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‡ This chapter outlines the liberal perspective on
international political economy, linking today's rise of the
liberal view to its historical roots. We trace liberalism
from eighteenth century France, through nineteenth
century England, to today¶s world of the twenty-first
century. Along the way we listen to the words of some of
the most famous political economists, Adam Smith,
David Ricardo, John Maynard Keynes, Friedrich Hayek,
and Milton Friedman, and to some noteworthy
practitioners of political economy, such as Václav Havel.
This chapter contains an unusual number of direct
quotes from the works of these authors because the
grace and power of their writings are irresistible.
 |ont
‡ Liberalism, like many other terms we use in IPE,
suffers from something of a personality disorder.
The same set of letters means different things in
different contexts. In the United States today, for
example, a political "liberal" is generally one who
believes in a strong and active state role in
society, helping the poor and solving social
problems. It is ironic, therefore, that what has
also come to be referred to as economic
liberalism, as we will study it here, means almost
(but not exactly) the opposite of this
 |ont
‡ Liberals, in the classical sense used here, fear the heavy
hand of government and seek to liberate the individual
from state oppression. All liberals believe in freedom,
individual rights, and free markets. It is no accident that
liberal and liberty have the same Latin root. In the United
States and other countries such as England and some
European nations, many liberals have much in common
with those people and their political parties that are now
referred to as "conservatives" in the sense that they
focus on individual rights, oppression from the state, and
preserving society¶s traditional values and institutions.
 |ont
‡ Liberalism arose and evolved in reaction to important trends and
events in the real world. In plotting liberalism's path from its origins
to the present day, we will necessarily pause to consider the events
that shaped this point of view. A case study of the |orn Laws
illustrates the political economy of liberalism in the context of
nineteenth-century Britain (pg. 44)

