Global Political Economy 101: Liberal and Neoclassical Interpretations


Foreword


It is common to hear in public discourse that the world has never been as interconnected and interdependent as it is today. Technological progress in the fields of communication and transport has promoted giant leaps in the last 100 years in terms of the internationalisation of the economy. The term globalisation, in fact, has become of common use, and national economies can no longer be studied without facing their embeddedness in the world economy. The series of articles Global Political Economy 101 strives to address the complexity of the global economy by historicising the process that led to the present situation, providing an overview of the different academic approaches, and finally coming up with critical interpretations of the global economy and globalisation. The study of global political economy as a coherent subject of inquiry provides valuable insights into the big issues of our days, such as poverty, inequality, development, and sustainability. The pieces will maintain a humanities-based approach. Therefore, the economy will be seen as the intertwining between several factors like politics, society, culture, and human agency rather than the result of mathematical calculations. The set of articles will be divided into three blocks, each one composed of three articles. The first block will analyse the world economy from a historical perspective. The second one will provide an overview of the main theoretical interpretations of the world economy. The third one will address some of the main questions of today’s global political economy with the analytical tools previously provided.


Global Political Economy 101 is divided as follows:

  1. Global Political Economy 101: From the Discovery of the Americas to Imperialism

  2. Global Political Economy 101: Decolonisation, World Capitalism and Neoimperialism

  3. Global Political Economy 101: Neoliberalism and Globalisation

  4. Global Political Economy 101: Liberal and Neoclassical Interpretations

  5. Global Political Economy 101: State-centric & Developmentalist Interpretations

  6. Global Political Economy 101: Critical Approaches and Dependency Theory

  7. Global Political Economy 101: Why Few Have Much, and Many Have Little - Inequality

  8. Global political Economy 101: The Wretched of the Earth - Development and Poverty

  9. Global Political Economy 101: The Mantra of Our Times - Sustainability


Introduction


Until now this series of articles have addressed the historical development of the world economy from the appearance of capitalism — mercantilist capitalism, at the end of the XV century — to the rise of neoliberalism and globalisation. The purpose of the next three articles is to examine different standings that have characterised economic thought throughout its history. Specifically, they will address the different ways in which Global Political Economy has been conceptualised by scholars — not necessarily only economists, namely neoclassicals, state-centric, and criticals — leading to different standings regarding the development of world capitalism. Furthermore, the practical and empirical implications of those strands of scholarship — that propose a different understanding of how the economy, and thus the society, should be organised — will be analysed. This first article will address the oldest and most traditional strand of economic scholarship: neoclassical/liberal economics. The article will be divided into two main sections. Firstly, it will describe what is meant by neoclassical and liberal political economy. Secondly, it will examine the historical manifestations and evolution of liberal/neoclassic economic thinking.


Neoclassical and liberal political economy


The term ’neoclassical and liberal political economy’ encompasses a variety of strands of thought that have developed throughout history sharing the principle according to the economy is governed by the market, which provides the ideal allocation of resources. Usually, the liberal strand of thought is referred to as the classical stage of economic thinking that began with the industrial revolution. Neoclassical relates instead to the XX and XXI centuries’ revision and application of such a strand of thought. The intellectual forefather of liberalism, as well as of the discipline of political economy itself, was Adam Smith. In The Wealth of Nations (1776) he described the principles that governed the economy of the early industrial revolution and defined a crucial concept in the realm of Global Political Economy: economic specialisation. According to Adam Smith (1776), economic specialisation was the way in which countries could develop and achieve the best economic output (Heilbroner, 1987). Every nation was regarded as having a comparative advantage in one or more specific economic activities and thus, by engaging in such activities, it could gain significant shares in the world market. Also according to Adam Smith (1776), e.g., some countries had availability of land and labour force and hence should engage in the production of agricultural goods, for which land and an extensive labour force are required. Others instead had a high availability of capital — factories, machines — and, therefore, should engage in industrial production (Heilbroner, 1987). This scheme puts the basis for the study of the world economy, as it postulates the interdependence of countries in a global division of labour where every nation engages in the economic activity that is most convenient and for which it holds a comparative advantage vis-à-vis the rest of the world. This principle — as it will be shown in the second section — underpinned ante litteram the development of world capitalism since the discovery of the Americas.


Image 1: Unknown. (n.d). Adam Smith [Illustration].

