Internation Relation Paper on International Political Economy: Mercantilism, Classical Liberalism, and Modern Liberalism

International Political Economy: Mercantilism, Classical Liberalism, and Modern Liberalism

Through different periods of time scholars tried to describe the relationship between economics, state and international relations. For each period of history or epoch scholars come up with variety of theories like mercantilism, Adam Smith’s classical liberalism or Keynes and Mill’s modern liberalism. Throughout the time each of these theories proved to perform its job good or bad. And each of these theories has their own explanation of different events related to International Political Economy.


Mercantilism is the first theory that proved instrumental in the understanding of international political economy (IPE). The earliest distinctive mercantilist writings appeared during the sixteenth century, a time when the modern capitalist world economy was being established. However, mercantilism does not purely exist as a systematic theory, but also appears to constitute a wide range of policy prescriptions and ideas. It is due to the above-mentioned qualities that make mercantilism to exist both as a theory that explains the working of the IPE and as a philosophy that defends mercantilist policies. Mercantilist policies are those that strive to protect domestic industries at the expense of foreign industries, and are characterized by tariffs, quotas, subsidies, and tax breaks, among others. Therefore, mercantilism is strongly related to the political philosophy of realism, which focuses primarily on the efforts by a sovereign state aimed at accumulating wealth and power with the sole purpose of protecting its society from the physical harm or influence exerted by other states.     

The early forms of mercantilism were focused on the dominance of the respective national interests in economic policy, in which the state’s core responsibility involved directing economic activity and creating favorable trade balance that would promote growth and prosperity. Mercantilists believed that state’s efforts to maximize wealth was a crucial means to gaining power for national security, be it defensive or aggressive. Mercantilism views the international system and economy as comprised of different economies competing with each other for a given size of economic wealth, in which the state either wins or losses. Therefore, early mercantilists recognized and legitimized the role of the state in regulating or controlling the nation’s domestic economic activity, and further promoting external economic expansion, either through peaceful or military means. The increase in economic liberalism ideas advocating for free trade in the 18th and 19th century made mercantilism take a slightly different dimension. The 19th century mercantilism considered nation-building and state intervention as playing a critical role in promoting economic growth of the less developed states or economies. It emphasized that nations that are in the early stage of development have to rely on quite different policies to catch up with the more developed ones. They believed that the less developed states could only realize economic growth through erecting protective barriers that minimize competition from superior economies. These mercantilists also advocated for specific policies that promote development of infant industries in developing economies to enable them reach a state of international competitiveness. During the economic depression of the 1930s, the most developed economies were forced to alleviate their condition through the mercantilist’s policies. The nationalist mentality greatly informed the establishment of colonial and semi-colonial trading blocs, for instance those by Britain, Japan, Germany, and France. For example, prior to their military defeat in 1945, both Germany and Japan had launched extensive military expansion across Europe and East Asia respectively to achieve economic gains through mercantilism.

After the end of the Second World War, the neo-mercantilist ideas re-emerged in the form of developmental theory. The neo-mercantilist greatly influenced the economic policy of developing nations through the dependency theory.  The new forms of mercantilism are deeply entrenched in the contemporary global economy, and are evident through the activities of international trade institutions such as the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO) that are strongly controlled by the developed nations. For example, the increased protectionism of essentials such as food, agricultural products, and manufactured goods from developing countries are strongly subjected to tariff regulations in industrialized economies, even in the presence of the General Agreement on tariffs and Trade (GATT) that is meant to promote international trade and prevent mercantilism. Furthermore, conditions imposed on developing countries, such as the Structural Adjustment Programs, which were economic policies designed for developing countries since the early 1980s are still adversely affecting the socio-economic future of developing countries. The borrowing of development loans at high interest from these institutions and other developed nations have entrapped developing nations in debt crisis. The terms of trade dictated by developed nations controlling the WTO have created inequalities in the balance of payments (BOP) between rich and poor countries at the expense of developing nations as they end up making cheaper exports and while incurring high import costs. Therefore, mercantilism clearly explains the close relationship between economics, the state, and international relations.   

