IPE Lecture Notes - Introduction PDF

James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 What is International Political Economy? I. The IPE is all-encompassing, and it touches every dimension of modern life. A. It is a course about ‘how the world works,’ literally. 1. Since it...

James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 What is International Political Economy? I. The IPE is all-encompassing, and it touches every dimension of modern life. A. It is a course about ‘how the world works,’ literally. 1. Since it is all encompassing and ubiquitous, we need to be quite systematic in how we approach it. 2. Clear definitions, theories and concepts. 3. IPE is about globalization, but what does that mean? 4. I define it as increasing levels of exchange. B. We can think of MANY examples of the IPE, potential topics: 1. Exchange of goods (trade) 2. International exchange/flows of capital/money 1 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 200 years of capital flow cycles (C. Reinhart, et al.) 3. International Migration 2 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 4. Explosion of information of all types, cyber world we live in. C. IPE is about the relationship between politics & economics. 1. Politics can be defined in terms of relationships of power & Authority. 2. Economics is defined in terms of relationships of exchange. 3. Politics usually takes place within the confines of a political system, defined in terms of institutions, laws, rule, process, policy (government): name some types of political systems. 4. Economics usually takes place in a market, driven by the price system. 3 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 5. Why do we call it a price system? D. A typology of political economies? Power AUTHORITY Rights Unregulated | | E A | C X | C autocracy | liberal democracy H | A __________________________|_____________________________ N | G B | D E | totalitarian | social democracy | | Regulated 1. You can see where countries fit into this typology 2. US in C quadrant (libertarian tendencies), with many 4 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 European countries (UK, CH), and India (largest democracy) 3. Also Sweden in D quadrant (strong welfare state and social rights) 4. Russia in A quadrant (autocratic, few rights, corrupt economy) 5. North Korea B quadrant (autarkic system) 6. Where to classify China, somewhere between A & B? E. But how do we think about the international dimension of politics? 1. In the IPE politics is much more about POWER 2. Because there is no central authority, no world government. 3. Realists would say that international politics is all about power. 4. And that the international system is ‘structured’ by anarchy 5. How could that be? Perpetual conflict & struggle for power Hobbes (Leviathan and ‘war of all against all’) + Machiavelli (The Prince, advice on how to gain and hold power at all costs, no room for morality or rights). Stephen Krasner argues that balance of power is most important for understanding openness and closure in the IPE. You will read his article for next class. 6. Idealists (sometimes referred to as liberals) would say that there are rules, limits on power, international law and organizations (IGOs) and more cooperation Immanuel Kant (Perpetual Peace, 1795)… Robert Keohane, 5 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Joseph Nye (liberal institutionalists, 20th century). You will read Keohane later in the course. F. And how do we think about the international dimension of economics? 1. Most economics textbooks would say that the only difference between domestic and international markets is distance and other transaction costs (what are these?) 2. But we know that markets cannot function without basic rules Contracts must be respected, for starters, need for rule of law And markets always create positive & negative externalities, act of producing or consuming goods & services produces an unintended cost or benefit. For example… How to deal with intellectual property (a positive externality) Pollution, climate & environmental degradation (negative externality) Climate change (obviously a big negative externality)? 3. At the international level (IPE) we can talk about GOVERNANCE (some rules govern the IPE but no centralized authority) 4. But not GOVERNMENT (rules and laws with centralized authority) 5. What is the difference? Sovereignty and security dilemma predominate in international politics… 6 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 G. In international relations (IR) we have to be cognizant of ‘levels of analysis’ following Kenneth Waltz, Hans Morgenthau, Steven Krasner (you will be reading him for next class) 1. Man [sic]—the individual level (political psychology) 2. The State—the national level (comparative politics) 3. War—the international level (international politics) 4. The textbook adds a fourth, global level, but I think this is overkill 5. We must be able to think and to theorize about each level. 6. How can we do that? Three broad perspectives on IPE (more to come). H. However, before reviewing the three perspectives, we must ask two IMPORTANT questions: 1. Who are the players in the IPE, and what are their interests? 2. And how is the IPE governed, what institutions and structures? 