Lecture Five: Theoretical Conversations--Liberals April 15, 2008

POLS/ECON 426 International Political Economy Lecture Five: Theoretical Conversations--Liberals April 15, 2008 Professor Timothy C. LimCal State Los Angelestclim@calstatela.edu

Theoretical Conversations in IPELiberal Perspectives What is Liberalism? Some Questions • Who’s a “liberal”? • Are liberals “leftists”? • Who subscribes to liberal beliefs? • If you classify yourself or others as a liberal,what does that mean? For our purposes it is essential to distinguish between liberalism in the context American politics and liberalism in the “classical” context or in the context of IPE

Theoretical Conversations in IPELiberal Perspectives What is Liberalism? • In the context of American politics, “liberal” refers to … Democratic Party ideas, which advocate active state role in society, a focus on government’s ability to solve social problems, to manage economic affairs, etc • In the classical context or context of IPE, liberal has a very different meaning … It is based on idea of individual rights and personal freedom (i.e., rights that are separate from the sovereign); representative, but limited government, etc. In addition, economic liberalism based on idea of a self-regulating market and laissez faire principles Laissez faire is a French phrase literally meaning "let do." It is used as an injunction against government interference with trade, and is now used as a synonym for strict free market economics. Click here for more.

Theoretical Conversations in IPELiberal Perspectives What is Liberalism? From the classical perspective, it is worthwhile noting that … We are all liberals Yes, even Rush Limbaugh is a liberal!

Theoretical Conversations in IPELiberal Perspectives Respect of Individual Rights: A Paradox? In the liberal view, individuals have inalienable natural rights that must be protected • This raises a fundamental question: Protected by whom? • Short answer … • Here’s the paradox: While the state is necessary to safeguard individual rights, the state, in turn, is one of the greatest threats to individual liberty THE STATE Fear of the state’s threat to individual freedom is reflected in the notion of “Big Brother”

Theoretical Conversations in IPELiberal Perspectives Liberalism and the State • The liberal view of the state, therefore, is complicated: the state is both necessary and despised • This applies both to the political realm and the economic realm In the political realm, the state provides order and security, which are needed for individual rights to thrive In the economic realm, the state provides order and security, which are needed for markets to thrive For students of IPE/GPE, we must always remember the paradoxical nature of the state in a “liberal society” and market economy; we must always consider the question: what would our world be like without the modern state? This is a question that Thomas Hobbes’ famously addressed in his book, The Leviathan (1851)

Theoretical Conversations in IPELiberal Perspectives Liberalism: Basic Tenets The primacy of the individual • Because liberals put so much emphasis on the individual, it should not be a surprise that they put individuals squarely at the center of their analyses of the political economy • To repeat: the primary unit of analysis for liberals is the individual It is important to understand the implications of this position: liberals tells us that it is decisions made by individuals that determine the nature of our lives, the dynamics and shape of the world, and so on From this perspective, therefore, there’s no point in looking beyond the individual (at least in principle), since any human institution, structure or organization is simply an aggregation of private interests methodological individualism

Theoretical Conversations in IPELiberal Perspectives Liberalism: Basic Tenets The primacy of the individual Taken to its logical conclusion, liberalism tells us that nothing exists beyond the individual, including “society” … consider this statement by Margaret Thatcher, a champion of liberal ideas: • "I think we've been through a period where too many people have been given to understand that if they have a problem, it's the government's job to cope with it … ‘I'm homeless, the government must house me.’ They're casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first.” • Prime minister Margaret Thatcher, talking to Women's Own magazine, October 3 1987

Theoretical Conversations in IPELiberal Perspectives Liberalism: Basic Tenets The primacy of the individual: One last point Implicit in the liberal focus on the individual is the idea that any constraint on the ability of individuals to act in their own interests, by definition, inhibits their freedom And any interference with the freedom of people to act is a violation of their natural (or God-given) rights This is key reason why liberals are so wary of the state: by its very existence, the state inhibits freedom

Theoretical Conversations in IPELiberal Perspectives Liberalism and Adam Smith Some General Questions • What do you know about Adam Smith? • What were his key ideas? • Are his ideas still relevant today* * Smith’s most famous work, The Wealth of Nations, was first published in 1776

Theoretical Conversations in IPELiberal Perspectives Liberalism and Adam Smith Smith provided the liberal justification for the free pursuit of self-interest: he argued that, by allowing individuals to maximize their own gain, society as a whole would gain Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society

Theoretical Conversations in IPELiberal Perspectives Liberalism and Adam Smith Smith also introduced the concept of the invisible hand, which is often misunderstood … So, what is the invisible hand? Is there is single word one can use to define the invisible hand?