‡ This chapter also introduces the important notion of hegemony (also

discussed in more detail in |hapter 5). A hegemon is a rich,
powerful nation that organizes the international political economy.
Britain was a hegemon in the nineteenth century, and the United
States in the twentieth century. Is a hegemon necessary? What are
its motives? There are critical questions in IPE today.
 Liberalism
‡ Liberalism broadly means ³liberty under the law´.
‡ Liberalism focuses on the side of human nature that is
competitive in a constructive way and is guided by
reason, not emotion.
‡ |ontrasts with mercantilist view which dwells on the side
of human nature that is more aggressive, combative and
suspicious.
‡ Led by Francois Quesnay (french), condemned
government interference. His motto ³laissez faire´
meaning ³let be, let pass´ or ³hands off or leave us
alone´
 ROOTS OF THE E|ONOMI|
LIBERAL PERSPE|TIVE
‡ a) Havel writes in praise of the market and to condemn
the (communist) state (pg.38)
‡ b) Adam Smith writes to praise the market and to
condemn the (British) state. (pg 38)
‡ c) Focus is on the range of state activities that have the
potential to abuse power.
‡ d) Market activities are seen as examples of a positive-
sum game.
‡ e) Mexico, India, Russia have all adopted market
reforms including |hina and some eastern europe are
now members of EU
 Smith, |apitalism, Self-Interests,
the Invisible Hand, and |ompetition
‡ a) A free market is one element of the liberal view, which sees
individuals as best equipped to make social choices.
‡ b) Liberals focus on the range of human activities that reveal their
cooperative side.
‡ c) The best interest of society is served by (rational) individual
choices, that when observed from afar appear as an ³invisible hand´
that guides the economy and promotes the common good. Read
Adam Smith¶s quotation pg. 39
‡ d) Adam Smith's liberalism was part of a broader intellectual
movement that was intensely political. For political theorists,
liberalism is based on the principle of freedom of the individual.
‡ e) Liberal political philosophy holds that people need to have
negative rights (freedom from state interference, such as freedom
from unlawful imprisonment), positive rights (freedom to do certain
basic things, such as freedom of speech), and a participatory
democratic form of government to guarantee the positive and
negative rights.
‡ Adam Smith works (wealth of nations) gained respect and profound.
 Tenets of |apitalism
‡ a) In a capitalist economy, self interest drives individuals to make rational
choices that best serve their own needs and desires.
‡ b) Many countries have experienced an economic, political, and social
transformation from an agricultural-based economy to one characterized as
industrial or service-based.
‡ c) Ô
   motivates economic activity as if lead by an ³invisible
hand´ that distributes resources, enhancing society as a whole.
‡ d) 
    creates strong incentives to use resources efficiently.
‡ e)   regulates economic activity by disciplining the pursuit of
self-interest. Ex: Producers face competition that forces them to charge
reasonable prices and provide quality goods.
‡ f)  help coordinate society¶s economic activity by allocating
resources given the tastes and preferences of individual consumers.
‡ g)   consists of freedom of job choice and enterprise,
and consumer sovereignty to dictate how resources will be allocated.
‡ h)   is the idea that suggests that a capitalist economic
system functions best when there is no intervention by the state.
‡ i) |apitalism today connotes large manufacturing plants with long
production lines.
‡ j) Read pg 39 for details
 THE LIBERAL VIEW OF
INTERNATIONAL RELATIONS
‡ a) David Ricardo extended the economic liberal perspective to
include international trade. Read his argument pg. 44
‡ b) International trade is seen as being mutually advantageous not
cut throat competition for wealth and power. What is true about
individual is also true about states as Smith wrote pg. 44.
‡ c) Positive-sum game is one where all players can win -- contrast
with zero-sum game (where you can only win at the expense of
another actor).
‡ d) Liberals do not just fear the state; rather, they are suspicious of
power generally, including excessive concentrations of power in the
market.
‡ e) Quote from Ricardo details benefits of trade.
‡ f) Liberals tend to focus on the domain in which nation states
show their cooperative, peaceful, constructive natures through
harmonious competition.
 Britain¶s |orn Laws
‡ a) Opposed by Ricardo (champion of free trade)
‡ b) |orn Laws were restrictions on food imports
enacted by Britain in 1815 to protect agricultural
interests that then dominated Parliament.
‡ c) Industrial interests and liberals, including
Ricardo, opposed the |orn Laws.
‡ d) |orn Laws repealed in 1846 -- triumph of
liberalism over mercantilism. British industrial
production (and exports) increased.
JOHN STUART MILL AND THE EVOLUTION OF
THE LIBERAL PERSPE|TIVE
‡ a) Political economy is a dynamic field, as the evolution
of liberalism shows. Liberalism today is complex and
interesting.
‡ b) Mill (inherited the liberalism of Smith and Ricardo)
was a liberal who favored selective state intervention in
the market in areas such as educating children and
assisting the poor.
‡ c) Favored markets and individual actions generally,
but limited state action where markets failed to achieve
social welfare.
‡ d) Difference between liberalism and mercantilism is
still clear in Mill¶s views, but now becomes a matter of
shades of gray, not just black and white.
‡ e) His textbook ³Principles of Political Economy with
Some of Their Applications to Social Philosophy´.
 JOHN MAYNARD KEYNES (most influential
economists of the 21st century) AND THE GREAT
DEPRESSION
‡ a) John Maynard Keynes (say ³canes´) continued the evolution of
liberalism.
‡ b) Great Depression viewed as an example of serious flaws in the
market, especially during periods of risk, uncertainty, and ignorance.
‡ c) Keynes favored state action to shore up market failures and an activist
macroeconomic policy (note that this differs in degree only from statism). He
wrote (pg 46)
‡ d) The Paradox of Thrift (masalah dgn. Kedekut) illustrates Keynes's
view that rational individual actions can produce irrational collective
outcomes. When all individuals rationally save, they collectively become
poorer as economic activity slows. Government can compensate for the
invisible hand's failure by spending when individuals do not. Read pg. 47
‡ e) Malaysia stimulus package now.
‡ f) How Mahathir handled 97 financial crisis. Revisit Keynes?
‡ g) |urrency swap (simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates) with |hina for hedging.
 The Keynesian |ompromise: Balancing
State and International Interests
‡ a) Keynes participated in the birth of the Bretton Woods system that
established several institutions (discussed in more detail in |hapters 6-8)
that organized much of the international political economy following World
War II.
‡ b) While Bretton Woods sought to create a liberal system of O
 
O 
economic relations among Western member states, individual nations would
be allowed to support domestic markets and insulate them from
depressions and other economic dislocations.
‡ c) The ³Keynesian compromise´ between stronger markets (international)
and stronger state (domestic) roles also reflected the idea of embedded
liberalism, whereby states would gradually decrease protection and allow
market forces to shape domestic and international political-economic
policies.
‡ d) Note that the difference between the Keynesian compromise and
neomercantilism is one of degree only, namely how much, when, and under
what circumstances the state would intervene in the market to achieve a
variety of political, social, and also economic objectives.
 The Liberal View of Hegemony
‡ a) Another contemporary liberal view is that international markets
work best when a hegemon exists to supply international public
goods, such as sound money, free trade, peace, etc. (See |hapter 5
for more detail on this concept.)

