, 2004).
Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University
Press, 1987), p. 33.
See, for example, Tina Rosenberg, “Globalization: The Free Trade Fix,” New York Times Magazine,
August 18, 2002.
Adam Segal, The Hacked World Order: How Nations Fight, Trade, Maneuver, and Manipulate in the
Digital Age (New York: PublicAffairs, 2016), p. 35.
Shane Harris, @War: The Rise of the Military-Internet Complex (Boston, MA: Houghton Mifflin
Harcourt, 2014).
Ibid., p. 119.
See Mariana Mazzucato, “The US Entrepreneurial State” in her The Entrepreneurial State:
Debunking Public vs. Private Sector Myths, rev. ed. (New York: Public Affairs, 2015).
Linda Weiss and Elizabeth Thurbon, “The Business of Buying American: Public Procurement as
Trade Strategy in the USA,” Review of International Political Economy 13:5 (2006), p. 718.
See Chang, Bad Samaritans, for many examples (especially Chapter 4, “The Finn and the Elephant”).
See also Ha-Joon Chang, “Regulation of Foreign Investment in Historical Perspective,” European
Journal of Development Research 16:3 (Autumn 2004): 687–715.
See Patricia Goff, Limits to Liberalization: Local Culture in a Global Marketplace (Ithaca, NY:
Cornell University Press, 2007).
See Bob Reiss, “Why Putin’s Russia Is Beating the U.S. in the Race to Control the Arctic,”
Newsweek, February 25, 2017, at www.newsweek.com/why-russia-beating-us-race-control-arctic-5-
Economic Determinism and
Exploitation: The Structuralist
UN Anti-Racism Day demonstration, in London, March 2017.
Source: Shutterstock/Dinendra Haria.
Capital is dead labour, that, vampire-like, only lives by sucking living labour,
and lives the more, the more labour it sucks. The time during which the
labourer works, is the time during which the capitalist consumes the labourpower he has purchased of him.
Karl Marx1
If you take some time to look at income trends in the United States, you will find
that for many people in the last few decades, the American Dream is just that: a
dream. Ten million more Americans were living in poverty in 2015 compared to
2 The median U.S. income in 2015 was still slightly less than the median
income in 1999 (in 2015 dollars). The financial crisis in particular hurt the
poorest Americans: incomes of the bottom 10 percent of households were still
lower in 2015 than they had been in 2007. Even so, there were several glimmers
of hope. The Census Bureau reported that the median U.S. income grew by 5.2
percent from 2014 to 2015 to reach $56,500. The number of people without
health insurance fell from 49 million in 2010 to 28 million in 2016, largely due
to the Affordable Care Act.
How are we to make sense of these trends? The structuralist perspective offers
a way to recognize their underlying logic. With a focus on economic power and
class conflict, structuralism has its roots in the ideas of Karl Marx. While most
structuralists do not share the commitment to a socialist system as envisioned by
some Marxists, they do believe that the current global capitalist system is
exploitative and can be changed into something that distributes economic output
in a more just manner. Indeed, the structure in structuralism is the global
capitalist economy, which shapes society’s economic, political, and social
institutions and imposes constraints on what is possible.
Plenty of scholars claim that the demise of socialism in the former Soviet
Union and Eastern Europe and China’s transition to a mixed economy mean that
“Marx is dead.” However, the global financial crisis highlighted not only the
failures of free market capitalism but also the political clout of the economic
elite. Outside the seats of official power, millions of citizens continue to protest
against free-trade organizations and U.S. imperialism. Those who feel excluded
from economic progress or who reject the legitimacy of globalization have
marked their dissatisfaction in various ways, including by joining leftist social
movements, supporting populist politicians, and voting for Brexit.
The structuralist perspective has no single method of analysis or unified set of
policy recommendations. Rather, it is the site of an active debate that forces us to
ask important questions. What are the historical events that created the capitalist
structure? How does the global capitalist system operate? How are resources
allocated? What comes next and how do we get there? Moreover, this critical
perspective challenges the existing state of affairs. The main theses of this
chapter are as follows:
First, many see in structuralism not only the tools to conduct a scientific
analysis of existing capitalist arrangements but also the grounds for a moral
critique of the inequality and exploitation that capitalism produces.
Second, this framework of analysis allows us to view IPE “from below,” that
is, from the perspective of the oppressed classes and the developing nations.
Third, it raises issues about human freedom and the application of reason in
shaping national and global institutions.
Finally, structuralism views capitalism and other modes of production as
driven by conflict and crisis and subject to change. The structure that exists
now emerged at a particular time and may one day be replaced by a different
system of political economy.
After outlining some of the major ideas, concepts, and policies associated with
both Marx and Lenin, we explore recent theories of dependency, the modern
world system, and neoimperialism. We also discuss some structuralist arguments
about the 2007–2008 financial crisis and inequality trends around the world.
The first great scholar to pioneer a structural approach to political economy was
Karl Marx (1818–1883). Born in Germany, Marx did his most significant work
while living in England, spending hours on research at the British Museum in
London. Many of his views reflect the conditions he and his collaborator
Friedrich Engels observed in English mills and factories at the height of the
Industrial Revolution. Adults and children often labored under dreadful working
conditions and lived in abject poverty. Marx’s theory of history, his notion of
class conflict, and his critique of capitalism must all be understood in the context
of nineteenth-century Europe’s political and economic climate.
Marx understood history to be a dynamic, evolving creature, determined
fundamentally by economic and technological forces. He believed that we can
objectively explain these forces just like any other natural law through a theory
of historical materialism, which takes as its starting point the notion that the
forces of production, defined as the sum total of knowledge and technology
contained in society, set the parameters for the whole political-economic
4 As Marx put it, “The hand mill gives you society with the feudal lord,
the steam mill society with the industrial capitalist.”5 At very low levels of
technology (primitive forces of production), society would be organized into a
hunting-gathering system. At a higher level, we would see an agricultural system
using steel ploughs and horses, oxen, or other beasts of burden. This
technological advancement (although still considered primitive by modern
standards) causes a change in the social relations in society, specifically the
emergence of feudalism. Instead of hunters and gatherers banding together in
small-scale tribes with a relatively equal division of the economic output,
feudalism is characterized by a large stratum of peasant-farmers and a small
aristocracy. The key Marxist claim is that changes in technology determine
changes in the social system. Thus, Marx has been considered a technological
determinist, at least within his theory of history.
Marx sees the course of history as evolving from one system of political
economy (or “mode of production,” in his words) to another due to the growing
contradiction between the forces of production and the property relations in
which they develop. In each of these modes of production, there is a dialectical
process whereby inherently unstable opposing economic forces and
counterforces lead to crisis, revolution, and the next stage of history. Over long
periods, the forces of production will continually improve because technology is
simply an aspect of human knowledge. Once a discovery is made, whether the
smelting of copper and tin into bronze or the development of a faster computer
processor, knowledge of it tends to be retained and can be improved upon by
subsequent generations. Human knowledge and technology have a ratchet-like
quality—they can go forward a bit at a time but will not go backward.
For Marx, the agents of change are human beings organized into conflicting
social classes. Because class relations change more slowly than technological
development, social change is impeded; capitalism gradually produces a face-off
between the bourgeoisie and the proletariat. According to Marx, the bourgeoisie
are wealthy elites who own the means of production—or what today are big
industries and financial institutions. In British society, the bourgeoisie also made
up the Members of Parliament and thus controlled the government—or state, as
Marx would refer to it. In Marx’s day, the proletariat were the exploited
workers (including their fam-ilies) in Britain’s mills and factories, who received
very low wages and sometimes died on the job. Gradually, it was thought,
workers would realize their common interests and would press on the
bourgeoisie for higher wages and better working conditions.
Marx identified three objective laws that would, at some point, destroy
capitalism from within:
First, the law of the falling rate of profit asserts that over time capitalists
replace workers with machines and other labor-saving devices, increasing
unemployment. Because surplus value (profit) can only come from exploiting
living labor, the lower proportion of living labor compared to machines
causes the rate of profit to decline.
Second, the law of disproportionality holds that capitalism, because of its
anarchic, unplanned nature, is prone to instability. During a period of
economic boom there will be overproduction such that capitalists cannot sell
everything they produce at profit and workers cannot afford to buy
everything that they make. This disproportionality between supply and
demand causes recession (economic bust) as many firms go out of business
and unemployment increases, but it also prepares the conditions for another
cycle of overproduction to occur. Periodic booms and busts increase social
unrest and destabilize the capitalist economy. In response to these
disequilibriums, governments will often increase social spending or create a
military–industrial complex to increase consumption.
Third and finally, the law of concentration holds that capitalism creates
increasing inequality in the distribution of income and wealth. As the
bourgeoisie continue to exploit the proletariat and as weaker capitalists are
swallowed by stronger, bigger ones, wealth and the ownership of capital
become increasingly concentrated and centralized in fewer and fewer hands.
Marx viewed these as objective, inescapable features of the capitalist mode of
production, which he predicted would result in the ultimate collapse of the
For Marx, capitalism is a necessary stage in history, which builds wealth and
raises material living standards. It transforms the world and in so doing breaks
down feudalism, its historical antecedent. It creates the social and economic
foundations for the eventual transition to a “higher” level of social development.
Marx argued that when class conflict becomes so severe that it blocks the
advance of human development, a social revolution will sweep away the existing
legal and political arrangements and replace them with ones more compatible
with continued social and technological progress. In this way, history has
already evolved through distinct epochs or stages after primitive communism:
slavery, feudalism, and capitalism. Marx and Engel’s Communist Manifesto,
published in 1848, called for a revolution that would usher in a new epoch of
history—socialism—which would, after yet still another revolution, finally
produce pure communism.
As we will discuss in the next section, neo-Marxists and structuralists still
accept the notion of exploitation, although it has been separated from Marx’s
labor theory of value, which argues that the value of a commodity is related to
the amount of labor required for its production. Also, most neo-Marxist scholars
no longer accept the claim that capitalism will inevitably destroy itself. Rather, it
is generally accepted that Marx’s mathematical analysis that produced this
prediction was simply erroneous.
6 Socialism may be a possible future, but it
would have to be a political choice, not something imposed on society by Marx’s
deterministic laws of historical epochs. Nonetheless, many other ideas from
Marx or from the school of thought he established contribute to an explanation
of phenomena we still observe today in the international political economy.
Here we explore four ideas that are found in varying degrees within Marx’s
work and that have been further developed by neo-Marxists and other
structuralists. Some ideas that Marx considered to be of great importance are no
longer regarded as useful, and many of his ideas have been modified (and
hopefully improved) by subsequent scholars, which can be seen as part of the
normal development in any field of academic inquiry. The following four
Marxist ideas are central to contemporary structuralist analyses of the
international political economy: the definition of class, class conflict and the
exploitation of workers, capitalist control over the state, and ideological
The Definition of Class
To understand the Marxist notion of class, we must first define capital. Capital,
what Marx called the means of production, refers to the privately owned assets
used to produce commodities in an economy. Automobile factories are capital,
as are all the machines and tools inside them. A computer, when owned by a
company, is capital. So are the desks, filing cabinets, cranes, bulldozers,
supertankers, and natural resources like land and oil. Almost all production
requires both workers and physical assets, and in modern economies, production
processes can indeed be very capital-intensive.
When we speak of “capital goods,” we mean more than simply the existence
of such productive assets. Humans have used tools for much longer than
capitalism has existed and socialist societies have machines and factories just
like capitalist ones. To call an asset capital also means that it is privately owned,
that somebody has legal ownership and effective control over that asset. In many
cases today that ownership is merely a piece of paper or a computerized account
representing stock in a corporation. The property rights in a capitalist society
dictate that the owners of capital will receive the profits from the sale of
commodities produced by the capital they own and the labor they hire.
Class is determined by the ownership, or lack of ownership, of capital. A
minority of people will own a disproportionate share of the productive assets of
the society; they constitute the capitalist class, also referred to as the bourgeoisie.
In the United States, for example, the wealthiest 10 percent of the population
owns 81 percent of stocks, leaving 19 percent of this financial asset for the
remaining 90 percent of society.
7 Real estate, excluding a household’s principal
residence, has a similarly unequal distribution. Financial securities and business
equity are even more concentrated, with the top 10 percent owning 94 percent of
the total. The majority of the population owns very little capital, and indeed,
many people own no productive assets; they constitute the working class, known
as the proletariat. Note that workers may own houses, cars, appliances, and so
on, but these are simply possessions, not productive assets. They cannot be
mixed with labor to form a commodity that could be profitably sold on a market.
Implicitly, if not explicitly, Marxists regard the original distribution of assets as
unjust, noting that historically a small number of people confiscated large
amounts of land and other resources by means of violence and coercion. Thus,
the contemporary consequences of this distribution are criticized for moral
Class Conflict and the Exploitation of Workers
For households in the capitalist class, profits are the leading source of income.
For example, if the average return in the stock market is 5 percent per year and a
capitalist household owned $50 million worth of stock in various corporations,
then the income produced by that ownership would be $2.5 million in one year
($50 million times 0.05). This leaves the original $50 million intact and it comes
without any requirement that the capitalists actually perform any work.
Workers, on the other hand, have little or no capital and therefore must sell
their labor to capitalists if they are to receive an income. In other words,
businesses hire workers and pay them a wage or salary. For Marxists, this
inevitably leads to the exploitation of workers because of their weak bargaining
position. In a capitalist economy, there is always a certain level of
unemployment, even when there is sufficient idle machinery that could put
everybody to work if put into operation. The presence of unemployed workers
functions to keep down the wages of the employed—if one worker does not
accept the going rate, then he or she can be easily replaced. Thus, unemployment
allows capitalists to dominate workers and serves as the foundation for their
The exploitation of workers by capitalists is a specific instance of power
relations more generally. To say that actor A has power over B is to say that A is
able to get B to act in ways that promote the interests of A and are contrary to
8 This does not necessarily mean that B has literally no choice but simply
that the options are configured to benefit A. When the armed robber tells the
hapless victim, “Your money or your life!” the victim could choose the latter.
Nonetheless, it is the case that the robber, due to the presence of a gun, has
power over the victim because in either scenario the robber will make off with
the money. The victim is coerced into making the least bad choice.
Many workers are in a similar situation: either accept low wages or starve!
Capitalism depends on “the existence of workers who in the formal sense,
voluntarily, but actually under the whip of hunger, offer themselves.”9 Joan
Robinson, the famous socialist-leaning post-Keynesian economist, captured the
position of workers by remarking that the only thing worse than being exploited
under capitalism is not being exploited. In other words, the worst outcome for
those in the working class is to be unemployed, and it is the fear of
unemployment that forces workers to accept low wages. Workers technically do
have a choice, but the game is structured such that the best choice is still a bad
choice for them, yet a good one for the capitalists. In sum, exploitation means
that capitalists, because they have greater labor market power, are able to
expropriate a share of the economic output that should belong to workers.
We should be clear that class conflict does not necessarily mean a state of
warfare or even hostility of any sort. In fact, many individuals may not even
recognize the conflicting nature of their relationship with the other class. Class
conflict usually results in a gain for one side at the expense of the other. The
degree to which individuals in different classes act upon this fact is hard to
predict. Furthermore, even when the conflict is recognized, it is possible that a
compromise between classes can be found. In welfare states such as France,
Germany, and Sweden, organized labor renounces the goal of a socialist society
and offers a relatively harmonious relationship with business in exchange for
high wages, adequate unemployment compensation, universal health care, and
generous pensions.