The liberal idea of economic development is, therefore, as Deirdre McCloskey (2016) wrote paraphrasing Adam Smith, “the liberal plan of equality, liberty, and justice” (p. 3). This means that it is the free access to the market and its full development that guarantee economic expansion and progress. It is by liberating the forces of the markets on a global scale that economic specialisation is achieved, and countries can grow by progressively gaining shares of the world market. This vision of the world economy fosters the idea that nations should not pursue solutions to their economic and social problems by mitigating the market or their insertion into the world economy. Instead, economic performance, and thus life conditions, are improved by facilitating access — on an international scale — to the world economy (McCloskey, 2016). According to McCloskey (2016), the progress that humanity as a whole has undergone from the industrial revolution to the present — namely the decisive improvement in living conditions and economic performance — was delivered by the free world market. Hence, according to McCloskey (2016), the further improvement of those that live in the bottom layers of the world’s society ought to be realised through the improvement of market mechanisms, as their condition is ascribed to the lack of access, both as countries and individuals, to the market itself. The values that spurred the industrial revolution of individuality, freedom, and entrepreneurship, from a neoclassical standpoint, are those that fostered economic growth after the industrial revolution (McCloskey, 2007).


Image 2: Unknown. (n.d). Supply and Demand [Illustration].

Such faith in market efficiency is shared among the spectre of neoclassical and liberal economic thinking, although it assumes different declinations, particularly regarding the role of the state in the economy. Classical liberalism, of which Adam Smith is the intellectual forefather, postulated laissez-faire, the non-intervention of the state in the market. This expression openly refers to the fact that states should let the market work independently because the forces of demand and supply will automatically deliver the best allocation of resources. The famous invisible hand of the market would in fact allocate resources in the most efficient way without any external intervention. The market is seen as an invisible entity composed of the sum of individual economic behaviour, that yet is able to move things around in the economic realm (Heilbroner, 1987). However, this conceptualisation has been modified over time, and neoclassical and liberal economists have come up with different ideas regarding the role of the state. On the one hand, neoliberal economics — the term coming from a revisitation of the traditional liberal economics that developed in the XIX century — postulated a new role for the state. Contrary to what is often said, neoliberalism does not postulate the annihilation of the state as an economic agent, but rather encourages it to protect the market (Slobodian, 2018). In a neoliberal paradigm, the state does not relinquish its economic role, instead, it transforms into an actor that provides an encasement of the market, protecting the circulation of capital from actors that might want to constrain it (Slobodian, 2018). Neoliberalism, therefore, entails the protection and promotion of the market by the state. Market principles are thus applied to a variety of situations that traditionally stand outside the market such as social life, public services or even human bodies (Harvey, 2005). This is what has been called by scholars the competition state, for its role Is that of facilitating competition, marketisation, and economisation (Genschel & Seelkopf, 2015). On the other hand, other scholars postulate strong state interventionism in the market economy in order to curb its worst effects. This is the case of Keynesian-inspired scholarship that fosters the idea that the market itself does not provide the best allocation of goods, for it suffers from numerous inefficiencies and leads to an unequal and unfair distribution of wealth. The role of the state should be that of correcting those distortions of the market and providing for a fairer distribution of the market’s outputs. Those economists postulate that the state should engage in corrective monetary and fiscal policies in order to manage the demand side of the market (Stiglitz, 2002). Even though these two perspectives are contraposed, it must be noted that they both share the assumption that the market is the entity through which positive economic and social outcomes are achieved; poverty, marginalisation, and other social issues are ascribed either to a malfunctioning of the market that must be curbed with state intervention — Keynesian approaches — or to the fact that the market is not free enough — neoliberals.


The next section will examine how the neoclassical economic paradigm has declined throughout the history of world capitalism.


Image 3: Unknown. (n.d). The invisible hand [Illustration].

Historical development of neoclassical and liberal political economy


The nucleus of a world market was already present in the XV century in the finance-based relations that the Italian city-states maintained with Spain and France, as argued by Arrighi (1994). However, by that time the concept of the free market was not developed yet, for the main economic relation on the global scale was the colonial one. As one may easily imagine, the colonial relation was anything but free, as the colony was forcefully obliged to trade with the metropolis at favourable terms for the latter (Arrighi, 1994). It was during Great Britain’s hegemonic period (roughly 1770 - 1870) that the concept of the free market was developed thoroughly and became hegemonic in the world economy. The period of British hegemony is often referred to as free trade imperialism, for the imposition of free trade and free market were at the core of such a system (Arrighi, 1994). The industrial revolution, which notably started in England, led British rulers to adopt the free market as the hegemonic model to be imposed elsewhere. The industrial poles that were rapidly developing in England required, in fact, the expansion of the markets where they could both sell their products and buy commodities at an accessible price (Arrighi, 1994). The colonial scheme clashed with the aims of the British economy of expanding beyond the boundaries of the British empire. The classical/liberal approach to international political economy strongly underpinned the British model of market imperialism, as shown by the faith of Adam Smith in the functioning of the market and its invisible hand, as well as in the concept of specialisation which of course was functional to the growth of the British economy. Such a model worked until the outburst of World War II (1939 - 1945) and topped against some of its contradictions in the late 1920s, ending with the crisis of 1929 caused by over-production (Arrighi, 1994).