Classical Liberalism

The classical liberalism is drawn from the economics of Adam Smith. The classical liberalism’s central claim is that the creation of a free market can result in improved division of labor and coordination of the division of knowledge through the price mechanism can significantly improve individuals’ rationality. The resulting specialization facilitates better allocation of a society’s resources, thereby leading to greater national wealth. However, classical liberalists do not consider a free market as one characterized by perfect competition. Furthermore, they insists that harmony of interests is often non-existence in such market, thus the need for a legal framework that would be instrumental in mediating between clashing interests and reconciling individual-self interest with the public good (Lal, 2010, p. 49). Classical liberals do not believe in absolute free market without government intervention, but advocates for a government intervention through lawful protection of liberty to prevent entities from hurting one another in the marketplace (Economides & Wilson, 2002, p. 21-22). They were also opposed to government’s intervention in the marketplace where it discriminates some against others, such as imposing tariffs, providing subsidies, and enforcing monopolies. Therefore, rather than interfering with the market, Smith emphasized that the functions of the state should be limited to protecting the society from foreign invaders, ensure every individual in the society is free from oppression and injustice as much as possible, and finally, provide and maintain various public works and public institutions that provide public goods (Lal, 2010, p. 49-50). However, some of the responsibilities of the government proposed by Smith, such as preventing enterprises form forming monopoly and protecting society from the perceived foreign invaders (powerful foreign enterprises) appeared to support the protectionism of the mercantilism system (Walter, 1996, p. 7-8)     

Classical liberalism views the national mixed economies as harmful to the market economy because they encourage trade protectionism and capital controls (Van, 2009, p. 146). According to classical liberalists, the states undertaking trade protectionism and capital control measures do so for the short-term gains, while totally disregarding the long-term benefits which are more important in realizing sustained economic growth. Therefore, the classical liberalists hold the view that people would benefit greatly in the long-term if the state intervention is kept at a minimum. To them, the benefits realized from free market are not only confined to the domestic economy, but would rather spill-over to other states that the domestic market trades with. The reason for this is that the free market economics normally generates a need for inputs, some of which have to be imported from abroad. Furthermore, enterprises are constantly exploring new markets for their goods and services. It is through these activities that trade between state is encouraged, which eventually influences their respective international relations. Classical liberalists insists that free trade between states could prove mutually beneficial in the long-term as it would bring about interdependence among states and improve wealth generation, both of which would minimize the possibilities of conflict, for instance, encouraging economic protectionism measures that are driven by the state’s short-sighted and perverse conceptions of the ‘national interest’ (Steans et al., 2013, p. 28). Classical liberalism believe that the interdependence between states because of their respective specialization in production of goods and services needed by other states would foster integration between states and people, which would lead to shared interests and increase in the costs of conflict. Such outcomes would significantly improve how states relate with one another in the international sphere. For instance, the interdependence would increase wealth generation in the states involved in free trade, and thereby help satisfy human needs, and to some extent wants, thus minimizing the need to attain them through unacceptable means, such as conflict. One historical case of classical liberalism free market is the 1846 repeal of Corn Law and abolishment of tariffs on many manufacturing goods in Britain (Chang, 2002, p. 23). Britain’s Corn Law that had been passed in 1815 was meant to increase agricultural protection of domestic farmers. Prior to its repeal, Britain was experiencing shortage in corn supply, and the British people purchased the available corn at high prices to inhabitants of other European and North American countries. The repeal of the Corn Law resulted in increased importation of corn from America and even the Russian empire at relatively low prices, thereby benefiting both the importing and exporting states, with its benefits trickling down to the society.           