Because workers are exploited, they share an objective economic interest in
changing the economic system, while capitalists will have an interest in
maintaining the status quo. The presence of an “objective” interest does not
necessarily mean that workers will actually form a socially and politically active
movement. Workers may not subjectively recognize their common objective
interest due to false consciousness (discussed in the section “Ideological
Manipulation”). Alternatively, workers may recognize their common interest but
be unable to organize due to suppression of unions or the result of collective
action problems. In Marxist language, workers are often a class in itself without
becoming a class for itself.
The central idea, however, is that the relationship between capitalists and
workers is built upon an objective division of the economic output of a society
into wages and profits. The actions of individual workers and capitalists will
depend on many concrete historical variables, leading to revolution, class
compromise, or passivity. Regardless of the way in which the conflict plays
itself out, class conflict is a fundamental objective characteristic of capitalist
Capitalist Control over the State
The state is the organization that governs, by force if necessary, a population
within a particular territory. Despite globalization, the modern state is still
usually the most powerful organization within any society, typically possessing
the strongest tools of repression in the form of military and police forces. Based
on its powers, the state also exercises tremendous influence in picking economic
winners and losers through taxation, spending, and regulations. Some of its most
important regulations involve labor issues such as the minimum wage, child
labor laws, and the ease or difficulty in forming labor unions. While states are
not omnipotent, they do have the ability to help their friends and punish their
enemies. It is therefore reasonable that both capitalists and workers would seek
to “capture” the state, to apply the capacities of the state to their particular
In the struggle to control the state, capitalists and workers have very different
resources. The capitalist class has greater financial resources, and this often
translates easily into influence in the political system. Capitalists are typically
able to donate more money to pro-business candidates. Corporations and
wealthy elites fund policy-proposing think tanks such as the Brookings
Institution or the Heritage Foundation. Furthermore, the state depends upon
businesses to generate tax revenue and employment; a climate that is too antibusiness will cause capital to flee elsewhere or at least reduce investment. Thus,
even without direct attempts by capitalists to influence the state, many policies
will promote their interests regardless.
For workers to turn their greater numbers into political power, the state must
allow for strong democratic institutions. In Western European countries that
have proportional representation voting, workers’ parties (Social Democratic or
Socialist Parties) often win majorities or significant pluralities. Whereas
capitalists have the power to relocate or reduce investment, workers may also
attempt to influence a political system through strikes and protests. Often a strike
is the response of a single union to a particular grievance with a firm, but when a
large segment of the population is involved in a general strike, the entire
economy can be halted and governments can be forced to respond to working-
class demands. It is no surprise to Marxists that general strikes, and even more
limited secondary or sympathy strikes, have been made illegal in the United
In their search for profits, capitalists in the rich states not only exploit
domestic workers but workers in other countries as well. The international
situation is complicated because capitalists in any country are not only in
conflict with their own workers but also have a complex relationship with
capitalists in other countries. Meanwhile, capitalist firms do compete with other
firms both domestically and internationally, yet they also form alliances with
those firms on issues that impact the functioning of the global capitalist system.
Thus, depending on the issue, capitalists in New York or London often form
alliances with the local capitalist elite in other parts of the world in order to keep
profits up, workers weak, and wages down.
Ideological Manipulation
Power derives from the control over hard resources, like capital or the military,
and the ability to force others to act in certain ways by structuring the choices of
the weaker to the benefit of the stronger. Yet structuralists also accept that power
is exercised through the deployment of ideology. An important goal of capitalist
ideology is to give legitimacy to the capitalist economic system by controlling
people’s hearts and minds. Once the working class believes that the system is
legitimate, it will believe that it is appropriate and just. While democratic
societies possess arsenals of surveillance and repression, they tend to be less
intrusive than those found in authoritarian systems. In a democracy, because
citizens participate in fair elections, the leaders typically earn the consent of the
led, including even those who voted for a different candidate or party.
When individuals regard a democratic political system as legitimate, they are
also likely to believe that the capitalist system itself is proper and just. A belief
by workers in the legitimacy of capitalism ensures that (1) they will not seek to
replace it with something else (e.g., socialism) and (2) they will work harder
within the present system, thus increasing the income of the capitalists who
generally do not have to use force. Marxists would say that, in effect, workers
consent to their own exploitation. Given the importance of legitimacy, the
capitalist class will actively seek to create an ideology in society that gives
legitimacy to pro-capitalist institutions (see Box 4.1).
In his political economy writings, well-known public intellectual Noam
Chomsky argues that the consent of the proletariat to their own exploitation must
be “manufactured” by powerful interests in society, including the state and the
corporate media. He writes, “One of the prerogatives of power is the ability to
write history with the confidence that there will be little challenge.”10 For
example, political elites in the United States use the threat of foreign enemies to
draw attention away from internal, class-based conflicts. For much of the
twentieth century, the Soviet Union and communism served that function.
Writing on the George W. Bush administration, Chomsky observes,
“Manufactured fear provided enough of a popular base for the invasion of Iraq,
instituting the norm of aggressive war at will, and afforded the administration
enough of a hold on political power so that it could proceed with a harsh and
unpopular domestic agenda.”11 Little changed under the Obama administration
except that Iran and the Islamic State replaced Iraq as the targets of propaganda.
Chomsky and his colleague Edward Herman have also created a propaganda
model to explain the ways in which the “free press” in liberal, capitalist societies
—especially in the United States—reports on events in ways that ultimately
serve the interests of large corporations and the state.
One of the most influential structuralists of the twentieth century—and one
whose ideas are particularly relevant to the global political economy of the
twenty-first—is the Italian Marxist Antonio Gramsci (1891–1937). He lived
in a time of tremendous economic and political tension, witnessing the rise
of fascism in the 1920s and 1930s and the intense conflicts among nations
and between classes. He proposed a philosophy of praxis—that we should
demonstrate our beliefs through our actions. He edited an intellectual
journal, Ordine Nuovo (The New Order), and led worker protests in the
Italian industrial center of Turin, especially against the manufacturing giant
FIAT. These activities drew the attention of Italy’s fascist government,
which imprisoned him. In his Prison Notebooks, Gramsci attempted to
revise Marxist theory to account for changing conditions in the advanced
industrial world. He died in prison at the age of 46.
According to Gramsci, the dominant class in society maintains its
position in two different ways: through coercion and through consent.
Coercion is an obvious mechanism, applying economic and political power
directly to keep the subordinate class in line. For example, police and
manufacturer-backed thugs employ violence against protesting workers.
Coercion is a powerful tool, Gramsci said, but ideas are even more
powerful means to rule over the masses. The dominant class produces and
promulgates an ideology that supports and legitimizes its interests. These
popular ideas permeate society through education and the communications
media. Once the subordinate class comes to accept this worldview, whether
intentionally or by osmosis, as common sense, its thoughts and actions are
brought into line with the interests of the dominant class. Police are not so
necessary because the idea of taking actions that oppose the dominant class
is not part of society’s accepted values and norms.
In Gramsci’s view, there are no truly independent intellectuals.
Traditional intellectuals, such as professors, like to “put themselves forward
as autonomous and independent of the dominant group,”a but this selfimage is inaccurate, as all intellectuals are products of particular historical
events and social relationships. Civil society institutions, including
universities, the arts, mass media, and religion, are the spheres through
which consent to rule by the dominant class is produced and social control
exercised. What is needed is for workers to develop, from within their own
class, organic intellectuals who remain connected to their class while
providing organization, leadership, and a vocabulary that challenges the
ideology of the dominant class and articulates a different vision of the
future. If they can also win over many of the traditional intellectuals, the
formulation of a counterhegemonic ideology becomes all the more likely.
Schools, newspapers, songs, and coffee shops will then reverberate with
debate and demands for change.
aAntonio Gramsci, Selections from the Prison Notebooks, Quintin Hoare and Geoffrey Nowell
Smith, transl. and eds. (New York: International Publishers, 1971), p. 7.
The superior financial resources of the capitalists typically ensure that procapitalist messages—the benefits of free trade, the need for low taxes on the
rich, the desirability of limited government, and the problems with unions—will
be stronger than a competing set of beliefs favored by workers. Workers, of
course, are not powerless and at certain times on certain issues may succeed in
persuading the public. But the game is biased in favor of capitalists.
It is a great tragedy, according to Marxists, that capitalists not only exploit
workers but also manipulate their beliefs so that they become ignorant of, or
apathetic about, their own exploitation. Workers’ belief in the legitimacy and
benefits of capitalism is false consciousness. Is it possible that people could be
fooled about what their own self-interest is? We should recall that the rule by
monarchs in the Middle Ages in Europe was at least partially legitimized by an
ideology promoted by the Catholic Church asserting a Divine Right to govern: to
challenge the rule of the aristocracy was to offend God.
Vladimir Lenin (1870–1924) is best known for his role in the Russian
Revolution of 1917 and the founding of the Soviet Union. In many ways, he
turned Marx on his head, placing politics over economics when he argued that
Russia had gone through its capitalist stage of history and was ready for a
second, socialist revolution. Lenin is also known for his views on imperialism
based on Marx’s theories of class struggle, conflict, and exploitation. In his
famous book Imperialism: The Highest Stage of Capitalism (initially published
in 1917), Lenin explains how, through imperialism, advanced capitalist core
states expanded control over and exploited what his contemporaries called
“backward” colonial regions of the world, leaving them unevenly developed,
with some classes to prosper and others mired in poverty.
13 By the end of the
nineteenth century, new colonies were established mainly in Central and
Southern Africa, and they became sources of cheap labor and raw materials, and
an outlet for industrial investment of the advanced capitalist nations.
The critical element fueling imperialism, in Lenin’s view, was the
centralization of market power into the hands of a few “cartels, syndicates and
trusts, and merging with them, the capital of a dozen or so banks manipulating
thousands of millions.”14 Because capitalism led to monopolies that
concentrated capital, it gradually undermined the ability of capitalists to find
sufficient markets and investment opportunities in industrial regions of the
world. Of course, profit-seeking capitalists were unwilling to use their surplus
capital to help the proletariat purchase more goods and services and raise their
living standards. To prevent capitalism from imploding, Lenin and others argued
that imperialism therefore was a necessary outlet for surplus finance.
Imperialism allowed rich capitalist nations to sustain their profit rates, while
keeping the poorer nations deep in debt and dependent on the rich nations for
manufactured goods and financial resources.
For Lenin, imperialism also signified the monopoly phase of capitalism or
“the transition from capitalism to a higher system,” by which he meant that the
presence of monopolies and imperialism that followed was yet another epoch of
history between capitalism and socialism, unaccounted for by Marx.
15 Finally,
imperialism helped convert the poorer colonial regions into the new “proletariat”
of the international capitalist system. According to Lenin, “Monopolist capitalist
combines—cartels, syndicates, trusts—divide among themselves, first of all, the
whole internal market of a country, and impose their control, more or less
completely, upon the industry of that country,” generating a world market.
It is not surprising that Lenin’s theory of imperialism was very influential,
especially among intellectuals in the less developed countries, where his views
shaped attitudes toward international trade and finance. In these countries,
communist revolutionaries like Mao Zedong in China, Ho Chi Minh in Vietnam,
and Fidel Castro in Cuba fought “wars of national liberation” against capitalist
imperial powers. However, most contemporary structuralists no longer believe
that the falling rate of profit for capitalists will cause the collapse of the capitalist
mode of production.
In this section, we explore structuralist theories of dependency, the modern
world system, and neoimperialism that trace their analytical approaches and
policy prescriptions to both Marx and Lenin.
Dependency Theory
A structuralist perspective that highlights the relationships between core and
peripheral countries is called dependency theory. It argues that the structure of
the global political economy essentially enslaves the less developed countries of
the South by making them reliant to the point of being vulnerable to the nations
of the capitalist core of the North. Theotonio Dos Santos sees three eras of
dependence in modern history: colonial dependence (during the eighteenth and
nineteenth centuries), financial-industrial dependence (during the nineteenth and
early twentieth centuries), and dependence today based on multinational
Andre Gunder Frank, who has focused attention on dependency in Latin
America, is noted for his “development of underdevelopment” thesis.
17 He
argues that developing nations were never “underdeveloped” in the sense that
one might think of them as “backward” or traditional societies. Instead, once
great civilizations in their own right, the developing regions of the world became
underdeveloped as a result of their colonization by the Western industrialized
nations. In order to escape this underdevelopment trap, a number of researchers,
including Frank, have called for peripheral nations to withdraw from the global
political economy. In the 1950s and 1960s, the leadership of many socialist
movements in the Third World favored revolutionary tactics to change the
fundamental dynamics of the world capitalist system.
Some dependency theorists have recommended other strategies by which
developing nations could industrialize and develop. Raul Prebisch, an
Argentinean economist, was instrumental in founding the United Nations
Conference on Trade and Development (UNCTAD). The developing nations that
have joined this body have recommended policies that would help redistribute
power and income between North and South. Many dependency theorists,
however, have been more aggressive about reforming the international economy
and have supported the calls for a “new international economic order” (NIEO),
which gained momentum shortly after the OPEC oil price hike in 1973.
Modern World System Theory
One fascinating contemporary variant of the structuralist perspective focuses on
the way in which the global system has developed since the middle of the
fifteenth century. This is the modern world system (MWS) theory originated
by Immanuel Wallerstein. Capitalist in nature, the world system largely
determines political and social relations, both within and between nations and
other international entities.
According to Wallerstein, the world economy provides the sole means of
organization in the international system. The modern world system exhibits the
following characteristics: a single division of labor whereby nation-states are
mutually dependent on economic exchange; the sale of products and goods for
the sake of profit; and the division of the world into three functional areas.
18 The
capitalist core states of northwest Europe in the sixteenth century moved beyond
agricultural specialization to higher-skilled industries and modes of production
by absorbing other regions into the capitalist world economy. Through this
process, Eastern Europe became the agricultural periphery and exported grains,
bullion, wood, cotton, and sugar to the core. Mediterranean Europe and its laborintensive industries became the semiperiphery or intermediary between the core
and periphery.
According to Wallerstein, the core states dominate the peripheral states
through unequal exchange for the purpose of extracting cheap raw materials
instead of, as Lenin argued, merely using the periphery as a market for dumping
surplus production. The semiperiphery serves more of a political than an
economic role; it is both exploited and exploiter, diffusing opposition of the
periphery to the core region.
Wallerstein accepts the realist notion that the world is politically arranged in
an anarchical manner—that is, there is no single sovereign political authority to
govern interstate relations. However, much like a Marxist-Leninist, he proposes
that power politics and social differences are also conditioned by the capitalist
structure of the world economy. Capitalists in the core use state authority as an
instrument to maximize individual profit. Historically, the state served economic
interests to the extent that “state machineries of the core states were strengthened
to meet the needs of capitalist landowners and their merchant allies.”19
Wallerstein also argues that state machineries have a certain amount of
One problem with Wallerstein’s theory is precisely what makes it so
attractive: its comprehensive, yet simple way of characterizing IPE. Many
criticize his theory for being too deterministic, in terms of the constraining
effects of the global capitalist system. Nation-states, according to Wallerstein,
are not free to choose courses of action or policies. Instead, they are relegated to
playing economically determined roles. Finally, Wallerstein is often faulted for
viewing capitalism as the end product of current history. In this sense, he differs
from many structuralists who feel that political-economic systems are still a
choice people have and not something structurally determined.