Image 4: Samuel Griffiths. (n.d). The industrial revolution [Illustration].

The crisis of 1929 led to a critical reshaping of the world economy. Especially in the US before World War II, Keynesian policies became to be hegemonic and fostered the reconstruction of the economy. The crisis inaugurated a season of control over the markets; Adam Smith’s laissez-faire was put into a corner, and another strand of scholarship within the liberal economic spectre, inspired by US Keynesianism, became predominant (Arrighi, 1994). The crisis of 1929 was, in fact, caused by a lack of economic demand, and thus supply exceeded leading to overaccumulation. The economic recipe to get out of the crisis, also known as the new deal, was based upon state intervention on the demand side of the market, in order to foster supply in a virtuous circle (Arrighi, 1994). Keynesian policies were central in the world economy after World War II, during the US’ hegemonic period, fostering growth and economic development. Even though this school of thought postulated strong interventionism of the state in the market, the reliance on the free market is not threatened; the market should work in accordance with the state’s objectives, and the state itself, in times of crisis, ought to intervene in the market to rescue the economy (Arrighi, 1994).


Keynesianism-inspired liberalism was the dominant economic paradigm in the world economy led by the US until the 1970s. By the end of the 1960s and early 1970s, a new economic paradigm within the liberal/neoclassical spectre became to take over and later imposed itself as hegemonic: neoliberalism. After a period of regulated capitalism that had hit in the 1970s with some inherent contradictions that drove down productivity, the world economy shifted towards a return to an unconstrained market economy. Neoliberalism, as the name suggests, is an economic project that recalls the liberalist season of the world economy — the XIX century free market imperialism — and aims at reshaping it — as the suffix “neo” suggests. Neoliberals were inspired by the hegemonic economic paradigm of the XIX and early XX century and engaged in a reshaping of its principles. This strand of scholarship had its origins in the thinking of a group of economists mainly based in Chicago and Vienna in the 1930s and 1940s, recalling Adam Smith believed that the free market provided the best allocation of resources, and thus elaborated an institutional arrangement in which the state should facilitate and promote the market and market competition (Slobodian, 2018). Neoliberalists were determined at countering Keynesianism by proposing a radical view of the market based on competition and marketisation of everyday life, postulating that the state instead of intervening in the market and engaging in economic planning should uphold the free market (Slobodian, 2018). Such a model became hegemonic during the 1970s, and neoliberal thinking still underpins the current phase of the world economy known as globalisation or neoliberal globalisation. Contrary to Keynesians economists, neoliberals argued that state intervention only distorts the market, and therefore the state should not constrain the market. However, differently from XIX century liberals, neoliberals — who argued that the less the regulation the better — created a solid international system of governance that guarantees the world market to be shielded from political changes that might happen on the national level — the WTO, the European Market, Mercosur are examples of said system of governance.


Image 5: Unknown. (n.d). Neoliberalism [Illustration].

Conclusion


The neoclassical/liberal strand of scholarship has been dominant in the world market since the industrial revolution. Its basic tenet is economic freedom within a free market, where economic actors are encouraged to compete according to the laws of demand and supply. Even though economic liberalism has been historically manifested in a multiplicity of ways, sometimes contradicting one another, the world economy has always relied on the world market as the main entity with the role of allocating resources and goods. All the manifestations of liberal economic thinking, in fact, share the faith in the market, being it completely free, constrained by the state or fostered by the state itself. Neoclassical economics is the scholarly ideal that has underpinned world capitalism from the industrial revolution to nowadays, however, it constitutes one specific — and somehow narrow — understanding of the world economy.


The next article will address the strand of economic scholarship that has only briefly been described here: state-centric Keynesianism.


Bibliographical References

Arrighi, G. (1994). The long Twentieth Century; Money, power, and the origins of our times. Verso.


Genschel, P., & Seelkopf, L. (2015). The competition state. In S. H. Leibfried, The Oxford Handbook of Transformations of the State (pp. 237-252). USA: Oxford University Press.


Harvey, D. (2005). A Brief History of Neoliberalism. Oxford: Oxford University Press.


Heilbroner, R. L. (1987). The essential Adam Smith. London: Northon and Company.


McCloskey, D. (2006). The Industrial Revolution was a Great Tide. In D. McCloskey, Bourgeois Dignity: Why Economics can't Explain the Modern World (pp. 3-11). Chicago: University of Chicago Press.


McCloskey, D. (2007). The Bourgeois Virtues: Ethics for an Age of Commerce. Chicago: ‎University of Chicago Press.


McCloskey, D. (2016, September 2). The Formula for a Richer World? Equality, Liberty, Justice. The New York Times.


Slobodian, Q. (2018). Globalists. Milano: Meltemi.


Stiglitz, J. (2002). Globalization and its discontents. W.W. Norton & Company.

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Andrea Taborri

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