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Lecture Five: Theoretical Conversations--LiberalsApril 15, 2008

Lecture Five: Theoretical Conversations--LiberalsApril 15, 2008

Professor Timothy C. LimCal State Los [email protected]

POLS/ECON 426 International Political Economy

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?

Theoretical Conversations in IPELiberal Perspectives

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

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

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.

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.

What is Liberalism?

From the classical perspective, it is worthwhile noting that …

We are all liberals




Yes, even Rush Limbaugh is a liberal!





Respect of Individual Rights: A Respect of Individual Rights: A Paradox?Paradox?In the liberal view, individuals have inalienable In the liberal view, individuals have inalienable natural rights that must be protected natural rights that must be protected

This raises a fundamental question: This raises a fundamental question: Protected by whom?Protected by whom?

Short answer …Short answer …

Here’s the paradox: Here’s the paradox: While the state is While the state is necessary to safeguard individual rights, necessary to safeguard individual rights, the state, in turn, is one of the greatest the state, in turn, is one of the greatest threats to individual libertythreats to individual liberty


THE STATETHE STATE

Fear of the state’s threat to individual freedom is reflected in the

notion of “Big Brother”

Fear of the state’s threat to individual freedom is reflected in the

notion of “Big Brother”



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)

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)



Liberalism: Basic TenetsThe 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

Liberalism: Basic TenetsThe 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

"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

Liberalism: Basic TenetsThe 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






Liberalism and Adam SmithSome 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, * Smith’s most famous work, The Wealth of Nations, was first published in 1776was first published in 1776




Liberalism and Adam SmithSmith 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

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






Liberalism and Adam SmithSmith also introduced the

concept of the invisible hand, which is often misunderstood …

So, what is the invisible So, what is the invisible hand?hand?

Is there is single Is there is single wordword

one can use to define one can use to define thethe

invisible hand? invisible hand?






Liberalism and Adam SmithThe 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

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






Liberalism and Adam SmithThe 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

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This was another critical blow against the hitherto unchallenged assumption of state dominance

This was another critical blow against the hitherto unchallenged assumption of state dominance




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

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, 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 not equal: 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




Liberalism, IPE, and Free TradeWhat 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?


Liberalism, IPE, and Free TradeThe 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

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

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Liberalism, IPE, and Free TradeExample: 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!


Varieties of LiberalismThere 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


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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.

In the long run, we’re all dead.


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


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Summing UpSumming Up As with mercantilism, liberalism can only be fully As with mercantilism, liberalism can only be fully understood in historical perspective: it was a reaction understood in historical perspective: it was a reaction against state structures that, from a liberal perspective, against state structures that, from a liberal perspective, represented the antithesis of the market represented the antithesis of the market

This is one reason why liberalism generally depicts the This is one reason why liberalism generally depicts the market and the state in dichotomous or mutually market and the state in dichotomous or mutually contradictory terms, which (some might say) is both contradictory terms, which (some might say) is both liberalism’s greatest strength and greatest weaknessliberalism’s greatest strength and greatest weakness

The principles of liberalism cannot be ignored: The principles of liberalism cannot be ignored: methodological individualism, competition, market forces, methodological individualism, competition, market forces, free trade, comparative advantage, and so on are all free trade, comparative advantage, and so on are all relevant features of modern capitalism relevant features of modern capitalism

At the same time, liberalism offers only a partial view of At the same time, liberalism offers only a partial view of the international and global political economiesthe international and global political economies

lecture five: theoretical conversations--liberals april 15, 2008 lecture five: theoretical...

Documents

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state fear

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context of ipe slide

economic liberalism

active state role