Neoimperialism and Empire-Building Redux
The term neoimperialism describes a newer, subtler version of imperialism that
structuralists claim the United States has been practicing since the end of the
Vietnam War in 1975. Neoimperialism differs from classic imperialism in that
states no longer need to occupy other countries in order to exploit or control
Harry Magdoff (1913–2006), who edited the socialist journal Monthly Review,
provides a good example of the older, orthodox version of Marxist-Leninist
ideas related to U.S. imperialism. In his 1969 book The Age of Imperialism: The
Economics of U.S. Foreign Policy, Magdoff established some of the same
themes adopted by dependency and MWS theorists—especially those that
focused on capitalism’s expansive nature. He argued that the motives behind
U.S. efforts to promote the economic liberal policies of the GATT, the IMF, and
the World Bank could not be separated from U.S. security interests. During the
Cold War, U.S. intervention abroad was not the result of one leader’s decision,
but the result of underlying structural forces.
Contrary to realists who argue that the United States intervened in Vietnam
and other developing nations to “contain communism,” Magdoff claims that the
United States was motivated by a breakdown of British hegemony, coupled with
the growth of monopoly capitalism.
21 President Eisenhower had earlier linked
maintaining access to the natural resources of Indochina (Vietnam, Laos,
Cambodia, and Thailand) to U.S. security interests. But in his farewell address,
Ike warned of a military–industrial complex that exaggerated the strength of
enemies in order to justify military spending.
Although U.S. hegemony declined in the 1970s due to the effects of the 1973
OPEC oil crisis and the U.S. public’s opposition to military intervention outside
the U.S. “sphere of influence” in Europe, Japan, and Latin America, by the late
1970s a more classic type of imperialism resurfaced in the Carter Doctrine,
which proclaimed U.S. willingness to intervene in the Persian Gulf to protect
U.S. oil interests. In 1979, the Iranian Revolution overthrew the U.S.-backed
Shah of Iran, threatening U.S. influence in the Middle East. Soon after, the CIA
supported efforts of the Mujahedeen in Afghanistan against the Soviet
In the 1980s, as part of the Reagan Doctrine, the United States renewed its
efforts to intervene in developing nations. Reagan assisted Saddam Hussein in
the Iran–Iraq war, unsuccessfully intervened in Lebanon in 1983 and 1984, and
sold advanced weapons to Saudi Arabia. To contain communism in the Western
Hemisphere, Reagan backed the contras in Nicaragua and supported proWestern authoritarian regimes in Guatemala and El Salvador.
After the fall of the Soviet Union in 1991 and the Persian Gulf War in 1991,
Bush ushered in what many structuralists view as a “new age of imperialism.”
Because the Soviet threat was gone, the globalization campaign provided the
United States and other industrialized nations with an opportunity to penetrate
peripheral states via trade and investment. The Washington Consensus—an
understanding that economic liberal reforms promoted growth in developing
countries—became the rationale for IMF, World Bank, and WTO policies.
Throughout the 1990s, President Clinton promoted economic liberalism with
selective military intervention abroad. His campaign of “engagement and
enlargement” mixed hard and soft power to explicitly draw other countries into
the global capitalist economy while expanding the scope of democracy. Based
on some of the lessons learned in Vietnam, Clinton was not as overtly
interventionist as Reagan. However, the U.S. military hit targets in Iraq, Sudan,
Somalia, and Afghanistan. In cases where U.S. interests were not as clear, such
as Rwanda, the United States failed to intervene to save hundreds of thousands
who died in a campaign of genocide. Clinton’s preference for multilateral
(relatively equal) relations with U.S. allies set the tone for joint NATO
operations in the Balkans and for intervention in Kosovo in 1999.
Neoconservatives such as Charles Krauthammer and Max Boot deplored the
fact that when the Soviet Union fell, the United States failed to capitalize on a
“unipolar moment” by imposing its (benevolent) will on the rest of the world.
After 9/11, many policy officials encouraged the new Bush administration to
seize the moment and make maintaining U.S. hegemony—especially against
“Islamo-fascism”—a central premise of U.S. foreign policy. Issuing a new Bush
Doctrine that brazenly proclaimed that the United States “will not hesitate to act
alone,” the Bush II administration invaded Afghanistan and Iraq.
23 In essence,
when it came to security, the United States could do what it wanted, whenever it
wanted, and with whatever instruments it chose. It also promoted the moralistic
idea that the U.S. principles of liberty, equality, and individualism could not be
Contrary to the expectations of many Americans, Barack Obama did not
fundamentally change the global role of the United States. Going beyond the
militarism of the Bush administration, he escalated the use of military drones to
conduct extra-legal assassinations.
25 Instead of repealing the PATRIOT Act, he
reauthorized the law.
26 The United States continued to give billions of dollars in
aid to Israel—despite its illegal settlements in the occupied Palestinian
27 Obama also negotiated the Trans Pacific Partnership and promoted
other free-trade agreements. Structuralists argue that militarism and empirebuilding are endemic to the American polity because the political structure
operates on behalf of those with wealth and power. Empire serves the interest of
Structuralists recognize that study of the global economy cannot be divorced
from the study of the mechanisms of contemporary capitalism. Scholars have
been particularly interested in understanding the methods for extracting value
from workers, ways in which capitalism disciplines individuals, and changing
class structures. In this section we start with an analysis in Box 4.2 of the
transnational capitalist class (TCC), which exercises structural power over
political and economic institutions and spreads a powerful worldview. We then
review three processes that structuralists identify as critical for the TCC’s
success and the functioning of today’s global capitalism: accumulation by
dispossession, responsibilization, and the rise of the precariat.
Classical Marxism focuses on capitalist accumulation as a process through
which the owners of the means of production extract surplus value from
workers. The Marxist geographer David Harvey focuses on another mechanism
of profit accumulation that he calls accumulation by dispossession, which
involves transferring assets from public or communal control to private
28 This mechanism is predatory: it relies on seizure, thievery, and
fraud, sometimes accompanied by violence. It takes many different forms,
including privatization of state assets, liquidation of workers’ pensions, and
financial speculation. Individuals are also saddled with debt (like home
mortgages), then driven into insolvency and dispossessed of what they own
through bankruptcy. Even heavily indebted nations are forced into structural
adjustment, wherein they must sell off state assets, extract more taxes, and cut
social spending in order to pay creditors. In many developing countries, “land
grabs” have become a highly contested form of dispossession whereby peasants
and indigenous peoples are violently forced off of land that is then transferred to
private ownership. Harvey stresses that dispossession is occurring on a global
scale, requiring state power and enforcement.
A group of structuralist sociologists identifies the rise of a transnational
capitalist class (TCC) as one of the most important developments in
contemporary capitalism. This class primarily consists of the owners and
managers of transnational corporations and financial institutions. They
control most global financial assets and most of the stock in TNCs listed on
exchanges around the world. What makes them different from capitalists
before the mid-1970s is that they make money globally, not just in one
national economy. Although the TCC traditionally draws its elites from the
“triad” countries (the United States, the European Union, and Japan), it is
joined by a growing number of billionaires and millionaires from the
BRICs countries and other emerging nations. As such, some TCC scholars
claim that TCC members do not have any particular loyalty to the nations
from which they come or in which they are based. William Carroll finds
evidence for this thesis within the North Atlantic ruling class, but he thinks
there are still many business communities that have a strong national or
regional focus.
The TCC is highly concentrated and interconnected. Its members are
often in interlocking directorates of TNCs, meaning that corporate
directors simultaneously serve on the boards of multiple corporations. They
own shares in some of the same large companies and own bonds issued by
many of the same countries. Many in the inner elite are products of business
schools, share similar lifestyles, and lead the boards of a host of similar
social organizations. Nevertheless, different segments of the TCC do not
always share the same interests.
William Carroll and Jean Philippe Sapinski identify three key
transnational “policy-planning” bodies through which the TCC develops
class cohesion and promotes its worldview: the International Chamber of
Commerce (ICC), the Mont Pèlerin Society (MPS), and the World
Economic Forum (WEF).
b The MPS developed among anti-Keynesian
economists who later formed a network of free-market think tanks. The
WEF brings together elite capitalists every year in Davos, Switzerland, to
discuss global issues. There are many other networks through which the
TCC spreads ideas and coordinates policies.
Leslie Sklair portrays the TCC as made up of four “fractions” that
complement each other:
The owners of TNCs;
Globalizing politicians and bureaucrats who seamlessly move between
jobs in government and the corporate sector and negotiate international
political agreements on trade and finance;
Globalizing professionals (such as lawyers) with technical skills; and
A consumerist fraction of retailers and the media, who spread an
ideology of consumption.
William I. Robinson asserts that the TCC has more than just structural
power over national governments and the working class. It also exercises
authority through transnational state apparatuses such as the IMF, the
OECD, the WTO, and even the European Union. These apparatuses
“promote the conditions for capitalist globalization” but also try to fix the
problems that capitalism creates.
Globalization is the political project of the TCC, which turns countries
into self-marketers that compete for investments and showcase their
advantages to TNCs. The TCC has rolled back the welfare state throughout
the Global North. It generates considerable profits through financial
speculation and operating the infrastructure that states need for repression,
war, and mass surveillance.
e To accumulate on a global scale, it requires
free trade, weak capital controls (financial mobility), and strong protections
for private property. It must also have mechanisms to force debtors—
whether governments, companies, or individuals—to repay what they have
What is the alternative to capitalist society run by the TCC? Sklair
envisions a transition to “networks of relatively small producer-consumer
co-operatives (PCC)” detached from the global market and the state.
f He
also stresses the importance of struggling at the level of ideas to reject the
TCC’s “culture-ideology of consumerism” in favor of a “culture-ideology
of human rights and responsibilities.”g
a William K. Carroll, “Wither the Transnational Capitalist Class?” Socialist Register 50 (2013): 162–
bWilliam K. Carroll and Jean Philippe Sapinski, “Neoliberalism and the Transnational Capitalist
Class,” in The Handbook of Neoliberalism, ed. Kean Birch, Julie MacLeavy, and Simon Springer
(London: Routledge, 2016): 25–35.
cLeslie Sklair, “The Transnational Capitalist Class, Social Movements, and Alternatives to Capitalist
Globalization,” International Critical Thought 6:3 (2016), p. 331.
dWilliam I. Robinson, “Global Capitalism: Reflections on a Brave New World,” Great Transition
Initiative (June 2017), at www.greattransition.org/publication/global-capitalism.
Sklair, “The Transnational Capitalist Class,” p. 337.
gIbid., p. 338.
Contemporary capitalism also forces individuals to become “responsible” for
their own self-governance and risk management. In her 2015 book Undoing the
Demos: Neoliberalism’s Stealth Revolution, political scientist Wendy Brown
argues that the neoliberal form of capitalism undermines traditional economic
solidarity, replacing it with responsibilization. Instead of being protected from
the depredations of the market through unions or other organizations that engage
in collective action, individuals have become isolated units. As “responsibilized”
people they have to cultivate their “human capital,” compete with others, “selfinvest wisely,” and become self-reliant.
29 In other words, the individual lives in
service to the economy: “Instead of being secured or protected, the
responsibilized citizen tolerates insecurity, deprivation, and extreme exposure to
maintain the competitive positioning, growth, or credit rating of the nation as
With the spread of responsibilization, the state is no longer willing to bear as
much of the cost of nurturing citizens’ human capabilities or sustaining
households. For example, individuals are forced to pay for an ever greater share
of their education, health coverage, and retirement. They cannot expect the state
to provide public entitlements. In fact, the state imposes a seemingly permanent
austerity as it slims down and devotes itself to ensuring macroeconomic growth
rather than regulating the private sector. Brown argues that we end up with a
form of governance that “promulgates a market emphasis on ‘what works’” and
“eliminates from discussion politically, ethically, or otherwise normatively
inflected dimensions of policy, aiming to supersede politics with practical,
technical approaches to problems.”31 Ultimately, she claims, the neoliberal form
of capitalism threatens democracy and popular sovereignty. However, it seems
clear that society is also resisting responsibilization and market dominance. We
see this in the rise of anti-austerity parties and right-wing populist parties in
Europe and the United States. They are manifestations of what political
economist Karl Polanyi described as a “countermovement”—an effort to re-
embed the market in society.
In addition to dispossession and responsibilization, a third trend in today’s
capitalism is what Guy Standing describes as the rise of the precariat, a large
social class that has insecure work without benefits.
32 It includes immigrants,
young college graduates, and people who have lost their jobs to outsourcing and
automation. Many of them work in part-time jobs, temporary positions, paraprofessional jobs, and as independent contractors, often lacking stable work
hours. Unlike the old industrial working class, the precariat has no employerprovided benefits (like health insurance, pension contributions, and training),
and it cannot count on the state for unemployment benefits or social assistance.
In the face of these conditions—and knowing that it has few opportunities for
social advancement—its members experience what Standing calls the four As:
anger, anomie, anxiety, and alienation.
The precariat emerged in the era of globalization after 1975, as capitalists
demanded a flexible labor force and strove to dismantle the public sector. The
precariat only has wages—and stagnant wages at that—while plutocrats and
salaried workers in the state bureaucracy and corporate upper management take
a growing share of national income. The precariat erupts from time to time, as in
anti-austerity protests and the Arab Spring, but it is politically divided and
rejects mainstream political parties. For Standing, to create security for the
precariat and restore their citizenship rights, the state needs to provide a basic
income to every adult in society, whether they work or not.
For structuralists, the financial crisis of 2007–2008 and the subsequent Great
Recession brought into stark relief the contradictions in globalization. In this
section we review their assessments of the financial crisis and connect it to the
renewed focus on inequality as a fundamental outcome of contemporary
Structuralist Views of the Financial Crisis and Its Aftermath
From a structuralist perspective, the financial crisis was an inevitable
consequence of the increasing power of the capitalist class over the last forty
years, not an unfortunate result of some “bad behavior” by an assortment of
bankers and elected officials. Many structuralists say that we need to look at the
rising inequality of income and wealth in the United States after 1970 to help
explain why the financial system imploded. The share of total national income
going to the richest 20 percent of Americans grew from 43 percent in 1968 to 50
percent in 2010, while the share going to the poorest 20 percent fell from 4.2
percent to 3.3 percent in the same period.
33 Adjusting for inflation, the median
earnings of a full-time, year-round male worker were actually higher in 1973
than in 2008.
34 Over this 35-year period, the richest Americans claimed a large
proportion of the increase in new income produced by the economy.
At the same time, American households loaded up with debt. From 1989 to
2007, the mean level of mortgage debt for the middle class, defined as those
between the 40th and 60th income percentiles, increased from $45,000 to
35 When housing prices started falling in 2006, many homeowners
owed more on their mortgages than they could get by selling their houses. Credit
card debt, on the other hand, is not backed up by any assets and is simply a
promise to pay out of future income. Although the amounts are smaller, the
mean credit card balance more than doubled, from $2,600 in 1989 to $5,600 in
2007, for those in the middle 20 percent of the income distribution.
Initially, debt provided a boost to the economy because it increased
consumption, but households eventually had to spend a larger portion of their
income to service their debt instead of purchasing goods and services. From a
structuralist viewpoint, then, the U.S. economy was operating on an unstable
foundation of debt and inequality; the unexpected drop in housing prices caused
a ripple effect leading to a banking crisis and deep recession. While the
government bailouts improved the balance sheets of banks and other financial
institutions, the amount of debt held by the average household remained at a
very high level.
Of course, the forces at work in the United States were also operating on a
global level. In other words, class conflict is international. Using transnational
financial institutions, rich countries have lent money to poor countries, setting
into motion a stream of payments back to the rich. This dynamic has also
occurred between wealthy countries, as when northern European creditors lent
heavily to countries such as Greece, which since 2010 has lacked sufficient
income to repay its lenders. Once in crisis, the indebted countries are forced to
adopt austerity measures that shift spending away from social programs and
squeeze ordinary citizens in order to pay foreign creditors. The result is
accumulation by dispossession, which none of the mass protest movements were
able to stop.