‡ b) Public goods suffer from the free rider problem. Since each
individual wants to consume public goods without paying for them,
public goods are inadequately supplied by the market. State action
becomes necessary to assure an adequate supply of public goods.

‡ c) From the liberal perspective, the U.S. became the hegemon of

the Western nations following World War II, supplying public goods
such as security, money (liquidity), and other tangible and intangible
goods through NATO, the IMF, World Bank, and GATT.

‡ d) Many questions remain about hegemony

 |ONSERVATISM: THE RESURGEN|E
OF |LASSI|AL LIBERALISM
‡ a) As Keynesian liberalism evolved to justify a good deal of state
intervention in the market, a backlash movement grew in the 1950s
and 1960s, taking the name of conservatism. The popularity of
Keynesian compromise gradually diminished.

‡ b) Friedrich Hayek and Milton Friedman were two of the

intellectual leaders of conservative IPE. Hayek wrote about the
importance of freedom and the slippery slope that we face when we
begin to empower the state to provide things individuals could better
provide for themselves. Milton Friedman wrote of the dangers of
concentration of power in the state and the importance of political
and economic freedom.

‡ c) |onservative IPE reflects a resurgence of the classical

liberalism of Smith and Ricardo, rejecting many of the state policies
and roles that Mill, Keynes, and others had argued were necessary
in the face of market failures.
 REAGAN, THAT|HER, AND THE
NEO|ONSERVATIVES
‡ a) |lassical liberal thought grew in influence in the 1980s, often under
the guise of neo-conservatism.

‡ b) President Ronald Reagan in the U.S. and Prime Minister Margaret

Thatcher in Great Britain were influential in the advance of neoconservative
policies as well as public support for these policies.

‡ c) Neoconservative policies often involved privatization of state-run

enterprises, deregulation or a decrease of the state¶s role in the market, and
tax cuts. These policies were later credited with helping the U.S. and to
some extent Western Europe¶s economies recover from an economic
recession in the late 1980s and early 1990s.

‡ d)   is a professor at the Johns Hopkins School of

Advanced International Studies.  A foreign policy expert and proponent of
liberal democracy
 GLOBALIZATION AND THE
E|ONOMI| LIBERAL HOUR
‡ a) In the late 1980s the United States also championed globalization, or
the extension of these economic liberal principles, as a p that would
help the international economy grow.

‡ b) Taking advantage of unfettered markets, globalization was expected

to generate economic growth, enhance production efficiency, and generate
jobs in response to increased demand for a wide variety of new products
and service.

‡ c) In this way, globalization is expected to benefit millions suffering from

poverty.

‡ d) Globalization is characterized as an economic process that integrates

regional markets into a single global market; as a political process that
weakens the state; and as a cultural process that reflects a growing network
of complex cultural interconnections in modern society.
 Globalization Today: Is the Liberal
Hour Waning?
‡ a) In the late 1990s many researchers and journalists focused on
both globalization¶s positive and negative social, economic, and
political effects.

‡ b) As globalization grew in popularity, so did local resistance.

‡ c) The anti-globalization movement gained momentum on a

global scale, focusing on, among other things, sweatshop production
conditions in many poor countries, damage to the environment, and
income distribution issues.

‡ d) Joseph Stiglitz (MIT), Jeffrey Sachs (Harvard) critical of IMF

 |ON|LUSION: E|ONOMI|
LIBERALISM TODAY
‡ a) Liberalism today remains true to the core of Smith¶s views,
emphasizing the benefits of individual action and the potential for the abuse
of concentrated power, especially in the hands of the state.

‡ b) Liberalism is deeply marked, however, by its evolution. The question

is not whether liberalism is consistent with state action, but rather how much
state action is consistent with liberalism.

‡ c) On one hand, this seems to be the Liberal Hour, where the virtues of
liberalism have seemingly overcome all obstacles to become the
conventional wisdom of political economy. The collapse of communism is
held as the triumph of liberalism.

‡ d) On the other hand, markets and democracy are fragile. It is not clear
that it is possible to create and sustain the environment that liberalism
needs to take root and grow. The jury is still out on the triumph of liberalism.