Global Economy: Politics and Capitalism

Global Political Economy

Emergence & Development of Capitalism

The 20th Century Debate on Global Commerce

The North – South Divide

A Look Ahead

Global Political EconomyA study of the concept of a global political economy and the role of capitalism in international relations confirms that Economics and Politics are inherently tied to one another.

The idea of laissez-faire (French for "to leave alone") is a political decision. The term political economy means the intersection of politics (or authoritative choice) with economics, which is concerned with seemingly unlimited wants in a world of relative scarcity of resources.

Political economists are either economists who understand the political nature of economicsor Political scientists who understand the importance of economics.

Emergence & Development of Capitalism

Capitalism is an economic system, a form of political economyor a mode of production

Capitalism emphasizes money, market-oriented trade, capital investment for further production, and a set of values or culture legitimating investment and market-oriented behavior.

Emergence & Development of Capitalism

Capitalism replaced feudalism as the dominant form of political economy in the late Middle Ages.

Feudalism is an economic system composed of a diverse group of governmental units. It is a prime example of pluralism.

Emergence & Development of Capitalism

Attributes of emerging capitalism included markets and money, but both of these had existed in a more limited state under feudalism. The distinguishing feature of capitalism is investment. Capital goods, or goods that have no value in themselves other than their contribution to the production of other goods and services, required savings. If everything is consumed, there is nothing left to purchase these capital goods with.

Emergence & Development of Capitalism

Gross National Product (GNP):a measure of the aggregate size of a national economy in a given year. Its two important components are annual consumption and investment

how much is spent on goods and serviceshow much is saved or set aside for capital investment.

GovernmentConsumption + Investment + spending + exports – imports

GNP = C + I + S + X - M

Emergence & Development of Capitalism

Capitalist economies must sufficiently invest to avoid decline or drops in production, consumption, and living standards. Capital formation – new and continuing investment in capital goods for production and consumption

is essential to maintain or expand production, consumption, and living standards.

Emergence & Development of Capitalism

Gross Domestic Product (GDP):a more refined measure that subtracts national earnings from foreign investment. GDP = GNP - foreign investment earnings.

Neither GNP nor GDP accurately account for all commercial transactions. Excluded are

goods and services not traded in the marketplace, i.e. in the underground or black markethousehold production and consumption

Emergence & Development of Capitalism

Max Weber also pointed out another feature of capitalism. He showed how the emergence of capitalism was also accompanied by a new set of social values that supported market-oriented trade as well as savings and investment. The culture of religion and the "Protestant ethic" were central to his ideas.

Emergence & Development of Capitalism

As capitalism gained a foothold in the world, states became more and more central to the political picture.New World colonies were acquired in order to acquire gold and silver and other resources. Mercantilism is the theory of early capitalism that saw the wealth of a nation as a function of the amount of gold and other treasure that it could accumulate.Mercantilism

Generally shares with realism the belief that each state must protect its own interests at the expense of others.Emphasizes relative power: what matters is not so much a state’s absolute amount of well-being as its position relative to rival states.Importance of economic transactions lies in their implications for their military.

Mercantilism and Liberalism

MercantilismEconomics should serve politics.Creation of wealth underlies state power.Achieved prominence several hundred years ago – BritainDeclined in the 19th century.Favorable balance of trade: positive balance of trade versus negative balance of trade

LiberalismGenerally shares the assumption of anarchy but does not see this condition as precluding extensive cooperation to realize common gains.

Mercantilism and Liberalism

LiberalismHolds that by building international organizations, institutions, and norms, states can mutually benefit from economic exchanges.It matters little to liberals whether one state gains more or less than another – just whether the state’s wealth is increasing in absolute terms.

Liberalism and mercantilism are theories of economics and also ideologies that shape state policies.Liberalism is the dominant approach in Western economics, though more so in microeconomics than in macroeconomics.

Classical Political Economists in the economic liberal tradition:

Adam Smith questioned this view in his book, The Wealth of Nations.

Smith argued that wealth was not in gold, but in the productive capacities of economies. He emphasized free markets and a laissez-faire approach to economics.

David Ricardo argued for comparative advantage, saying that states should produce what they have an advantage in and trade with other states.

Comparative Advantage

The overall success of liberal economics is due to the substantial gains that can be realized through trade.

These gains result from the comparative advantage that different states enjoy in producing different goods.Transaction costs

International trade generally expands by increasing the overall efficiency of production.

Comparative Advantage

Trade is not without drawbacks:Long-term benefits may incur short-term costs.Benefits and costs of trade tend not to be evenly distributed within a state.Protectionism

Two commodities of great importance in the world are oil and cars.

Example: Saudi Arabia and Japan

The Progressive Globalization of Capitalism

Colonialism effectively spread the idea of capitalism around the world. Today, the effects of colonialism are still felt in neocolonialism, or the fact that a number of former colonies are still politically heavily influenced by their former occupiers.The second wave of imperialism of the 19th and 20th centuries effectively spread capitalist political economy throughout the globe to Africa, Asia, and the Pacific with the same European powers (British, French, Dutch, Spanish, and Portuguese) and new powers (Germany, Belgium, and the U.S.).

The Progressive Globalization of Capitalism

1750, Britain had the world’s most advanced economy

IndustrializationFree trade

Today, the largest and most advanced economy belongs to the United States.

IndustrializationTerritorial expansionImmigrant laborTechnological innovationGreat Depression and resultant protectionist policy

The Progressive Globalization of Capitalism

Keynesian economicsWWIISoviet bloc - centrally planned economy

State-owned industriesShock therapy - PolandTransitional economies

Today there is a single integrated world economy that almost no country can resist joining.