Rediscovering Inequality
The financial crisis and the slow, anemic recovery afterwards brought renewed
attention to some of the structuralist ideas that had been ignored by many IPE
scholars in the 1990s and 2000s. Suddenly, the global system looked unstable
and dysfunctional. Structuralists could explain some of its underlying
contradictions. They could also claim that Marx and Engels were right when
they wrote in the Communist Manifesto, “The executive of the modern state is
but a committee for managing the common affairs of the whole bourgeoisie.”
When the crisis hit, states around the world immediately showed themselves to
be the handmaids of capitalist elites, providing massive bailouts to financial
institutions and key corporations while hanging the lower and middle classes out
to dry. Meanwhile, the popular slogan of the Occupy Movement—“We Are the
99%”—signaled rising class consciousness. Then, the election of Donald Trump,
the vote for Brexit, and the rise of populist parties demonstrated to many
structuralists that the ideological and political hegemony of capitalists in the core
countries was weakening.
It is in this context that scholars and international institutions suddenly “rediscovered” the underlying problem of inequality that they had been ignoring for
decades but that structuralists had always claimed was an inherent feature of
capitalism. Why does inequality matter now? Certainly there is a moral case
against it. Political theorists and pundits have also focused on its political effects.
Because concentration of wealth has so plainly translated into disproportionate
political influence by elites and corporations, it is hard to make the case that
democracy is thriving in Western countries. The majority of citizens—even
those who vote—have little influence over public policies compared to the
moneyed class. Finally, there is growing recognition that inequality is weakening
capitalist economies by suppressing consumer demand.
It was the left-leaning (but non-Marxist) French economist Thomas Piketty
who brought inequality back into the academic and public mainstream with the
2014 publication of his influential book Capital in the Twenty-First Century.
He lays out empirical evidence supporting the claim that over the long term the
rate of return on capital tends to exceed the rate of economic growth. In other
words, the rate of return the wealthy earn from their investments exceeds the rate
of growth of GDP. Unless governments mitigate this tendency through policies
of taxation and redistribution occurs in a social welfare economic will increase.
Piketty believes that public investment levels and access to education
profoundly shape trends in inequality. After World War II, beliefs about
inequality changed, and the spread of unions and communism helped foster
progressive taxation. The war—and efforts to recover from it—also made state
involvement in economic and social affairs more pervasive, which supported the
rise of the welfare state. But globalization and deunionization after the 1970s
weakened the political power of workers in developed countries, while the rising
wealth of the top 10 percent magnified their influence over government policies.
More recently, the rising cost of higher education in the United States has
weakened social mobility.
Structuralists and non-structuralists continue to debate trends in global
inequality. The non-structuralist scholar Branko Milanovic persuasively argues
that, if one looks at the changes in distribution of income of all households in the
world, global inequality decreased between 1988 and 2011, mostly due to the
rapid rise in incomes in Asian middle classes.
37 However, he points out that even
as incomes of many in Asia (especially in China) have risen significantly, in
Western countries during the same period, the lower and middle classes had
mostly stagnant incomes while the wealthiest had growing incomes. In other
words, inequality within the Western countries is worsening as Asia overall is
starting to catch up with the West.
However, structuralist anthropologist Jason Hickel points out that inequality
between the rich countries and most peripheral countries has worsened. Between
1980 and 2014, the absolute gap between per-capita GDP in the United States
and per-capita GDP in regions other than East Asia nearly doubled.
38 Thus, even
though incomes have recently grown relatively faster in some developing
countries than in developed countries, it will take a long time for developing
countries to close the absolute income gap with developed countries. The
international NGO Oxfam, which regularly supports structuralist arguments, also
points to data indicating high levels of global inequality:
The accumulated wealth of the world’s richest 1 percent is equal to the
wealth of half of humanity.
Labor’s share of income as a percentage of GDP has fallen in most of the
world since 2000.
Labor productivity has grown much faster than wages.
The mostly developed countries in the Organisation for Economic Co-operation
and Development (OECD) progressively lowered inequality from the end of
World War II until the late 1970s, but since the 1980s inequality has risen
significantly. In light of this, many non-structuralists have begun to accept the
argument of structuralists and Keynesians that inequality is hurting national
economies. For example, the OECD “finds consistent evidence that the longterm rise in inequality of disposable income observed in most OECD countries
has indeed put a significant brake on long-term growth.”40 Surprisingly, it argues
that higher taxes and transfer payments do not necessarily lower economic
growth; rather, they enable the poorest 40 percent to gain more education and
skills that enhance social mobility. Similarly, the IMF’s studies of advanced
economies indicate that “if the income share of the top 20 percent (the rich)
increases, then GDP growth actually declines over the medium term, suggesting
that the benefits do not trickle down.”41 There is higher GDP growth when the
bottom 20 percent gains a greater share of a nation’s income—a finding
consistent with structuralist thought.
Japan has historically been more egalitarian than most industrialized
countries, but economic stagnation since the early 1990s has caused inequality to
rise. Among other trends, it is harder for young workers to support Japan’s
rapidly aging population, and nearly 40 percent of workers are in the precariat,
earning less than $20,000 a year.
42 Shinzo Abe, who served briefly as Japan’s
prime minister in 2007 and returned to power in 2012, has boosted stimulus
spending and instituted quantitative easing, under which the Bank of Japan has
bought up hundreds of billions of dollars worth of government bonds, to increase
demand and growth.
Most of Latin America has seen a modest decline in income inequality since
the mid-1990s, perhaps due to a preponderance of leftist governments. For
example, Brazil’s leftist president Luiz Inácio Lula da Silva pursued social
policies such as Bolsa Família that raised incomes of the lower classes between
2003 and 2011.
In contrast, inequality has become a serious problem in China. Between 1978
and 2015, the real pre-tax income of China’s top 1 percent grew by an
astounding 1,898 percent, while that of the bottom 50 percent grew by 401
43 So, while most Chinese incomes were rising, they were rising much
more quickly at the top. A 2015 report from Peking University based on a survey
of 15,000 households found that the top 1 percent of households control onethird of China’s wealth while the bottom 25 percent of households control only 1
percent of the wealth.
As we indicated at the beginning of this chapter, inequality has worsened
significantly in the United States. In recent years, French economists Thomas
Piketty, Emmanuel Saez, and Gabriel Zucman have compiled some of the most
comprehensive data on wealth inequality and national income distribution, much
of which is published on the site World Wealth and Income Database (http://wid.world). Their startling findings support some of the claims of structuralists.
Between 1980 and 2014, the real pre-tax income of the top 10 percent of
American earners grew by 121 percent, while that of the bottom 50 percent grew
by just 1 percent.
45 Simply stated, “The bottom half of the adult population has
… been shut off from economic growth for over 40 years, and the modest
increase in their post-tax income has been absorbed by increased health
spending.”46 The bottom 50 percent of the population earned just 19.3 percent of
after-tax U.S. income in 2014, while the top 1 percent earned 15.7 percent (see
Figure 4.1). Emmanuel Saez estimates that the top 1 percent of Americans
captured 55 percent of all the gains in income between 1993 and 2014.
If we look at wealth inequality rather than income inequality, the class
disparities are even starker. The median wealth (assets minus debts) of middleincome Americans (defined as households of three earning between $42,000 and
$126,000 in 2014 dollars) was nearly the same in 2013 as it had been in 1983.
The financial crisis of 2007–2009 wiped out most of the earlier gains of this
class. Meanwhile, the top 1 percent of Americans increased their share of the
country’s net personal wealth (assets minus debts) from 23.5 percent in 1980 to
38.6 percent in 2014 (see Figure 4.2).
49 The bottom 50 percent essentially holds
no net wealth.
Proportion of Total Post-Tax Income Accruing to Different Segments of the
U.S. Population, 1997–2014.
Source: Data from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National
Accounts: Methods and Estimates for the United States,” Working paper (revised July 6, 2017), Main
data, at http://gabriel-zucman.eu/usdina/.
How do we explain all these trends in inequality? Many economic liberals
attribute part of the rise in inequality to increased automation and other
technological changes that disproportionately benefit people with the highest
skills and education. In contrast, structuralists emphasize that capitalism has an
inherent tendency to concentrate ownership of capital. They note, however, that
changes in the balance of power between classes can redistribute income in
society. In this sense, changes in inequality are as much a product of political
struggles as they are a result of economic forces. Structuralists contend that the
rise in inequality in industrialized countries is due in part to a strategic political
campaign by capitalists to weaken labor’s power, downsize the welfare state,
and lower taxes on the wealthy, all legitimized by the ideology of neoliberalism.
The wealthiest in the world are also skilled at tax avoidance, using legal
loopholes and illegal tax evasion. Even as labor productivity has grown
significantly, gains have been taken by the elites rather than passed on to
workers through higher wages and benefits. The lowering of top marginal
income tax rates and capital gains taxes in the United States, along with dramatic
hikes in salaries of CEOs, has left the top 1 percent with much more after-tax
income. Political and ideological transformation will need to occur before
inequality can be lowered through tax and spending policies.
Proportion of Net Personal Wealth Held by Different Segments of the U.S.
Population, 1980–2014.
Source: Data from World Wealth and Income Database, at http://wid.world/country/usa/.
In this chapter, we separated Marx’s four main contributions to IPE—the
definition of class, class conflict and the exploitation of workers, control of the
state, and ideological manipulation—from his theory of history, which predicted
the inevitable collapse of capitalism and its replacement with socialism (and
ultimately communism). Structuralists, drawing upon core ideas from Marxism,
emphasize the class-based nature of the contemporary international political
economy. One cannot understand domestic economic policies or the
international political economy without recognizing the conflict derived from the
division of the economic output into profits and wages.
Structuralists reject the optimistic liberal interpretation of free trade and
deregulated markets, asserting instead that the disparities in power between
capitalists and workers, and the rich and poor countries, produce exploitation,
inequality, and poverty. The capitalist system tends to reproduce itself such that
those who begin with more power and wealth are able to maintain that position
at the expense of labor and the poor. Accumulation by dispossession transfers
communal assets to private control, while responsibilization transfers the
management of economic risks to individuals, many of whom are in the growing
precariat. Theories about imperialism, dependency, and modern world systems
demonstrate that, given states’ vastly unequal starting places, it is naïve to
believe that free markets operate on a level playing field that will somehow lead
to the end of poverty. This is because key states and international institutions are
seen as largely responding to the pressure of the transnational capitalist class,
which seeks profits wherever they can be found.
The structuralist version of anti-globalization calls for greater unity among
workers from all countries. Even Marx implied that not all decisions must be
seen as beyond our collective control when he stated that “men make their own
history, but & they do not make it under circumstances chosen by themselves,
but under circumstances directly encountered, given and transmitted from the
past.”50 Thus, for many structuralists today, a deep understanding of the
economic structure permits the exercise of human freedom, understood as the
application of human reason to the shaping of our world. Of course, not every
change is possible; but some very substantial improvements almost certainly are,
particularly a reduction in inequality. The precondition for such action will be
the development of a new consciousness—one that sees the free-market version
of globalization as simply ideological manipulation by those in power with an
economic interest in perpetuating the status quo.
structuralism 72
historical materialism 73
dialectical process 73
bourgeoisie 74
proletariat 74
false consciousness 77
dependency theory 81
modern world system
(MWS) 82
core 82
periphery 82
semiperiphery 82
neoimperialism 83
transnational capitalist class (TCC) 85
accumulation by dispossession 84
interlocking directorates 85
responsibilization 86
precariat 87
Summarize the four main contributions of Marxism to contemporary
What are the essential characteristics of neo-imperialism, dependency
theory, and the modern world system approach?
To what extent does capitalism limit democracy and popular participation
in political decision making?
Why can’t the working classes effectively resist dominant forms of
repression and exploitation?
What are some of the most important causes of and trends in inequality
since the 1980s?
Are there realistic alternatives to the current form of global capitalism, and
if so, how might they be brought into existence?
The fourteenth meeting of the States Parties to the Anti-Personnel Mine Ban
Convention in Geneva in November 2015.
Source: AP Photo/Keystone/Salvatore Di Nolfi.
It is interests (material and ideal), and not ideas which have directly governed
the actions of human beings. But the “worldviews” that have been created by
ideas have very often, like switches, decided the lines on which the dynamic of
interests has propelled behaviour.
Max Weber
The perspectives of economic liberalism, mercantilism, and structuralism
capture many, but not all, of the important elements of IPE. One of the main
intellectual projects of contemporary IPE is to expand its domain to include
actors, frameworks, and ways of thinking that cannot easily be classified under
the three main perspectives. In this chapter we highlight some of the ways in
which IPE can be more inclusive—“without fences,” as Susan Strange would
say—by honestly confronting a broader range of important issues without
necessarily abandoning IPE’s intellectual roots.
Constructivism is a vibrant theory that focuses on the beliefs, ideas, and
norms that shape the views of officials, states, and international organizations
(IOs) in the global system. It identifies an important role for global civil society
in molding the identity and interests of actors that wield enormous economic,
military, and political power. As in the case of the three dominant IPE
perspectives, constructivism has many different viewpoints and variations.
Constructivists reject the realist assertion that by simply observing the
distribution of military forces and economic capabilities in the material world we
can explain how states will interact. Institutions like the state, the market, or IOs
are constructed in a social context that gives them meaning. How power is used,
what goals states have, and how countries relate to each other depend on the
ideas that actors have about those things. As actors interact, they may create or
change their own identity and purpose.
Several puzzling aspects of recent U.S. foreign policy illustrate how
constructivism helps us understand that threats, friends, and enemies are socially
constructed. Terrorism has been perceived as a major threat to the United States
since 9/11, with significant government resources spent fighting it. Between
2001 and 2014, 3,043 Americans died from acts of terrorism on U.S. soil;
however, CNN points out that during this same time period, 440,095 Americans
were killed by firearms.
2 Objectively, guns are a vastly larger threat to people
than terrorism, and yet the fight against terrorism commands a vastly
disproportionate amount of attention and resources.
Many observers have been startled by how rapidly Trump magnified threats
from certain groups, cast previous U.S. rivals as friends, and alienated long-time
U.S. allies. For example, even though the number of unauthorized immigrants
from Mexico in the United States fell by more than 1 million from 2007 to 2014,
perceptions of these immigrants as a problem grew. Even though Russia’s
political system and foreign policy have been based on values and interests
perceived by most as antithetical to those of the United States, Trump has in
many instances praised Vladimir Putin and cast Russia as a potential ally.
Meanwhile, in the first few months of his presidency, Trump castigated
historical friends of the United States such as Mexico, Australia, and Germany.
Constructivists help explain these puzzles by stressing that relations between
countries are not simply a product of balance of power and immutable national
interests. Friends and rivals are to some extent a reflection of our worldviews
and our identities—that can change and be shaped through our discourse.
Additionally, problems in the world are not self- evident; society chooses them
and defines what it is that makes them problems—sometimes on the basis of
perceptions and prejudices that are not grounded in “objective” information. In a
sense, ideas and values can take on lives of their own, becoming real forces for
change (or stability) in international relations.
In this section, we explore the emergence of constructivism and present some of
its broad ideas. Realism and liberalism have traditionally dominated IPE—
particularly American IPE. They are rationalist perspectives, in that they portray
actors as making strategic decisions on the basis of all available information to
advance their material interests such as profit, power, and re-election. They often
assert that institutions and structures constrain actors and shape their choices.
Constructivist studies expanded rapidly in the field of international relations in
the 1990s, focusing predominantly on human rights and security. The end of the
Cold War and the upsurge in globalization changed the nature of global
problems and created optimism that nonstate actors could promote a more
ethical international system. Within the social sciences generally, there was an
emphasis on interrogating our assumptions and recognizing that the social
position of researchers shapes the knowledge they produce.