3. We can think of the IPE in three dimensions: 7 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 II. Who are the players in the IPE? A. Much depends on your philosophical or theoretical perspective and 1. Whether you are looking at the IPE primarily from a 2. Political perspective (like a realist—S. Krasner) 3. An economic perspective (like an economist, a businessperson, or an investor) 4. Or a social perspective (is there such a thing as international society? A transnational or non-state actor, NGO, drug cartel, terrorist organization, social activist, all elude the authority of states to some extent) B. Can we dispense with Man (sic) that is the individual perspective? 1. Are individuals ever players in the IPE? 8 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 2. Can you think of examples, individuals who move the IPE? 3. Rarely are they players: Osama Bin Laden, George Soros, Bill Gates, Warren Buffet, Elon Musk, Jack Ma, Vladimir Putin, Donald Trump? Can individuals change the game, alter the balance of power? Rarely. C. If you think the State is the most important actor, you are certainly a Realist (and possibly a mercantilist, but be careful, because not all realists are mercantilists, although most mercantilists are realists— terms still to be defined). 1. What is a state? 2. States has a monopoly on the legitimate use of force within a given territorial unit (Max Weber), this is a garrison state. 3. States need raw military power, the ability to use/project force. 4. States must have sovereignty, control over territory. 5. States need some measure of legitimacy. 6. Which means they need a government, supported by a people/population, tacitly and/or overtly, not always through consent of the governed (remember the great variety of states in the world today, and only a minority of them are democracies) 7. States must have territory and population and they need to control both. 8. Modern states and the international state system can be traced to the 17th century and the Peace of Westphalia (1648, end of the thirty years war), two separate peace treaties one in Münster and the other in Osnabrück. 9 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 9. What was the thirty years war about? Religion. Recall opening scenes of the film, Elizabeth, where Bloody Mary (Elizabeth’s half-sister) had ordered that Protestants (heretics) be executed, burned at the stake. Religion always has been a powerful factor in world politics, and it still is. Note Treaty of Augsburg and the doctrine of Cuius regio, eius religio The basis for the doctrines of sovereignty and non-intervention, two key precepts of the modern state system 9. States must be recognized by other states to have legitimacy in the international political system—basic principle of international law. 9. What is the obvious measure of such legitimacy? Membership in the U.N. 193 states are members today, and in theory they all are equal, but in practice there are tremendous asymmetries in the international system and there is a balance or concert of powers embedded in the UN Security Council—five permanent members, U.S., Russia, China, UK, and France. Why not India, Brazil, or Nigeria? D. How does a realist (like Stephen Krasner) think about governance of the IPE—read his chapter in the IPE reader for next class? 1. States play strategic games and they are considered unitary Rational actors. 2. They have strategies to anticipate the actions of others states— rivals—and allies, and their rivals and allies anticipate their moves, like a big chess game. 3. We can use game theory to model state behavior. 4. The most famous game is that of the Prisoner’s Dilemma (PD) 10 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 5. Explain… states are trapped in an eternal security dilemma, from which they never can escape. States do not trust each other. 6. Does this mean that states are condemned to a perpetual state of war? No and why not? More peace and cooperation, less war and conflict. What is the norm in world politics? 7. States will manoeuver to achieve a balance of power, searching for an equilibrium, to maintain the peace, so that states can pursue wealth, also necessary for power (see Krasner’s ‘four goals’). States must 1. maximize political power (note the emphasis on political) 2. aggregate national income (economic power) 3. maximize economic growth (economic power) 4. maintain social stability (legitimacy, example of PRC dilemma) 8. From this standpoint, IPE is about global power & wealth, subtitle of the IPE reader. E. But are states the ONLY players in the IPE? 1. How about powerful firms? 2. Multinational Corporations (MNCs) 3. MNCs develop within and alongside states, and at some points they become extensions of state power—think of the British or Dutch East Indies Companies—key to building empires in south and southeast Asia, the Indian subcontinent, founded in 11 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 16th and 17th centuries. 4. What are some powerful US MNCs that bestride the globe today? 5. Household/name brands that are found everywhere (anecdote about my oldest daughter, Hannah, on the High Street in Oxford, looking at US MNCs like GAP, Pizza Hut, Burger King). 6. Today who has not heard of Google, Apple, Microsoft, WalMart, ExxonMobil, and so forth, not to mention Hollywood and the cultural power of US cinema?? 