Mixed economiesMultinational Corporations (MNCs) – firms based in one state that own and manage affiliated, branches or subsidiaries in two or more countries

Multinational CorporationsMost important: industrial corporations

Automobile, oil, and electronicsUsually based in G7 states

Financial corporationsService corporations

McDonald’s AT&T

MNCs do not just operate in foreign countries; they also own capital (standing wealth) there.

U.S. and German MNCs own some of the capital located in Japan.Japanese MNCs own capital located in the United States and Germany.

Multinational Corporations

Direct foreign investment involves tangible goods such as factories and office buildings.In general, an MNC cannot operate in a state against the wishes of its government.In theory, an MNC operates in host countries only when it is in the interests of both the MNC and the host government.Conflicts may arise

Trade regulationsEx: NAFTA

Monetary policy

The host country - a state in which a foreign MNC operates.The home country – a state where the MNC has its headquarters.

Multinational Corporations

Monetary policyIssues of international securityCorruption

Conflicts with home governmentsTaxationTrade policies

SecurityOccasionally, MNCs can get their home governments to provide security when host governments fail to do so.

Impact on liberalism rather than economic nationalism

The Progressive Globalization of Capitalism

Cartels: An association of producers or consumers, or both, of a certain product – formed to manipulate its price on the world market

Can use a variety of means to affect pricesMost effective is to coordinate limits on production by each member so as to lower the supply, relative to demand, of the good.Organization of Petroleum Exporting Countries (OPEC)

40% of the world totalSaudi Arabia largest oil exporterHeadquarters in Vienna, Austria

Consumers do not usually form cartels, but the major oil-importing states formed their own organization –the International Energy Agency (IEA)

The Twentieth-Century Debate on Global Commerce

The 20th century context is best understood through the history of capitalism. In order to maintain a favorable balance of trade, many states through the years have devalued their currency, making it less valuable compared to others, and thus making their exports relatively cheap. Such competitive devaluations contributed to the onset of the world-wide economic depression in the 1930s. Attempts after World War II have also been made to organize international trade and monetary regimes, such as GATT, the WTO, and the IMF.Globalization is transforming not only trade, but money, business, integration, communication, environmental management, and the economic development of poor countries.

The World Economy, 1750 - 2000

The World Economy, 1750 - 2000

The North – South DivideToday, there still is a divide between the North & the South, or First & Third World countries. First World and the North

are used to refer to high-income stateshas a much higher standard of living, consumes much more, and are highly urbanized

South and Third World are used to refer to poorer, developing states. has a much lower standard of living, consumes much less, and are less urbanized

Theorists, including world-systems theorists, have looked at these realities in an attempt to explain these differences.

Globalization of the world economy has created a backlash in many parts of the world, including the U.S.

Growing nationalismCompetition from low-wage countries in the global South

Impact on wages in other countriesStandards of labor regulation/worker safety

Labor unions have been among the strongest political opponents of unfettered trade expansion.

Human rights Minimum wage issues, child labor, and worker safety issues

Environmental issues

The North – South Divide

Glossary List:

political economycapitalisminternationalization feudalismcapital goodsGNP/GDPMercantilism

comparative advantageprotectionismimperialismneocolonialismdevaluehard currency

This chapter examines the role of economics in international relations. Clearly, the capitalist economic structure of the world has a strong impact on the way states behave.

Review – How much do you understand?

1. Which of the following best conveys the meaning of laissez-faire in economics?A. economic inequity between nationsB. government controlC. a free marketD. none of these answers

Review – How much do you understand?

1. Which if the following best conveys the meaning of laissez-faire in economics?A. economic inequity between nationsB. a free marketC. government controlD. none of these answers

Review– How much do you understand?

2. The total aggregate of goods and services produced in a state in a given year is its?A. capital accumulation.B. Monetary reserves.C. Per Capita Income (PCI).D. Gross National Product (GNP).

Review– How much do you understand?

3. Gross Domestic Product (GDP) equalsA. GNP - returns on foreign investments.B. GNP + returns on foreign investment.C. GNP - returns on domestic investment.D. GNP (i.e., GDP is the same thing as

GNP).

Review– How much do you understand?

4. Neo-colonialism is a system of dominance or exploitation byA. multinational corporations, other

business firms, and their home countries-typically the former colonial powers.

B. Communist powers prior to the collapse of the Soviet Union.

C. mercantilist powers.D. local capitalists.

Review– How much do you understand?5. Who wrote The Wealth of

Nations?A. David RicardoB. Max WeberC. Adam Smith D. Immanuel Wallerstein

Review– How much do you understand?

6. What is meant by comparative advantage?

A. Countries should export those goods which they have an advantage in producing.

B. Countries should make colonies of those countries that they have an advantage over.

C. Individuals will only buy goods that offer them an advantage compared to other goods.

D. Individuals will only take part in capitalism if it offers an advantage over other forms of economics.

Review– How much do you understand?

7. Which of the following is an example of a hard currency?A. Mexican PesoB. U.S. DollarC. Turkish LiraD. all of the above

Review– How much do you understand?

8. Why might a country devalue its currency?A. to increase exportsB. to increase imports C. to pay off a loanD. all of these answers

Review– How much do you understand?

9. Less developed countries are also referred to asA. periphery.B. The East.C. Third World.D. none of these answers

Review– How much do you understand?

10. A key organization in the trade regime after World War II wasA. World Bank.B. GATT. C. IMF.D. International Trade Organization.