Constructivists were dissatisfied with realist assertions that the distribution of
material resources is always the key determinant of outcomes in the global
political system. They also disputed the assumptions of rational choice
economics that actors are always self-interested and seek to maximize utility.
Instead, they contended that identities that actors hold—shaped by interactions
with other actors—inform their choices between right and wrong, and between
appropriate and unwarranted. They found that in many cases actors will conform
to social norms even when they have the power not to or when it does not benefit
them materially. For example, scholars Martha Finnemore and Kathryn Sikkink
developed an influential explanation of how “norm entrepreneurs” influence
states to adopt and internalize new norms and values.
3 Barry Buzan, Ole Wæver,
and Jaap de Wilde created an influential framework for explaining how nonmilitary issues such as the environment and immigration come to be seen as
security threats.
4 Alexander Wendt argued that the ideas states have about
international politics are formed through social interactions.
Although IPE has been slow to take up constructivism, by the 2000s there was
much more application of it to studies of environmental issues, finance, and
governance. In 2010 Rawi Abdelal, Mark Blyth, and Craig Parsons published the
edited volume Constructing the International Economy in which they urged
fellow political economists to use constructivism’s insights to explain economic
outcomes. Today, IPE constructivists pay significant attention to nonstate actors,
focus on how ideas and identities form, and explain how the beliefs of states and
international organizations change. They use more sociological and nonmaterialist approaches than other schools of thought. Four basic assumptions of
constructivism applied to IPE are as follows:
Ideas, norms, and identities of groups and states are socially constructed.
Ideas and values are social forces that are as important as military or
economic factors.
Conflict and cooperation are products of values and beliefs.
Some international political changes are driven by changes in the beliefs and
identities of actors over time.
In the rest of the chapter, we introduce some key concepts in constructivism and
provide many examples of how this perspective studies norms, security, and
economic ideas.
Conceptual Tools
Constructivists have developed a number of conceptual tools to explain how
norms and language shape outcomes in the global political economy. In this
section, we look at several: problematization, framing, discourse analysis, and
Problematization is a process by which states and advocacy groups construct a
problem that requires some kind of coordinated, international response.
Constructivists argue that problems exist because we talk them into existence.
Consider these questions: How do you know what you should care about or be
worried about in the world? Which problems does your country focus on and
which does it not? The problems we care about are a reflection of our social
environment, our culture, and the beliefs we share with others in our society.
They are often “constructed” by political elites and powerful lobbying
organizations; we rarely choose them ourselves.
Constructivists trace the process by which “problems” become defined as
problems. Today, many in the international community define the following as
problems: global warming, drug trafficking, Islamic terrorism, and North Korean
missiles. These “problems” are not just “out there”; they become what we make
them to be through processes of deliberation. It is our perception of the problems
that determines what countermeasures we will adopt against them. Some
phenomena can exist for many years before they come to be defined as
“problems.” For example, German political scientist Rainer Hülsse points out
that the OECD countries talked the money-laundering problem into existence in
recent years, even though the common practice of laundering the proceeds of
crime had never been perceived as a big issue before.
6 Similarly, Peter Andreas
and Ethan Nadelmann note that until the twentieth century, drug trafficking and
drug use were not considered crimes that required a global prohibition regime.
Sometimes people will construct what most of society considers as “false”
problems. For example, medical experts have found no evidence that vaccines
cause autism, yet a growing number of parents refuse to vaccinate their children.
Constructivists also suggest that states have choices in terms of who they
identify with. Enemies have to be defined into existence. We make enemies and
friends through a discursive, deliberative process informed by our culture,
history, prejudices, and beliefs. Why has Iran been problematized as a pariah in
the world in the last three decades? Haggai Ram argues, for example, that Israel
has constructed an anti-Iran phobia, viewing Iran as posing an existential threat,
in part because of completely unrelated anxieties over ethnic and religious
changes within Israeli society.
8 In a similar way, countries create enemies by
projecting their own fears on others (as Trump has on immigrants) and by
attributing the characteristics of monsters, madmen, and new Hitlers to leaders
of other countries (such as Syria’s Bashar al-Assad).
Framing is the process of defining what the essence of a global issue is: what is
causing it, who is involved, what its consequences are, and what the best
approach to addressing it is. All actors frame through language, reports,
propaganda, and storytelling. Frames are always political constructs or lenses
that may or may not be the “right way” to interpret a complex problem. Frames
make us see a problem in a certain way as opposed to another, and therefore they
greatly influence how we understand how we should behave toward it (see Box
5.1). By exploring framing and framers, constructivists help explain who
influences the global agenda and how our approach to problems changes over
For many people, climate change is a reality caused by humans. To head off
an excessive rise in global temperatures, they insist there must be a
reduction in carbon emissions and a switch to renewable energy sources.
This framing of climate change is based on scientific methods and
interpretation of scientific data. It identifies the causes and consequences of
a phenomenon and recommends certain policy responses. It is the dominant
frame that the Intergovernmental Panel on Climate Change espouses, and it
informed the 2015 Paris climate accord and Al Gore’s popular 2006
documentary, An Inconvenient Truth.
Nevertheless, a significant proportion of people do not accept this frame.
They believe that climate change is not happening or that it is due to natural
causes. They do not believe that it will be a significant risk to humans in the
coming decades or that limiting carbon emissions is necessary. For
example, in 115 tweets on climate change by Donald Trump since 2011, the
current U.S. president describes global warming as a “canard,” “based on
faulty science,” and an “expensive hoax.”a
Law and psychology professor Dan Kahan writes, “Social-science
research indicates that people with different cultural values … disagree
sharply about how serious a threat climate change is. People with different
values draw different inferences from the same data.”b A group of
communications scholars summarizes their research on climate change
attitudes, showing that “how people ‘frame’ an issue—i.e., how they
mentally organize and discuss with others the issue’s central ideas—greatly
influences how they understand the nature of the problem, who or what
they see as being responsible for the problem, and what they feel should be
done to address the problem.”c In general, how one views climate change
depends on one’s social group, social identity, political identity, religion,
etc. Climate change is both a “scientific fact” and a “social fact” rooted in
culture and values.
International organizations and advocacy groups try to convince people
of the urgency of climate change by framing it in different ways. They use
frames of public health, environmentalism, risk, social justice, and morality,
among many others. In addition, the Obama administration spun the U.S.
response to climate change as an opportunity to boost the economy by
investing in new, profitable, job-creating renewable energy industries.
French president Emmanuel Macron argued that we all have a
“responsibility” to combat climate change to “make our planet great again.”
Some states and IOs have been framing climate change as a security
threat. While scientists have defined climate change as an environmental
problem through their definitive research since the 1980s, the recent
“securitization” of the issue has changed the way we understand and
respond to it. International relations scholar Julia Trombetta shows that by
tying climate to security, the European Union, the United States, and the
UN Security Council emphasize that it could cause violent conflicts,
threaten island nations, spark mass migration, and undermine food supplies.
Thus framed, climate change propels them to cooperate at the interstate
level by focusing on risk management, precautionary policies, and carbon
emissions reductions.
d Similarly, political scientist Denise Garcia argues
that by reframing climate change as a security threat, states have come to
recognize that they must work multilaterally to solve such a complex
problem. In so doing, states have begun to understand security in a new
way—less as safety from territorial aggression and more as ensuring global
human security through mutual action and reciprocal responsibilities.
aDylan Matthews, “Donald Trump Has Tweeted Climate Change Skepticism 115 Times. Here’s All
of It,” Vox (June 1, 2017), at www.vox.com/policy-and-politics/2017/6/1/15726472/trump-tweetsglobal-warming-paris-climate-agreement.
bDan Kahan, “Why We Are Poles Apart on Climate Change,” Nature 488 (August 12, 2012): 255.
cEdward Maibach, Matthew Nisbet, Paula Baldwin, Karen Akerlof, and Guoqing Diao, “Reframing
Climate Change as a Public Health Issue: An Exploratory Study of Public Reaction,” BMC Public
Health 10 (2010), p. 2.
dMaria Julia Trombetta, “Environmental Security and Climate Change: Analysing the Discourse,”
Cambridge Review of International Relations 21 (2008): 585–602.
eDenise Garcia, “Warming to a Redefinition of International Security: The Consolidation of a Norm
Concerning Climate Change,” International Relations 24:3 (2010): 271–292.
For example, in early 2017 President Trump and French presidential candidate
Marine Le Pen framed immigration and free trade as harmful to national vitality
rather than as sources of economic growth. In another example, by framing
deforestation and the loss of biodiversity as caused by corruption in poor
countries, we overlook an alternative understanding that global environmental
destruction is rooted in consumption patterns in rich industrialized countries.
The frame that we adopt will define how we interpret our own behavior.
In the last few decades, “conflict resources” have been framed as causing
some wars in Africa. Transnational advocacy groups claim that combatants in
places such as Sierra Leone and the Congo gain money from control of
diamonds, timber, and minerals to buy weapons used to destabilize governments
and terrorize civilians. We are led to believe that conflict can be reduced by
cutting off combatants’ ability to sell natural resources in international markets.
The Kimberley Process is one such approach to conflict reduction arising from
the framing of “blood diamonds” (see Chapter 15). Critics argue that although
the frame of “conflict resources” may have gotten countries and companies to
“do something” about Africa, it obscured the more important reasons for conflict
rooted in colonial history, ethnic rivalries, and bad governance.
Discourse Analysis
Discourse analysis helps us understand where important concepts come from
and how they shape state policies, sometimes in very undesirable ways. Some
constructivists trace changes in language and rhetoric in the speeches of
important officials to understand the role of ideas in foreign policy. Officials talk
their state’s interests into existence, sometimes by adopting a discourse that
resonates with important lobbying groups or sectors of public opinion. We look
at three examples of foreign policy issues that constructivists have interpreted
through discourse analysis: Islamic terrorism, torture, and the clash of
International politics professor Richard Jackson shows us that the way in
which academics and states talk about problems affects the range of possibilities
for actions. Through discourse analysis, he claims, we can understand the “ways
in which the discourse functions as a ‘symbolic technology,’ wielded by
particular elites and institutions, to: structure … the accepted knowledge,
commonsense and legitimate policy responses to the events and actors being
described; exclude and de-legitimize alternative knowledge and practice;
naturalize a particular political and social order; and construct and maintain a
hegemonic regime of truth.”9 He finds that an academic and political discourse
about “Islamic terrorism” draws upon and reinforces historical stereotypes about
Muslims, obscures understanding of the workings of Islamist movements, and
paints a threat to Western civilization as so great that only counterterrorism or
eradication are seen as appropriate responses to the “Enemy.” This discourse has
informed the European and American military responses to the Islamic State,
closing off alternative understandings of how and why the militant group arose.
Richard Jackson has also used discourse analysis to explain how political
elites in the United States repeatedly used a “highly-charged set of labels,
narratives and representations” in such a way that “the torture of terrorist
suspects became thinkable to military personnel and the wider public.”10 In other
words, official U.S. public discourse in the 2000s created the conditions for a
“torture-sustaining reality” in the United States by using language that
dehumanized suspected terrorists and made the public—despite minority
opposition—willing to accept the necessity to abuse them. Without assessing the
power of this discourse, it is hard to explain how the United States could adopt a
set of practices so at odds with its moral values.
Similarly, constructivists have analyzed how political scientist Samuel
Huntington’s concept of the clash of civilizations became a popular way in the
1990s to explain the roots of global conflicts. The more this clash of civilizations
rhetoric was used to describe relations between countries, the more it became a
sort of self-fulfilling prophecy that constructed conflict itself. In effect, the clash
exists because we believe it exists and we act on that belief. The clash discourse
has become accepted as the truth—a causal explanation—even in the face of
overwhelming social scientific studies that find no significant link between
religious beliefs and terrorism and that point out the difficulty in even ascribing
a common set of values to huge groups of people like the “Islamic world” or the
Analyzing Metaphors and Categories
Closely related to discourse analysis is the study of metaphors and categories
that we apply to things in the social world. Constructivists note that, although we
often choose metaphors and categories without political intent, sometimes
ideologically motivated actors deliberately “code” the social world with the
intent of changing it. For example, the European countries that had the worst
debt crisis in 2010—Portugal, Italy, Ireland, Greece, and Spain—were lumped
together under the undignified acronym “PIIGS” to imply that they had bad
economic policies. Samuel Brazys and Niamh Hardiman find that repeated use
of the term “PIIGS” in the media in 2009 and 2010 associated all five countries
with economic crisis and peripheral status, masking significant economic
differences between the countries.
11 Initially the term was “PIGS,” but an “I”
was later added for Ireland. After this happened, the Irish-German bond yield
spread increased, thereby exacerbating Ireland’s financial troubles. Perceptions
of similarities between countries in PIIGS—even though not based on wellfounded economic data—caused financial markets to treat them as similarly
risky, worsening the Eurozone crisis.
Jim O’Neil, a former chief economist of Goldman Sachs, coined the acronym
“BRICs” in 2001 to refer to the large industrializing countries of Brazil, Russia,
India, and China (after 2010, some changed it to the “BRICS” by adding South
Africa). The term—with its metaphorical suggestions of solidity and
construction associated with “bricks”—caught on and is widely used today, even
though the countries have very dissimilar economies. By the late 2000s, the four
countries were actually coordinating some initiatives as if were a distinct bloc.
Similarly, Robert Ward, the editorial director of the Economist Intelligence
Unit, coined the term “CIVETS” in 2005 to refer to the emerging markets of
Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. Several
investment banks began offering funds that invested in the CIVETS (a civet is a
cat-like animal that produces a musk used in perfume). The Financial Times
journalist Elaine Moore states that although terms like CIVETS “have been
backed up by economic analysis, they have also been criticised as marketing
ploys to make investors feel more relaxed about putting money in countries they
know relatively little about.”12 All of the groupings of countries are essentially
arbitrary, but once the metaphorical terms become widely used, many people
come to believe that there are commonalities among the countries, and they act
on this belief, whether it is in the form of investors putting money in a CIVETS
fund or leaders of the BRICS establishing a multilateral New Development Bank
to fund infrastructure projects. As Brazys and Hardiman argue, terms such as
BRICs and PIIGS “not only shape the way we think about and discuss groups of
state actors in the global economy, but do so in ways that have real
consequences for the markets’ treatment of the countries in question.”13 The key
point to remember is that how we categorize things and the words we employ to
make sense of them have consequences.
Constructivists have made an important contribution to IPE by explaining how
norms influence the behavior of states and markets. Martha Finnemore and
Kathryn Sikkink state the common definition of norms as “standard(s) of
appropriate behavior for actors with a given identity.”14 Constructivists believe
that norms guide the choices of states and international organizations by
constraining their understanding of what is “normal” vs. “aberrant,” right vs.
wrong, and acceptable vs. out-of-bounds. Because norms are shared values, it
can be difficult for a state to violate them without threatening its own identity
and risking opprobrium from other states. Many international norms are well
known. For example, the norm of state sovereignty is a shared belief that every
state has the right to exercise exclusive control over its own laws and territory.
And a human rights norm enshrined in the UN’s Universal Declaration of
Human Rights (Article 3) is that “everyone has the right to life, liberty and
security of person.” In this section we introduce constructivist ideas about how
global norms emerge, spread, and (sometimes) wither away.
Models of Norm Life Cycles
Finnemore and Sikkink have presented an influential model of three stages
through which international norms typically go.