Modern Liberalism

The modern liberalism ideas and concepts advanced by Keynes and Mill are quite different to those advocated by Smith’s classical liberalism. The modern liberalism supported interventionist government or state policies to regulate free market economies, which were mainly established based on classical liberalism ideas and concepts. The need for state interventionist policies were inspired by several things. Firstly, it was noted that free market conditions founded on the classical liberalism encouraged income inequalities between lower and higher income groups, thus raising ethical questions about justice and democracy. Furthermore, the increasing income inequality between the producers and consumers appeared to lead into some serious economic crisis. This is because capital-intensive techniques of production tended to increasingly concentrate wealth in fewer and fewer hands. This inequality would result in a situation where we have increased aggregate production and decreased aggregate consumption, in which the goods produced, might go into waste as they would be unaffordable to the masses, thereby creating an economic crisis. Therefore, there was need for the state to re-design the fundamentals of domestic and international economic policy to promote justice and democracy being threatened by wealth or income inequalities. Secondly, it was noted that monopolies and cartels were increasingly dominating the world economic landscape. Collaboration between such firms in dividing up the markets was replacing free competition between enterprises within a market. In such a case, government intervention would prove instrumental in ensuring people get goods and services at a competitive price. Thirdly, under the free market, foreign firms were increasing their ability to gain a decisive or crucial competitive advantage in the international markets through exploitation of their non-unionized workforce. The varying degree of protection that the state gives workers within its jurisdiction, and the varying strength of trade union movements across countries was becoming a more important determinant of national competitiveness. It was observed that some countries were able to suppress trade unions and reject workers’ demands for employment rights and workplace regulations, thereby forcing down the price of labor. This enabled such firms to steal or unfairly gain some competitive advantage over their rivals operating in more humane and socially progressive countries. Finally, it was noted that countries that had erected high protective walls had realized tremendous success in building up immense industrial strength. This was contrary to the classical liberalism teachings that protectionism was harmful in the long-term.

Modern liberalists, such as Keynes insisted that the economic anarchy of free markets was responsible for the high unemployment rates and excessive inequality in the distribution of income. Keynes therefore attributed recessions to inadequate spending as the lower class groups have low incomes to spend, as the wealth is concentrated in the hands of few upper income groups. Keynes pointed out that recession could only be addressed through increasing the government’s expenditure so as to supplement the low spending by consumers who have low incomes and businesses that are unwilling to invest back into the economy (Harrison & Dye, 2014, p. 225).Furthermore, modern liberalists insisted that such government spending would be more effective when financed by borrowings rather than taxes, as taxes normally tend to depress private spending (Clark, 1998, p. 95). The economic order that emerged after the Second World War compelled the states to play a much greater role in directing the economic activity undertaken by private individuals and enterprises, and further providing welfare support for citizens. The deficit spending by governments greatly helped the western economies that had languished in depression for decades to spring back to life, accompanied with full employment and enormous output.   The modern liberalism thinking encouraged the establishment of a set of regimes, institutions, and agreements negotiations gave rise to the formation of the Bretton Woods Systems (BWS) that was meant to facilitate economic growth, development, and trade by offering a stable framework for international economic activity. The BWS that is comprised of the World Bank, IMF, and WTO have continued to play an important role in domestic and international development. These international institutions, particularly the World Bank and IMF have continued to significantly influence international relations between developed and developing countries. For instance, the World Bank has been compelling developed nations to adopt SAP as an effective means of addressing the problems of poverty and indebtedness before being awarded any development loans. These economic policies by the World Bank and IMF require developing countries to focus on exports in addressing their debt problem as it would generate the much needed foreign currency to service their debts. Export-led growth strategies are believed to encourage economic competitiveness, dynamism, and growth that will eventually trickle down to all sectors of the society.

Modern Liberalism Best Describes the Relationship of IPE Today

Modern liberalism best describes the relationship of IPE today as it illustrates how the economy, the state, and international relations are all interconnected. For example, after the 2008 global financial crisis, governments across the world have continued to implement interventionist measures to facilitate the recovery of their respective economies. The United States (U.S.) itself announced a stimulus package – a special fiscal package of spending and tax measures designed to increase economic activity by increasing short-term aggregate demand during periods of economic weaknesses. The deficit related to the U.S. 2010 fiscal stimulus package was expected to amount to a deficit of 3.2% and 5% of the U.S. gross domestic product (GDP) by 2013 and 2014 respectively (Elmendorf, 2010, p. 2). The economic stimulus package as a form of government intervention has helped stimulate the U.S. economic growth, thereby creating more employment and resulting in increased national output. The export of the excess production would help the U.S. reduce its foreign debts. In the international sphere, China is the largest holder of U.S, debts, a fact that has significantly influenced the relations between China and the U.S. This has compelled the U.S. to carefully manage its international relations with China to improve its economic recovery. China’s state-led capitalism has extensively provided government interventionist measures advocated by modern liberalism as essential in improving the economic growth of developing nations. Between 2011 and 2013, China surpassed the World Bank lending US$10 billion, and has played a significant role in uplifting many countries out of their economic recession situation as it was least affected by the global recession (Cruz-del Rosario, 2014, p. 121).       


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