Theoretical Conversations in IPELiberal Perspectives Liberalism and Adam Smith The Importance of the Invisible Hand • Based on the notion that self-interested behavior by itself is no guarantee that society will be better off; in fact, Smith was quite clear that completely unfettered self-interest was detrimental to the market and society • What keeps self-interested behavior socially-beneficial, to repeat, is competition As Smith argued, in competition, individuals are essentially forced to act in ways that simultaneously promote their own interests as well as the public interest: Competition DISCIPLINES the market

Theoretical Conversations in IPELiberal Perspectives Liberalism and Adam Smith The Importance of the Invisible Hand: Two more points Strongly qualified the idea that “greed is good”: instead, Smith argued that greed is good only when disciplined by the invisible hand of the market At the same time, the idea of the invisible hand undermined the then prevailing idea that the “visible hand” of the state was necessary to discipline market actors 1 2 This was another critical blow against the hitherto unchallenged assumption of state dominance

Theoretical Conversations in IPELiberal Perspectives This is not to say that Smith did not talk about international political economy; he did, for example, assert that free trade is good. His ideas about IPE, however, were underdeveloped Liberalism and IPE • Smith’s focus was primarily domestic, that is, he was concerned with how liberal principles contributed to the development of the domestic, as opposed to, international economy • Other liberal economists, however, applied the basics of Smith’s analysis to the international economy as well • Not surprisingly, they concluded that his principles of political economy worked equally well in the international realm; thisis especially true withregard to free trade

Theoretical Conversations in IPELiberal Perspectives Liberalism, IPE, and Free Trade • Almost all liberals agree that countries are better off when goods and services move freely across national borders in mutually rewarding exchanges: in short, liberals believe in free trade • The liberal argument for free trade is true even when countries are notequal: e.g., if one country is much more prosperous and much more productive than another, free trade still benefit all parties • The belief that free trade is mutuallybeneficial even under conditions of inequality is the crux of the liberal argument on free trade

Theoretical Conversations in IPELiberal Perspectives Liberalism, IPE, and Free Trade What liberal principle tells us that free trade is always mutually beneficial? COMPARATIVE ADVANTAGE • What is comparative advantage? • Who developed this idea? • Why was/is the idea of comparative advantage important?

Theoretical Conversations in IPELiberal Perspectives Liberalism, IPE, and Free Trade The Logic of Comparative Advantage • The logic of comparative advantage is fairly simple: it is based on the idea that, if a country specializes in producing those products for which it is most suited, and then trades with other countries that are also specializing in producing products for which they are most suited, both countries will benefit • They will both benefit because the products are being produced in the most efficient manner possible; this is true even when one country has no absolute advantage in producing any one product Smith believed that all countries have some natural “absolute advantage” in the production of some good: it was this assumption that led Smith to argue that free trade is good for everyone

Theoretical Conversations in IPELiberal Perspectives Liberalism, IPE, and Free Trade Example: if Country A, say Japan, is better a producing both automobiles and shoes than Country B, say Vietnam, in absolute terms, it still makes more sense for Japan to specialize in the production where it can derive the greatest relative efficiency and productivity (autos), and allow Vietnam to specialize in the product in which it is relatively (but not absolutely) more efficient (shoes) • Both countries are better off because, when they specialize, they are able to produce more overall than they would than if both tried to make autos and shoes • To liberals, then, one of the basic problems of the IPE is that nation-states continue to operate on the mistaken assumption that they can be better off by trying interfere with the free flow of trade, rather than just accepting its mutually beneficial effects Specialization and trading makes everyone better off!

Theoretical Conversations in IPELiberal Perspectives Varieties of Liberalism There are deep disagreements among liberals: • On one side (Hayek, Friedman) are those with a single-minded belief in the power of the unfettered market to achieve optimal results through a self-correcting process • On the other side are those who believe strongly in a free market, but also recognize that markets are not perfect; they focus on “market failures” One of these was John Maynard Keynes, who believed that markets do not always self-correct In these cases, he advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms

Theoretical Conversations in IPELiberal Perspectives Varieties of Liberalism: Keynesianism • Keynes developed a strong intellectual and practical challenge to orthodox liberalism • The main theme of his work was that the orthodox belief in the convergence between self-interest and the public interest was dangerously exaggerated; even accepting that markets may eventually self-correct, Keynes believed that governments had a duty to intervene to correct market failures. Waiting wasn’t an option; as he so famously put it … In the long run, we’re all dead.

Theoretical Conversations in IPELiberal Perspectives Varieties of Liberalism: Keynesianism • His main argument, to put it in very simple terms, was that the mainstream understanding of equilibrium was wrong • It was wrong in the sense that, while markets always tend toward an equilibrium position, the position reached would not always be socially beneficial: e.g., it is possible to have equilibrium with unacceptably high levels of unemployment • From Keynes’s perspective this was terribly in-efficient in both and economic and political terms • Economically, it led to the under-utilization of capital and labor • Politically it created a basis for serious, even fatal instability

Theoretical Conversations in IPELiberal Perspectives Summing Up • As with mercantilism, liberalism can only be fully understood in historical perspective: it was a reaction against state structures that, from a liberal perspective, represented the antithesis of the market • This is one reason why liberalism generally depicts the market and the state in dichotomous or mutually contradictory terms, which (some might say) is both liberalism’s greatest strength and greatest weakness • The principles of liberalism cannot be ignored: methodological individualism, competition, market forces, free trade, comparative advantage, and so on are all relevant features of modern capitalism • At the same time, liberalism offers only a partial view of the international and global political economies

Lecture Five: Theoretical Conversations--Liberals April 15, 2008