15 First, “norm emergence”
occurs when norm entrepreneurs frame an issue and convince a core set of states
to champion a norm. Second, once a critical mass of states brings the norm to a
tipping point, a “norm cascade” kicks in, whereby previously reluctant states in
quick succession formally accept the norm, often because they want other states
to see them as legitimate members of the international community. Finally, as all
states “internalize” the norm, it gains a taken-for-granted quality and there is no
longer much international debate about it. States willingly comply with the norm
because they view it as appropriate and moral.
Influential constructivists Margaret Keck and Kathryn Sikkink complement
this model by explaining how norms spread around the world.
16 They specify
how transnational advocacy networks (TANs) spread information, employ
powerful symbols, leverage the power of sympathetic states, and hold states
accountable for adhering to norms. They also describe a “boomerang pattern”:
if domestic groups in a country cannot convince their government to accept a
norm, they work with international groups in their network to lobby other
governments and IOs to put pressure on the reluctant government to bind itself
to the norm.
Thomas Risse, Stephen Ropp, and Kathryn Sikkink add a “spiral model” to
the study of norms.
17 In the area of human rights, they observe that an
authoritarian state will often deny that it is violating human rights or claim that
the norm of human rights is superseded by some other norm, before eventually
making tactical concessions in the face of international pressure. Eventually, the
state liberalizes, starts to internalize the norm of human rights protection, and
finally adheres to it in practice. The spiral model has been influential because it
explains the process by which states are socialized to comply with a variety of
international norms, even if those norms initially conflict with the states’
material or political interests.
Actors That Spread Norms
A variety of international actors spread norms and try to socialize states to
behave in conformity with them. We will focus on three “actors” that feature
prominently in constructivist literature: transnational advocacy networks,
epistemic communities, and IOs.
Transnational Advocacy Networks
Political scientists Margaret Keck and Kathryn Sikkink coined the term
transnational advocacy networks (TANs) to describe “those actors working
internationally on an issue, who are bound together by shared values, a common
discourse, and dense exchanges of information and services.”18 These
interconnected groups include NGOs, trade unions, the media, religious
organizations, and social movements that frame new issues and try to get states
to accept new norms and interests, often involving “rights” claims. TANs act as
“norm entrepreneurs,” using testimonies, symbolism, and name-and-shame
campaigns to create a shared belief among political elites that, for example:
Human rights protection is a state obligation.
Torture is never acceptable.
Debt relief for poor countries is “the right thing.”
Human trafficking is a new form of slavery.
According to Keck and Sikkink, TANs rapidly communicate information, tell
stories that make “sense” to audiences far away from a problem, and hold states
accountable for the principles that they have already endorsed in their own laws
and international treaties.
The International Campaign to Ban Landmines (ICBL) demonstrates how
TANs can successfully reframe issues. Antipersonnel landmines (APLs) have a
long history of use in conventional wars and low-intensity conflict settings. They
were particularly popular during the 1970s and 1980s, when insurgent groups
took advantage of their low price and ease of use. After the Cold War, many
considered APLs to be unacceptable weapons because they “do not distinguish
between civilians and combatants; indeed, they probably kill more children than
soldiers.”19 With publicity from such celebrities as Princess Diana and Linda
McCartney, the ICBL rapidly gained popularity after 1991 and convinced the
UN in 1997 to establish the Convention on the Prohibition of the Use,
Stockpiling, Production and Transfer of Anti-Personnel Mines and on their
Destruction—known more commonly as the Mine Ban Treaty.
Among the factors that led to its quick ratification were the efforts of treaty
supporters to change the views of the security officials in different states
regarding the need for landmines. During the campaign, the International
Committee of the Red Cross commissioned a retired British combat engineer to
analyze the military utility of APLs; he found them not to be as useful as had
often been assumed. NGOs also informed the public and state officials of the
horrible effects of APLs, including the loss of a leg or arm by civilian
noncombatants. In addition to lobbying, the ICBL shamed officials who resisted
the discontinuation of landmines. In 1997 the ICBL was awarded the Nobel
Peace Prize for its work. As of 2017, 162 countries had ratified the Mine Ban
Treaty (although Russia, China, India, and the United States are not signatories).
The treaty significantly lowered global deaths from landmines and led to the
destruction of at least 50 million stockpiled landmines.
Epistemic Communities
Other nonstate actors that diffuse ideas internationally are “epistemic
communities,” defined as “professionals with recognized expertise and
competence in a particular domain and an authoritative claim to policy-relevant
knowledge within that domain or issue-area.”20 These global networks of experts
—often scientists—have detailed knowledge about complex issues and share
common understandings of the truth about these issues, based on the standards
of their profession. Although epistemic communities are not political actors in a
formal sense, political elites rely on them for advice and policy options. Thus,
these experts can have the ability to “educate” power holders about what
problems exist, how important they are, and even what can be done about them.
For example, Peter Haas has shown how atmospheric scientists around the
world studying the ozone layer disseminated the consensus scientific evidence
about the effects of chlorofluorocarbons (CFCs) on ozone depletion. In
coordination with colleagues in the UN Environmental Programme and the U.S.
Environmental Protection Agency, scientists provided an impetus to
international negotiations on the Montreal Protocol to ban CFCs. Similarly, Haas
points out that many international regimes that regulate global environmental
problems such as climate change and acid rain have come about through a
process in which epistemic communities teach policy elites and international
institutions the scientific consensus on environmental issues. In other words,
epistemic communities provide political negotiators “usable knowledge”—
defined as knowledge having credibility, legitimacy, and saliency—that
persuades them to adopt sustainability treaties even though the negotiators may
have been politically reluctant to do so initially.
There are many other epistemic communities, ranging from arms-control
experts to development experts. Networks of economists spread the ideas of
John Maynard Keynes in the 1930s and 1940s, laying the foundation for trade
and financial policies adopted at Bretton Woods after World War II. Similarly,
Latin American economists (sometimes called the “Chicago Boys”) had an
important role in spreading neoliberalism in their home countries in the 1980s.
Analyzing the ideas these economists were socialized to believe in during
graduate school in the United States, political scientist Anil Hira shows how they
formed “knowledge networks” that rationalized the adoption of structural
adjustment policies in Chile and other Latin American countries in the 1980s.
International Organizations
In addition to TANs and epistemic communities, international organizations also
socialize states. In other words, IOs help shape what a state is (its identity),
wants (its interests), and does (its policies). The knowledge and expertise that
IOs have tend to give them legitimacy. IOs that constructivists have studied
include the International Committee of the Red Cross (ICRC), the World Bank,
and the United Nations. Martha Finnemore finds that individuals in the ICRC
over many years convinced states that they should abide by humanitarian limits
during war.
23 A number of states have internalized and followed these norms of
wartime behavior, even though they would have more immediate success by
flouting them. Some IOs use technical assistance and training programs as ways
to diffuse norms.
Although the general public often perceives the UN as weak and ineffectual, it
has had an important role in spreading norms of gender equality and women’s
empowerment. Its panoply of conferences, commissions, and protocols has not
changed gender policies overnight, but it has set the stage for states to engage in
a dialogue about women’s rights when they otherwise might not have. As the
belief has spread that a respectable, “modern” member of the international
community must accept the goal of greater gender equality, recalcitrant states
find it ever more costly and isolating to resist the gender mainstreaming
Constructivists also point out that states often find themselves constrained by
their own self-proclaimed values. Martha Finnemore points out that a “unipole”
like the United States spreads liberal norms in an effort to legitimize its own
behavior and reinforce its soft power.
25 It was very successful in doing so
through the Bretton Woods institutions. However, the United States weakens its
soft power when it violates the very principles it has convinced its own people
and other countries it stands for. For example, the United States was viewed as
hypocritical for proclaiming its values of humanitarianism but breaking them by
enforcing sanctions on Iraq from 1991 to 2003 that caused many civilians to die.
And while proclaiming the importance of international law, the United States
launched military action against Serbia in 1999 and Iraq in 2003 without the
formal sanction of the UN Security Council. States are haunted by their own
principles and are usually less likely to violate them when they might lose
legitimacy or be accused of hypocrisy.
Norm Life Cycles
Constructivists have applied models and concepts to explain the emergence,
diffusion, and life cycles of a wide range of international norms. By looking at
examples from the IPE literature, we hope that readers will better appreciate the
role of ideas in shaping international dynamics.
Political scientists Devin Joshi and Roni Kay O’Dell explain how, beginning
in the 1990s, the United Nations spread a new understanding of international
development that was not focused solely on economic growth.
26 The norm of
“human development” emerged in part out of the writings of Indian economist
Amartya Sen, who viewed development as requiring the expansion of human
capabilities and freedoms. In 1990 the United Nations issued its first annual
Human Development Report (HDR), which championed ideas such as
democracy, human rights, gender equality, cultural diversity, and market
regulation. The HDR includes a Human Development Index (HDI) that seeks to
measure human capabilities. Joshi and O’Dell find that newspapers around the
world have played an important role in diffusing and legitimizing ideas in the
HDRs and the HDI, “thereby challenging older ideas that development is
identical to indicators such as GDP and PCI [per capita income].”27
At the heart of the global debt regime is a norm that sovereign borrowers (i.e.,
states) have to pay back their loans. It doesn’t matter if the loans were incurred
by a previous regime or government—the norm of “sovereign debt continuity”
still applies. Law scholar Odette Lienau traces how this norm came to prevail in
international finance—to the point of being taken for granted—in the post-World
War II period.
28 The norm is based on a particular notion of state sovereignty
and on how creditors are organized. But it seems unfair that, following a social
revolution or overthrow of a dictatorship, the successor government is
responsible for prior debts. What if the populace never consented to or benefited
from the previous government’s debt? What if lenders should have known that
their loans would be squandered by corrupt elites? These cases could justify
repudiation or forgiveness of debt incurred by a government’s predecessors on
the basis that it is “odious.” Since the 1990s, according to Lienau, alternatives to
the debt continuity norm have begun to emerge based on political discourses
stressing good governance, democracy, and popular sovereignty. Lienau’s point
is that the norm of sovereign debt continuity is a construct grounded in political
ideas and historical circumstances; a new norm of “odious debt” is in the
making as a result of changes in political values and notions of fairness. As a
result, there is a possibility that elimination of debt inherited from corrupt,
authoritarian regimes will become more widely accepted.
Many constructivists have studied how norms affect the ways in which global
environmental problems are managed. Canadian political scientist Hevina
Dashwood shows why Canadian mining companies framed their policies of
corporate social responsibility with the norm of “sustainable development.”29
The spread of the idea of sustainable development in the 1990s by NGOs and
some national governments helped convince mining companies to get serious
about corporate social responsibility. Dashwood argues that the companies
spearheading the adoption of sustainable development had leaders who believed
it was the right thing to do. They acted as norm entrepreneurs, pushing for higher
standards within industry associations and socializing other mining company
executives. By the mid-2000s a tipping point was reached, after which a norm
cascade led the majority of mining companies to adopt corporate social
responsibility policies.
Dashwood acknowledges that companies may start talking up a norm for the
purpose of public relations, not really believing in it. But a key constructivist
point is that the practice of discussing a norm “as if” it matters and “going
through the motions” of caring often habituate actors to a norm. As Dashwood
states, “Policies that were initially adopted for instrumental, strategic reasons,
may subsequently be sustained through conviction of their normative validity.
Firms’ identities may be transformed where they wish to be seen as good
corporate citizens, as opposed to corporate pariahs.”30 Nevertheless, many
mining firms have not yet gone through the last stage of the norm cycle, which is
internalization of the norm. This would require moving from talk to action, i.e.,
reaching a point where the norm becomes so much a part of the DNA of the
company that it actually changes its practices.
In recent years, the public has become more concerned with the ways that
multinational corporations (MNCs) operate outside of their main consumer
markets in developed countries. Civil society groups want more information
about the global supply chains of MNCs, in part so that consumers can make
more informed choices when purchasing goods. Lena Partzsch and Martijn
Vlaskamp argue that a new “foreign accountability norm” has emerged that
holds MNCS “accountable for socially and/or environmentally harmful practices
regarding natural [resource] extraction abroad.”31 The norm creates the
expectation that companies will exercise due diligence within their supply chains
to identify and minimize the risks of contributing to illegal logging, human
rights abuses, and armed conflict. The norm holds MNCs accountable for their
own conduct and the conduct of their suppliers in foreign countries. It is now
less acceptable for a company to be willfully ignorant of where its supplies
ultimately come from.
Partzsch and Vlaskamp follow the foreign accountability norm’s life cycle
through the stages of norm emergence, norm cascade, and norm internalization.
The NGO Global Witness and the liberal think tank Center for American
Progress (via its Enough Project) have put pressure on producers of computers
and cell phones to avoid conflict minerals such as gold, tantalum, and tungsten
from uncertified mines in the Democratic Republic of the Congo and
surrounding countries. Some industry groups representing MNCs have also
spread the norm. It has been incorporated into some laws, including the 2008
U.S. Legal Timber Protection Act and the 2010 EU Timber Regulation. The
2010 U.S. Dodd-Frank Act requires importers of gold, tungsten, tin, and
tantalum ores to report if the ores originate in the Democratic Republic of the
Congo and neighboring countries and to report what due diligence they
undertook to ensure that the minerals from these areas did not fund armed
groups. In 2017 the EU approved a similar Conflict Minerals Regulation. The
foreign accountability norm has affected commercial relationships in global
supply chains and reinforced the trend toward third-party certification of goods
such as conflict-free diamonds, fair-trade coffee, and dolphin-friendly tuna.
Contestation of Norms and Norm Death
As the literature on norms has grown, scholars have identified some of its
limitations and sought to extend constructivist thought to new issues. One
prominent criticism of constructivists is that they tend to study norms that have
successfully been accepted at the global level but ignore norms that never made
it to the stage of a norm cascade, let alone internalization. International relations
constructivists have focused especially on cases where norm entrepreneurs
successfully spread liberal Western norms regarding human rights, the
environment, and arms control. But we are now more aware that norm
entrepreneurs promote many norms that fizzle out. An adequate theory of norm
life cycles requires us to account for why many new norms stall.
Political scientist Charli Carpenter seeks to understand why some issues of
human security lead to the construction of global norms but other issues turn out
to be “lost causes” that never capture the attention of global leaders.
32 For
example, norms against the use of “killer robots,” child soldiers, and landmines
have widespread international support, but norms to prevent male circumcision
and language extinction have little traction globally. Similarly, Carpenter points
out that a communicable disease like HIV/AIDS is at the top of the global health
agenda, while “tuberculosis and Type 1 diabetes get only limited attention;
nondisease health issues such as maternal mortality and the right to pain relief
get even less.”33 Why do some normative ideas thrive while others remain
marginal? In the area of human security, Carpenter argues that powerful
organizations like Amnesty International, the Red Cross, and Human Rights
Watch have to “adopt” the new ideas in order for them to have a chance of being
turned into global norms. Well-established NGOs and UN agencies are
“gatekeepers” that determine what issues will lead to campaigns for global
agreements on norms. The organizations decide what “matters” and play a key
role in framing how elites and the general public understand human security
problems. They tend to adopt issues that have obvious victims and perpetrators,
emotional appeal, and credible solutions.
34 Constructivists in general believe that
problems are socially constructed in a politicized process; from the large pool of
issues that could be identified as human security problems, only a few will make
it to the international agenda.
Like Carpenter, Australian international relations scholar Alan Bloomfield
urges us to pay greater attention to cases where there is a failed attempt to
change status quo norms. He argues that “norm antipreneurs” sometimes
successfully prevent normative change. He sees antipreneurs as often having a
strategic advantage when emerging alternative norms have little credibility or
socio-institutional support.
35 For example, state antipreneurs have an advantage
when they can exercise vetoes in existing institutions or defund institutions that
are receptive to new norms.
36 Context matters for whether antipreneurs can
thwart normative change. In the face of war, financial crisis, or rapid
technological change, norm entrepreneurs have a greater window of opportunity
to overcome antipreneurs’ resistance.
Political scientist Clifford Bob has studied many antipreneurs that act
37 He explains how the U.S. gun lobby has allied with conservative
groups and sport-shooting groups in the Global South to resist norm
entrepreneurs who are promoting global gun control. He also examines how
Western evangelical Christians and other conservative religious groups have
allied with the Vatican and governments of Muslim-majority countries in an
informal “Baptist-Burka” network to resist laws and norms promoting toleration
of homosexuality. Bob stresses that right-wing TANs act just like progressive
TANs to promote and resist norms, drawing on scientific expertise and using
framing, rhetorical strategies, and counter-shaming.
38 He sees conflicts between
rival issue entrepreneurs as constantly “peppered with hyperbole and
Manicheanism.”39 As they interact through language, “both sides shape one
another’s demands, behavior and identity.”40
Realist scholars have criticized constructivists for overestimating the power of
ideas and norms. They argue that states often adopt new norms not out of moral
conviction but because the norms will promote their self-interests. In response,
constructivists increasingly accept that we should examine how norms interact
with material calculations and institutional dynamics to alter state behavior.
Critics also claim that constructivists overlook the many ways in which states
conveniently ignore norms that they have formally accepted. There are many
examples of states breaching norms in times of crisis or when it serves the
interests of policy makers. Constructivists counter that violations of norms are
not necessarily evidence that the norms are irrelevant. States may violate widely
accepted norms less frequently or may do so only temporarily in order to
minimize international opprobrium. More recently, constructivists also stress
that states and local communities may “practice” norms differently, depending
on their domestic institutions and local context.
41 In other words, states may
have different interpretations of what a norm means and in what context it is
applicable; thus they may implement the norm differently without necessarily
intending to reject it. These instances of different practice can actually be
productive if they lead to international debates that clarify a norm.
Finally, constructivists have been criticized for implying that in the last fifty
years or so the developed countries have inexorably adopted more progressive
global norms. For example, Ryder McKeown argues that the norms literature
overly focuses on “nice norms” and fails to consider that norm-induced moral
change “may be shallow and fleeting.”42 The recent rise of populism and trade
protectionism is a reminder that societies can also reverse liberal norms.
Some constructivists have tried to explain why democratic states in particular
are willing to violate norms that were previously deeply entrenched. In other
words, how is it that something unthinkable becomes thinkable and do-able by a
state? Julia Schmälter explains how the European Union has eroded its longsupported belief that there is a “collective responsibility to protect people in need
of international protection from persecution or serious harm in their home
countries.”43 In the face of the current refugee crisis, the EU has made it difficult
for refugees to exercise the right to seek asylum by quickly returning them to
their home or transit countries and making it much more difficult to even get to
the EU in the first place.
Finally, Christopher Kutz describes a process he calls “norm death.” For at
least two decades before 2001, the United States had strongly supported and
adhered to norms prohibiting assassination and interrogatory torture. The
categorical prohibitions, claims Kutz, were derived from values of military
honor and human dignity. After 9/11, civilian leaders shifted to a utilitarian
logic, emphasizing the U.S. right to self-defense and calculating how many U.S.
lives could be saved if torture and targeted killings were used. Kutz fears that the
death of the anti- assassination norm and the normalization of drone-based
killing can cause more interstate violence by “lowering the bar in terms of when
state interests justify war.”44
Whereas realists argue that the balance of power conditions states’ behavior,
constructivists suggest that conflict or cooperation between actors is a product of
their different values, beliefs, and interests. One of realism’s central assumptions
is that a potentially anarchic “self-help” world forces all actors to make security
their first priority, lest they be attacked by others. Realists contend that social
factors such as beliefs and values will always be overwhelmed by the structural
realities of an anarchical, self-help world.
In contrast, constructivist Alexander Wendt argues that “structure has no
existence or causal power apart from processes. Self-help and power politics are
institutions, not essential features of anarchy. Anarchy is what states make of
it.”46 In other words, for Wendt, we do live in a self-help world only because
over time states have come to “believe” that self-help is a consequence of
Constructivists have found that sometimes seemingly implacable rivals
cooperate because they come to have a shared understanding that they are part of
a “security community”—a group with a sense of shared moral purpose and
mutual trust. Israeli political scientist Emanuel Adler looks at how the
Organization for Security and Co-operation in Europe (OSCE), set up in the
mid-1970s as a process by which the Cold War sides could cooperate on security
matters in Europe, eventually became a transmission belt for liberal ideas about
freedom of the press, arms control, and protection of human rights.
Interactions within the OSCE between governments, NGOs, and experts spread a
new idea that how a country treats its citizens within its own borders is a
legitimate diplomatic concern of other states.
This idea conflicted with traditional notions of state sovereignty, opening up
the way for cooperation on security issues and constraining states in the Warsaw
Pact, perhaps even supporting their prodemocracy movements. After the
collapse of the Berlin Wall, the OSCE helped convince Eastern European states
to commit to free elections and protection of minority rights. Constructivists
argue that the OSCE shapes what a “normal” European country believes are its
obligations to other states and its own citizens, irrespective of the country’s
historical rivalries or military power. As more states formally commit
themselves to these obligations and discuss them, it becomes harder to violate
them—not so much because of the “costs” of doing so but because of the shock
it would pose to a country’s own identity.
When it comes to weapons of mass destruction like nuclear and chemical
weapons, constructivists help us understand why powerful states have not used
them since World War II, despite these weapons’ obvious military utility.
International relations scholar Nina Tannenwald analyzes the “nuclear taboo”—
the strongly held norm among the permanent members of the Security Council
that first use of nuclear weapons is unthinkable.
48 Even Israel and India, which
face neighboring enemies, have apparently internalized the norm that the use of
nuclear weapons would be morally unacceptable. Tannenwald argues that the
acceptance of the taboo—generated by a grassroots antinuclear weapons
movement around the world—is what constrains states from employing nuclear
weapons more than the fear that an enemy would retaliate with devastating
Similarly, international relations theorist Richard Price looks at how use of
chemical weapons by Great Powers has become almost unthinkable. The
stigmatization of their use is at odds with their obvious effectiveness. Price
explains how nonuse springs from a country’s understanding of itself: “Abiding
by or violating social norms is an important way by which we gauge ‘who we
are’—to be a certain kind of people means we just do not do certain things.”49
The widespread condemnation of Bashar al-Assad’s regime for using chemical
weapons in 2013 and 2018 demonstrated the power of the chemical taboo.
National Identity and Foreign Policy
Constructivists expect national identity to shape a state’s interactions with other
states. A state’s identity has many elements, some of which may be
contradictory, and the identity can change over time. Presumably, political elites
who make decisions affecting international relations have been socialized into
the identity that circulates within their nation-state. Identity can be rooted in
language, ethnicity, and religion, but also in understandings of what the political,
social, or economic essence of one’s country is. For example, a state might have
an identity as a Western liberal democracy, a peaceful rising power, or an
Islamic republic. It is important to note that a state might invoke different
elements of its identity with different countries.
International relations scholar Ted Hopf argues that domestic identity shapes a
country’s foreign policy. He also claims that the masses’ belief systems
constrain how elites behave. Identity relations between states will shape how
they understand each other’s actions and behave toward one another. States
could understand themselves and other states on the basis of religion, level of
‘civilization,’ enduring enmity, and enduring amity (among other bases).
50 For
example, Hopf states, “We would hypothesize that whether or not a country
identifies with capitalist modernity would be an important predictor of
environmental treaty ratification, as would the centrality of scientific ideas to a
country’s identity.”51 He adds, “Once one has uncovered a prevailing discourse
of national identity, one can expect that discourse to both persist over time and
explain a broad range of outcomes, regardless of who is making foreign policy in
that state.”52 (See Box 5.2 for a discussion of how U.S. worldviews affect U.S.
policies toward China.) For example, one might explain the long-enduring
friendship between the Anglosphere countries (the United States, the United
Kingdom, Canada, Australia, and New Zealand) as based in “identity relations
that make the use of force against one another virtually unthinkable.”53
Similarly, identity relations might explain why large German investments in the
United States are seen as unremarkable, but an effort by a Dubai company,
Dubai Ports World, to buy a U.S. port operator in 2006 evoked strident
opposition in the U.S. Congress.
Many realists predict that established states will use force against rising
states, or at least seek to balance against them. Realist political scientist
John Mearsheimer has stated adamantly that the United States and China
will enter into a security competition. Because China will inevitably
become more aggressive as it seeks regional hegemony, the United States,
with Asian allies, will try to slow its rise, leading to potential war.
a A more
liberal realist, Charles Kupchan, expects the rise of China to produce a
multi-polar world order in which China will have much more influence in
international institutions but will not necessarily become democratic.
b He
believes that cooperation between the West and China is possible, even if
liberal international norms do not remain dominant. Cooperation will
become more likely, he asserts, if the United States comes to understand
that its values and models of governance, capitalism, and modernity are not
Chengxin Pan, an international relations scholar at Australia’s Deakin
University, provides a deeper constructivist understanding of how the
worldviews of American elites shape U.S. foreign policy towards China. He
argues that many U.S. government officials and American mass media
outlets see China as a threat. This “cognitive habit” focuses on the dangers
of China’s military rise and on how China is undermining the U.S.
economy. In contrast, another group of U.S. officials and businesspeople
view China as an opportunity—a large export market and a place to make
handsome profits from offshore production. They expect that the more
China is integrated into multilateral institutions, the more it will become a
“responsible stakeholder” in the world.
American actors use the (perceived) China threat to advance their
domestic political and economic interests. For example, organized labor
blames corporations for unpatriotically siding with China and demands
protection from unfair competition, while big business uses the China card
to extract wage concessions from workers. The military–industrial complex
also lobbies for high military spending to keep ahead of China’s growing
military capabilities. Pan even argues that Sinophobes in academia and
think tanks constitute an epistemic community that supports fearmongers in
government and “lays the foundation for military Keynesianism.”e
The discursive effect of the China threat is to create a self-fulfilling
prophecy wherein containment is the logical foreign policy response.
American discourse and containment moves (in the South China Seas, for
example) evoke a nationalistic Chinese response, which in turn boosts the
China threat discourse in the United States. American and Chinese actions
are co-constituted; each country responds to the other’s worldviews. Pan’s
constructivist claim is that there is no pre-determined enmity between the
two countries; instead, “perceiving China as a threat and acting upon that
perception help bring that feared China threat closer to reality.”g
Ultimately, the representation a country makes of another is never fully
objective; rather, it reflects the “self-imagination, desire, and power” of the
country making the representation.
a John Mearsheimer, The Tragedy of Great Power Politics (New York: Norton, 2001).
b Charles Kupchan, No One’s World: The West, the Rising Rest, and the Coming Global Turn (New
York: Oxford University Press, 2012).
c Charles Kupchan, “America’s Place in the New World,” New York Times, April 7, 2012.
d Chengxin Pan, Knowledge, Desire and Power in Global Politics: Western Representations of
China’s Rise (Cheltenham, UK: Edward Elgar, 2012), p. 38.
e Ibid., pp. 76–77, 82.
f Ibid., pp. 86–87.
g Ibid., p. 105.
h Ibid., p. 148.
We can see identity playing an important role in U.S. relations with the
Middle East. For example, if the United States invokes its identity as Western,
secular, and democratic in contradistinction to a Saudi Arabia it understands as
Muslim, authoritarian, and unfriendly, it may perceive dependence on oil
imports from Saudi Arabia to be a potential security problem. In contrast, if the
United States and Canada share a similar identity, then the United States may not
view dependence on Canadian oil imports as a threat to national security. As
political scientist Sebastian Herbstreuth argues, because the United States has a
“moral geography” that represents the Middle East as a hostile cultural “Other,”
it views dependence on oil imports from the region as a danger.
54 Similarly,
British international relations scholar Greggorio Bettiza shows that by imagining
the Muslim world as a distinct community, U.S. experts have drawn a boundary
between it and other imagined civilizations, providing a frame of reference
through which to interpret events in Muslim-majority countries and, in some
cases, justifying violent actions against it.
55 U.S. foreign policy might be very
different if American experts adopted non-civilizational discourse to
conceptualize people with different identities.
A significant body of work with constructivist underpinnings is securitization
theory—also known as the Copenhagen School—which emerged in the late
1980s and was popularized by Barry Buzan and Ole Wæver. Securitization
occurs when elites, through discourse, construct an issue as a security threat; if
the public agrees with the discourse, leaders can undertake exceptional measures
against the security problem—such as suspending civil liberties—that the public
wouldn’t normally sanction. Issues like immigration, the drug trade, cyber
hacking, and climate change can be securitized even if they don’t have a military
dimension. What is important for securitization is that elite groups use speech
acts to define a problem as an existential threat to the state or society, and that a
community collectively accepts the security framing. Constructivists often use
discourse analysis to explain how securitization occurs.
Securitization can be problematic when it diverts us from understanding
problems through alternative frames. For example, we could view the drug
problem primarily as a public health issue, or we could frame immigration as an
economic benefit to destination countries. Securitization often causes
governments to address an issue with military and law enforcement instruments
that may be inappropriate or expensive compared to alternative instruments.
During the 2016 presidential campaign, Donald Trump tried to securitize
Muslims and Latin American immigrants. While many Americans did not accept
this discourse, enough did to lend momentum to extraordinary measures
President Trump proposed or enacted, such as building a wall on the Mexican
border and preventing many Muslims from traveling to the United States. Critics
argue that these measures, which they view as costly responses to non-existent
security threats, will provoke countermeasures from others overseas that will
weaken the ability of the United States to achieve its foreign policy goals.
Securitization of migration in Europe, about which much has been written,
connects to debates in the European Union about crime, the welfare state, and
cultural identity. Jef Huysmans argues that, among other things, securitization
“renders suspicion into an organizing principle of sociality through diffusing
uncertainties and risks.”56 Thus, securitization and the security practices that
accompany it, such as surveillance, alter how we interact in society and
potentially harm democracy. In contrast, securitization of some issues, such as
infectious diseases and climate change, doesn’t necessarily lead to a militarized
response; it can raise the priority of the issues and compel states to mitigate
potential risks in the future. Because securitization affects what resources a state
will use and how, it has implications for government spending. For example, an
expected peace dividend after the Cold War never materialized in the United
States; arguably, supporters of the military–industrial complex “constructed”
new security threats such as terrorism, Iraq, the Taliban, China, and failed states
in order to keep Congress from slashing the defense budget.
We can also securitize an anticipated future event. Geographer Andrew
Baldwin identifies two narratives about large-scale human migration caused by
climate change. Each narrative “authorizes a different politics.”57 A
“sovereigntist” narrative casts migration caused by climate change as a future
threat to national security and international order, requiring states to prepare now
to strengthen borders or use military force. A “liberal” narrative sees climateinduced migration as a development problem that will necessitate better
international governance and acceptance of managed migration. How we
imagine the future (which is not yet a reality) affects the actions states will take
today. Similarly, international relations scholar Maria Julia Trombetta says that
to securitize climate-induced migration is to turn its victims into perpetrators,
while to frame this migration as a human security issue is to emphasize
protecting vulnerable people.
Economic ideas strongly shape government policies. Constructivists seek to
explain from where these ideas originate and how they become accepted by
states and IOs as the self-evident justification of policies. This may require
studying the influence of academic economists, treaty negotiations, or internal
deliberations of a big organization like the World Bank. Although many
competing ideas float around in the policy world, those that become dominant
are very resistant to change. Sometimes it takes a traumatic event—a war, a
financial crisis, or the collapse of the Berlin Wall—to get organizations to accept
alternative ways of viewing the world and defining their role within it.
The Power of Economic Ideas
John Maynard Keynes’s ideas spread rapidly after World War II and became the
underpinning of the Bretton Woods institutions (see Chapter 2). But a new
neoliberal discourse rose to challenge these ideas in the 1970s and 1980s, spread
by American economists who constructed a different worldview about the role
of the state in an economy. The IMF in particular spread the notion that capital
mobility—i.e., unrestricted flows of private capital across borders—was a
necessary policy for every state that wanted to develop rapidly. IPE scholar
Jeffrey Chwieroth finds that IMF staff—made up mostly of economists—
brought to the IMF neoclassical economics ideas that they had been trained to
believe in during graduate school.
59 The organizational culture in the Fund
privileged economic theory, which had turned against Keynesianism and capital
controls by the 1970s. Chwieroth’s broader point is that the preferences of
international organizations are shaped in part by intra-organizational processes
in which culture, beliefs, and expertise of staff are important. However, shocks
such as the 1997 Asian financial crisis and the 2007–2008 global financial crisis
increased opportunities for New Keynesians among the IMF staff to endorse
capital controls in certain conditions. In the 2000s there were more
disagreements among staff, also reflecting changing ideas within the economics
profession about what unfettered markets lead to.
Similarly, in the 1990s the World Bank began to change some of its views on
development in the face of sustained efforts by TANs, which slowly convinced it
that promoting environmental and social norms like sustainable development,
poverty alleviation, and gender equality were part of its mission—indeed even
critical to its own identity and purpose as an organization.
60 Political scientist
Catherine Weaver argues that the World Bank’s thinking on what is necessary
for development has shifted somewhat from neoliberal orthodoxy to ideas about
good governance.
61 Empirical evidence of the failure of structural adjustment
programs and the success of state- interventionist policies in East Asia changed
thinking. In addition, pressure from lower-level staff and the appointments of
James Wolfensohn as President and Joseph Stiglitz as Chief Economist fostered
ideological acceptance that issues like corruption, rule of law, and public
administration problems needed to be incorporated into Bank development
policies. Even as ideas changed, Weaver contends that the Bank’s unwillingness
to hire non-economists who understand the cultural and political aspects of
development has limited the effectiveness of its good governance programs.
Constructivists can also help explain how neoliberalism came to triumph in
countries such as the United Kingdom, Canada, Australia, and New Zealand in
the 1980s and 1990s. Jonathan Swarts asserts that all countries have a “politicaleconomic imaginary”—that is, a “set of interrelated ideas” about “the
appropriate extent and form of state regulation of economic life and the
legitimate objectives of state economic policy.”62 Elected officials such as
Britain’s prime minister Margaret Thatcher and Canada’s prime minister Brian
Mulroney changed their nations’ political-economic imaginary. How did they do
it? Swarts identifies some key mechanisms they used: persuasion; rhetorical
coercion (such as arguing that “there is no alternative” to neoliberalism); appeals
to material self-interest; and coercion (imposing laws that people have to comply
with such as privatization of state-owned enterprises and labor market
deregulation). Eventually, most political parties came to accept the neoliberal
imaginary; it assumed a taken-for-granted nature. As a result, argues Swarts,
“the language of the ‘free’ market, the priority placed on growth and efficiency,
and the acceptance of market logic as factual and uncontested have become
firmly entrenched in the political-economic imaginaries of the Anglo-American
democracies.”63 However, in the 2010s Donald Trump and France’s Marine Le
Pen have used the same kinds of mechanisms as Thatcher and Mulroney to
spread a new imaginary centered on economic populism, anti-immigration, and
Economic ideas don’t only come from academics, international organizations,
and politicians. They also accrete from the everyday actions of ubiquitous
markets. Political philosopher Michael Sandel describes how market values have
permeated society in the last 30 years, reaching into “spheres of life traditionally
governed by nonmarket norms.”64 Private military contractors, prison
contractors, and for-profit colleges now provide services that used to be within
the government’s purview. Sperm, women’s eggs, and the right to pollute can
now be bought and sold. Before the 2000s, college football bowl games were
simply named after bulk commodities like sugar, cotton, oranges, and roses, but
now private businesses can buy official naming rights, such that at the end of
2016 we could watch the Rose Bowl Game Presented by Northwestern Mutual,
the Capital One Orange Bowl, the Allstate Sugar Bowl, and the Chick-fil-A
Peach Bowl. Few readers of this textbook are probably aware that before the
1980s, U.S. regulations prevented pharmaceutical companies from advertising
their prescription drugs directly to consumers (and it wasn’t until 1997 that drug
ads became common on television in the United States).
Sandel worries that these changes enhance inequality, corrupt public life, and
sometimes devalue the things that enter into markets. He argues that the reach of
markets should be determined by political debate, informed to a much larger
extent by moral and ethical reasoning.
65 As we become habituated to pervasive
markets, it becomes harder to imagine (or remember) that there are other ways
we could choose to distribute certain goods and services, such as by merit, need,
or lottery.
66 Efficiency is a value that markets are good at maximizing, but if a
polity values propriety or something else in social relationships, it may want to
keep commercialization at bay.
Finally, our understanding of the economy depends to a significant extent on
what we measure and how we measure it (see Box 5.3). Quantitative measures
and indicators construct the knowledge upon which decisions are made about
finance, trade, global health, and other facets of the global political economy.
Indicators come into existence through a social process involving choices of how
to measure, what to include and leave out, and what assumptions to make.
They often reflect the interests of powerful political actors.
We encourage readers to cultivate the habit of assessing measures and
indicators that economists and political scientists often take for granted.
Daniel MOgge argues that everyday macroeconomic indicators like GDP,
inflation, and deficits are powerful ideas that shape policy choices and the
distribution of resources in a society.
a For example, GDP gives us a sense
of how well an economy is doing, but it does not measure environmental
destruction that accompanies economic growth. Inflation is a measure of
the annual average rise in prices for a basket of goods. Governments often
use it to determine how much to increase social spending, and companies
rely on it when deciding on salary increases. But inflation is a blunt
measure. As Mügge points out, depending on what a household consumes
at its level of income, the national inflation rate can underestimate or
overestimate the effects of price changes on it.
Constructivists stress that indicators are often subject to political
manipulation and have political effects because of the way they influence
perceptions of how well a government is managing the economy. When we
use a measure we should consider whose interests it serves best and what
assumptions lie behind it. Controlling the criteria of indicators and publicly
issuing the indicators give some organizations significant influence. For
example, Lorenzo Fioramonti points out that credit ratings have become
“an all-powerful weapon in contemporary global politics.”b They affect the
rate of interest that companies and countries pay when they borrow. Global
investors in stocks and government bonds make decisions based in part on
information from the three main credit ratings agencies—Standard & Poors,
Moody’s Investor Services, and Fitch Ratings. As the financial crisis
showed, credit rating agencies do not necessarily issue credible ratings.
They misled investors by giving high ratings to many risky bundles of
mortgage-backed securities. And during the height of the Eurozone crisis,
ratings downgrades of some Eurozone countries caused borrowing costs to
rise, thereby making economic conditions worse. In that sense, the
indicators helped produce the very outcome they were ostensibly claiming
to predict independently. Fioramonti believes that credit rating agencies
essentially shift some control of macroeconomic policies away from the
people and their government, thereby weakening democracy. He does not
think so much power over perceptions in capital markets should be in the
hands of just a few private companies using myopic algorithms.
Many indicators are designed specifically to produce political effects. For
example, Transparency International’s widely cited Corruption Perceptions
Index puts pressure on governments to tackle corruption.
c The World
Bank’s “Doing Business” rankings, which since 1993 have been compiled
from a set of indicators of the “ease of doing business” in each country in
the world, have goals that include “encourag[ing] economies to compete
towards more efficient regulation” and “offer[ing] measurable benchmarks
for reform.”d Critics point out that the rankings promote neoliberal ideals
and “ignore the social benefits of regulation.”e A. T. Kearney’s Foreign
Direct Investment Confidence Index and the OECD’s FDI Regulatory
Restrictiveness Index can affect how much foreign investment a country
attracts. Even indicators of climate change may affect how seriously states
try to move from carbon-based to renewable energy. In all of these
examples, indicators do more than just explain; they have a performative
function that guides states toward particular goals.
a Daniel Mügge, “Studying Macroeconomic Indicators as Powerful Ideas,” Journal of European
Public Policy 23:3 (2016): 410–427.
b Lorenzo Fioramonti, How Numbers Rule the World: The Use and Abuse of Statistics in Global
Politics (London: Zed Books, 2014), p. 42.
c See www.transparency.org/research/cpi/.
d See www.doingbusiness.org/about-us.
e World Bank, “Independent Panel Review of the Doing Business Report,” June 2013, p. 20, at
The Role of Economic Ideas in the Global Financial Crisis
Economists have more influence on public policies than any other group of
social scientists. Daniel Hirschman and Elizabeth Popp Berman describe one of
the important ways in which economists affect politics: they shape the
“cognitive infrastructure of policymaking with their styles of reasoning or policy
devices.”68 Components of economic thinking, including cost-benefit analysis,
marginal thinking, and concepts such as efficiency and externalities, also
influence the way lawyers and non-economists in government think about policy
69 For example, Keynesian ideas deeply influenced post-World War II
policy makers, and the “efficient market hypothesis” led officials to lighten
regulations on financial markets in the 1990s. According to Hirschman and
Berman, supposedly technical policy devices such as GDP and the inflation rate
actually all “involve political and moral choices,” and their use by policy makers
deeply affects the distribution of resources in society.
Some constructivists blame economists for having ideological blinders that
prevented them from predicting a crisis. A discursive analysis of internal
government documents or official reports of government economic agencies can
show us how leaders’ ways of thinking predispose them to have certain priorities
but blind them to certain kinds of information. For example, Stephen Golub,
Ayse Kaya, and Michael Reay find that before the financial crisis the U.S.
Federal Reserve was guided by a paradigm that made it unwilling to try to detect
bubbles in the economy or take action against them before they burst.
71 The Fed
generally was not looking for evidence that there were systemic risks in the
financial sector. A different mindset might have led the Fed to seek better
information and act preventatively.
Economic ideas also shaped how governments responded to the financial
crisis. The post-2009 European response has been puzzling. Eurozone countries
stuck with austerity policies, even in the face of evidence that these policies were
making economic conditions worse in many countries. How can we explain this?
Political scientist Sebastian Dellepiane-Avellaneda points to the dominance of
the idea of “expansionary fiscal contractions” as a key driver of Eurozone
governments’ behavior.
72 In the 1990s, an influential group of Italian economists
—many of whom graduated from Milan’s Bocconi University—developed the
argument that during a recession it is not wise for a government to increase
spending and borrowing; rather, cuts in government spending and increased
taxes (also called “fiscal consolidation” or austerity) are most likely to produce
economic growth. In other words, austerity is good, budget deficits are bad.
They also assert that it is more effective to cut spending than to raise taxes
(particularly on the rich). Finally, they say that voters do not punish leaders who
carry out austerity; in fact, voters sometimes even reward them electorally.
These ideas directly contradict Keynesian ideas that recommend government
stimulus spending during a recession. The so-called “Bocconi Boys” and other
economists who believed in the benefits of expansionary fiscal contractions
constituted an epistemic community, spreading their ideas in academic journals
and in publications of the European Union, the IMF, and the OECD that were
directed at policy makers. Many EU policy makers did not really believe that
austerity would produce painless economic expansion, but they went along with
the idea because it framed policy debates and facilitated some of their policy
goals, such as small government.
73 Although the idea of expansionary fiscal
contractions has not been as influential in the United States as in the European
Union, pressures in the U.S. Congress for balanced budgets, a lower federal
deficit, and lower taxes on the wealthy echo some of its themes.
Finally, it seems clear that the ideas of German academics and policy makers
shaped the European Union’s response to the euro crisis. In post-war Germany,
ordoliberalism, which stressed balanced budgets and state-enforced rules for
competition, became the dominant economic view (see Chapter 2). Stability
became a culturally ingrained value. According to Matthias Matthijs and
Kathleen McNamara, the German narrative of the euro crisis was a “morality
tale of Southern profligacy vs. Northern thrift.”74 The authors state how the
narrative categorized EU countries: “Hard work, prudent savings, moderate
consumption, wage restraint, and fiscal stability in Germany were seen as
Northern virtues and were juxtaposed to the Southern vices of low
competitiveness, meager savings, undeserved consumption, inflated wages, and
fiscal profligacy in the Mediterranean.”75 This framing made austerity the
logical solution to financial crisis instead of issuance of Eurobonds and debt
forgiveness. It also ignored the possibility that Germany and other Northern
creditors may have irresponsibly lent too much to debtor countries. As Mark
Blyth pithily points out, “It is manifestly impossible to have over-borrowing
without overlending.”76
Ideas are very powerful and should be taken seriously. Constructivist theory
challenges us to think about IPE in new ways. As John Maynard Keynes noted
famously in the closing pages of his General Theory,
the ideas of economists and political philosophers, both when they are right
and when they are wrong, are more powerful than is commonly understood.
Indeed the world is ruled by little else. Practical men, who believe themselves
to be quite exempt from any intellectual influences, are usually the slaves of
some defunct economist. Madmen in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years back.
A good IPE analyst asks how an issue comes to our attention, how we talk about
it, and whether there are alternative ways to interpret the issue. How are ideas
generated, diffused, and adopted? How do governments determine what their
“national interests” are? How would the world be different if 9/11 were
constructed as a crime rather than an act of war? How would we have reacted to
the global financial crisis if we came to believe that it was caused by
overlending, not overborrowing? Would there be a militarized war on drugs in
Latin America if we conceived of the drug “problem” as created by U.S.
demand, not Latin American supply?
Constructivism provides us tools to better understand many global issues. It
focuses on how framing an international issue in a certain way necessarily means
that some information gets excluded or hidden from public view. It encourages
us to consider what ways of seeing get lost and whose voices are silenced by the
way a problem is rendered. It directs our attention to actors and forces that have
been overlooked in the liberal, mercantilist, and structuralist perspectives. In so
doing, it shows us that states and markets are not the only shapers of the world;
other actors such as norm entrepreneurs and social movements also propagate
new norms that states may eventually accept, internalize, and craft their policies
upon. It reminds us that the study of IPE cannot be divorced from moral and
ethical questions. Unless we grapple with the different ways that people perceive
the world, we will find it hard to explain what motivates their behavior.
constructivism 98
norm entrepreneurs 99
problematization 100
framing 100
discourse analysis 102
norms 104
norm cascade 104
boomerang pattern 105
spiral model 105
transnational advocacy networks (TANs) 105
epistemic communities 106
odious debt 108
norm antipreneurs 110
security community 111
nuclear taboo 112
securitization 114
capital mobility 116
expansionary fiscal contractions 119
Identify some norms that many states or societies have not accepted and
internalized. What factors explain the resistance to these norms? Do you
think global norm entrepreneurs will be able to overcome some of this
What criticisms can be made of constructivism? Do constructivists
underestimate the importance of material power in affecting global issues?
What tools do we have to measure whether norms actually influence an
actor’s outlook and actions?
Identify problems that have been securitized or that elites have attempted to
securitize. Do you agree that these problems constitute serious threats to the
state or society? What are alternative ways to frame and discuss these
What elements of culture or national identity in your country seem to
strongly shape its relations with other countries?
What elements of social life do you think should be off limits to market

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