7. But can these firms do their business without the support of states, even though MNCs often seek to avoid the reach, regulation, taxes of home states (note transfer pricing, etc.)?? F. And to come back to global society, who are the players? 1. NGOs like Greenpeace, Oxfam, AI, other human rights And environmental organizations—any human rights or environmental science majors in this class? And don’t forget the Roman Catholic Church, one of the most powerful NGOs in the world! 2. Terrorist organizations like ISIS or Al Qaeda are transnational And non-governmental organizations 3. These terrorist groups are sometimes referred to as ‘non-state actors’ 4. Powerful diaspora, who maintain ties with their home countries, send money (remittances) home, and often engage in transnational politics. Examples include the Chinese and Indian diaspora, Mexicans in the U.S., Turks and Kurds in Europe, and now Ukrainians., etc. 12 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 4. These ‘players’ often find themselves at odds, in conflict, if not at war with states. 5. Does this add up to a ‘global society?’ Can society exist outside the confines of a state? What happens if you are a stateless person? 6. You must have a nationality under international law, and that is the only protection you have when you travel outside your country, the passport gives you an international identity III. How do states govern the IPE? A. Looking back through history we can see at least four ways of organizing the ‘global’ economy. 1. The classic imperium or empire, like imperial Rome. The center or metropole (Rome) extracts wealth (tribute) from the periphery, the provinces or colonies. The empire is governed by force of arms, remember the Roman Legions. 2. The modern empire, which functioned along mercantilist lines (more on mercantilism in a moment). The center extracted wealth from the colonies. A good example is the Spanish Empire. Imperial systems needed a balance of power to maintain the peace. They competed with other imperial powers for colonies in the ‘New World.’ Some empires functioned strictly as mercantilist powers, like the Spanish Empire. Go, conquer and occupy territory, and bring the proceeds of conquest back to the mother country. Remember the Spanish galleons, loaded with gold and silver, romanticized in fiction and film, Pirates of the Caribbean. 13 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Other empires were commercial enterprises where the goal was not so much conquest, but to build and protect markets, to trade with the colonies, including the slave trade. This was the case of the British, Dutch, and to some extent the French empires. They also functioned on mercantilist principles, zero sum, accumulate wealth and treasure, tax the colonies, remember the Boston tea party. 3. In the 19th and 20th centuries we begin to see the emergence of hegemonic systems, with a dominant global power, setting the rules for the global economy (see Stephen Krasner). These were imperial but liberal systems based on the principle of free trade. They were not mercantilist or zero-sum, but variable and positive sum games/systems. Pax Britannica (18th and 19th centuries), Rule Britannia! Pax Americana (post 1945) What are the criteria for playing the role of a hegemon (again see Krasner)? a. Obviously, you need to be a dominant military power—see how the British Navy secured the sea lanes in the 19th century, and the US seventh fleet in the Pacific today. b. You need to be a dominant economic power, with a powerful currency that can function as an international reserve currency—almost all trade in 19th and 20th centuries was financed in British pounds, and The City of London was/is the hub for international finance, credit, and insurance (Lloyds of London). c. Your currency and economy need to be strong enough so you can play the role of lender of last resort. What does this mean? Provide liquidity, credit, finance for global 14 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 economy. d. You need a powerful national or central bank that can provide credit and liquidity for the global economy. e. The Old Lady of Threadneedle Street… 4. Finally another way to organize or govern the global economy is through a system of collective security, just like it sounds, where all states come together to agree a set of rules (UN Charter) to maintain the peace, a “perpetual peace?” a. What is the central, inviolable rule of the UN system? 15 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 b. No aggression. States should not seize other states’ territory by force, nor should a state interfere in another’s internal affairs, overthrow or undermine other governments, unless authorized by the UN Security Council. In other words, respect the sovereignty of other states, essentially the same principles adopted at Augsburg (1555) and in the Peace of Westphalia (1648) c. And you should make some provision for global public goods, what are these? d. A public good is something that a single player (an individual or a state) cannot provide on its own. Public goods are non-rivalrous, they cannot be used up as more people or states consume them. They also are non- excludable, which means once you create them, they should be available to all who use or benefit from them. National defense is an example, or another good example would be a traffic light. e. What are some examples of global public goods, and how are they created, and ‘administered?’ Free trade is a global public good (GATT/WTO). Exchange rate stability and liquidity are too (IMF). Migration management, especially forced migration (UNHCR) Economic growth and development (IBRD)? B. Since the Second World War, the system of collective security with an element of global governance has been pursued by the U.S. (until 2016 & Trump), return of the trading state (Rosecrance). 1. This is the famous Pax Americana, about which Krasner is writing. 16 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 2. Krasner has a simple theory of how such systems work—it is called Hegemonic Stability Theory. 3. In order to have a stable, peaceful, and functional IPE you need a Hegemon to underwrite (pay for) and provide (enforce) public goods—in effect a system of global governance. 4. And the hegemon must create international regimes (rules and norms around which actor expectations converge) institutions that will discourage and deter free riders (explain). C. What are the principal global public goods that the hegemon must provide? 1. An open, free trading system, that discourages beggar-thy- neighbor behavior/policies (repeal of Corn Laws to GATT & WTO) 2. Exchange rate stability to provide liquidity (money) to finance the trading system and provide a mechanism for structural adjustment (explain), from the Old Lady & The City to the IMF & the World Bank. 3. Tackle collective action problems and punish free riders, how? D. Krasner’s argument is that the smooth functioning of the IPE depends on the distribution (balance) of power in the international system. 1. You cannot understand the global economy without understanding international politics—tariff levels and openness to trade depend upon presence or absence of a hegemon 2. What evidence does Krasner provide? 3. Evolution of Pax Britannica, starting in 1820s (Zollverein), 17 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Repeal of the Corn Laws (1846) through the Cobden-Chevalier Treaty (1860) until the Great Depression of 1873, etc. (see Gourevitch) “To export machinery we must import grain” David Ricardo England clearly has comparative advantage in heavy industry and manufacturing, plus it is a relatively large and dominant economy, which allows it to take the first step in opening the world to free trade by lowering its agricultural tariffs. Smaller countries are likely to follow, even though it is riskier for smaller countries to open to trade—they risk being a wholly owned subsidiary of the larger economies—but they benefit far more from free trade because they cannot produce all the things they need. They must specialize. 4. The Interwar Period (1919 to 1939) shows what happens when the there is no hegemon. UK no longer can serve as a hegemon, Versailles, harsh Reparations—The Economic Consequences of the Peace, win the war but lose the peace, sterling crisis, Churchill, etc. US is unwilling to assume the role. Failure of Wilson’s Fourteen Points and the League of Nations. Like today with Trump, back to the future, America First, 1924 National Origins Quota Act, Smoot-Hawley tariff of 1930, etc. Economic and financial collapse, Great Depression, collapse of the Weimar Republic, rise of fascism in Europe and in Germany, World War II. Passage of Reciprocal Trade Agreements Act (June, 1934) shifts power for making trade policy from Congress to the President, making it much easier to negotiate trade agreements. 18 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 5. US/UK victory in 1945, Bretton Woods, to win not just the war, but to secure the peace, Wall Street will replace The City, but not completely. Even today one third of world trade is financed through The City! The pound sterling is still a strong currency. IV. You can see how important is the IPE, if you follow Krasner, but how do we study the IPE? A. I/we propose what I call an integrative approach. Trade Money/Finance Migration Development History Theory Policy 1. Our goal in this class must be to fill in each of these twelve boxes. 2. The foundation of the class is international economic history, some of that on the quiz today, drawn from the Krasner reading. History provides much of the raw data (facts) for the course and it informs our study of IPE in ways that no other discipline can. Some students love history, others hate it, in the same way some students love economics and others hate it. Americans tend to be quite ahistorical in their thinking, why? 19 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Thomas Jefferson famously said that Americans do not need history, because we must reject the legacy/history of the ‘old world,’ start afresh, and each generation should invent their own history. But, those who do not study history are condemned to repeat it, as the saying/cliché goes. Mark Twain said that ‘history does not repeat itself, but it rhymes.’ You may be surprised to learn that globalization is not a new phenomenon and that the 19th century was more open and globalized than the 20th century. The Corn Law debates, for example, started a movement to free Trade (a very liberal development, see Krasner). The Great Depression of the 1870s, by contrast, pushed Europe toward protectionism (see Gourevitch). Why do economic crises provoke waves of protectionism and nativism (Eichengreen on Smoot-Hawley)? The famous ‘marriage of iron & rye’ led to the unification of Germany and a new era of protectionism, beggar-thy- neighbor (see Gourevitch). Two devastating wars in the 20th century and the experience of the interwar period led some powerful states to set up a new liberal order (Bretton Woods, see IIPE). 3. Political and economic theory (PPE stands for politics, philosophy and economics—you read PPE at Oxford) What is theory? A set of laws or propositions that explain social, economic, or political phenomena. 20 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Can be deductive, starting from a set of premises or Assumptions about human behavior. Rationalist or utilitarian, formal using game theory and logic, mathematical proofs. Or inductive, simply collecting data (observations) and looking for patterns and relationships (correlations). Or more interpretivist, drawing on deep knowledge of history and culture, reasoning by ideal types (Max Weber), and drawing inferences from our knowledge to construct theories. Or even Freudian or psychoanalytic, to explore the most basic instincts and motivations for human behavior—the importance of the id, the ego, etc. Our research questions must be answerable and our arguments (hypotheses) must be falsifiable. They have to be tested against the evidence using qualitative or quantitative data and employing analytical (often statistical) techniques. In the social sciences, it is difficult (but not impossible) to perform controlled experiments on human beings… psychologists and others who study human behavior often do this. They subscribe to behaviorism. But, most theory in social sciences is built through inference and probabilistic reasoning. That is why statistics are so important because they allow us to seek correlations and sometimes come close to establishing causation. Examples of theories in political economy include absolute v. comparative advantage 21 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Hegemonic stability theory (Krasner) Heckscher-Ohlin (importance of factor endowments) Offer curves and the equilibrium terms of trade, etc. 4. Another objective is to understand policy and governance of the IPE What is public policy? A set of laws, rules, regulations that are designed to change human behavior to achieve a specific social, political, or economic outcome. Policies proceeds in three stages: formulation (inputs and outputs) and implementation (outcomes) Watch out for unintended consequences—policies are designed to do one thing, but they end up causing something else to happen—often harsh regulation, preventing drug addiction by making narcotics illegal, results in the creation of black markets or illicit economies. Moral hazard! See the example from immigration policy (below). 22 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Governments should take what we have learned from history and theory and apply it to design the best policies. What do we mean by best? What are the objectives of public policy? Free trade v. protectionism, what do history and theory tell us about the tradeoffs? The unholy trinity or trilemma of exchange rate policy, etc. 1. financial integration with global economy 2. exchange rate stability 3. independent monetary policy Governments can have 2 of the three, but not all three Policy always involve choices or tradeoffs. 23 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 B. And we have four main topics, the three pillars of globalization plus Economic growth and development. 1. What trade policies are best for promoting peace, security and human development? 2. What can we learn from international economic history? 3. To take a quick example: why did the victorious powers opt for a system of fixed exchange rates after WWII, the so-called Bretton Woods system? 4. And how do exchange rates work? For this we must study the balance of payments and what drives the value of currencies (see the articles I sent from the FT). 5. We can approach each major topic through different theoretical or philosophical lenses. V. We can identify three or maybe four philosophical perspectives that inform our study of the IPE. A. Mercantilism is the most dominant perspective throughout the ‘modern era’ and it is still very much with us today. 1. Becomes prominent in 16th century, dominant philosophy of the Spanish Empire. Preferred approach to political economy because European states are struggling to consolidate their territories, establish national markets, and develop the instruments of state power, the ability to make war and to levy taxes (Robin Hood). Louis XIV, l’Etat, c’est moi! 24 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Mercantilism complements the rise of the garrison state. Cardinal Richelieu and Jean-Baptiste Colbert (not Stephen!) Frederich List was a principal theorist of modern mercantilism Mercantilism is the perfect policy for imperialism, extending state power to other parts of the world through conquest and colonization—states trump markets and political objectives are more important than economic objectives. Mercantilism begins to wane and comes under political assault in the 19th century, culminating in repeal of the corn laws (1846) 2. What are the principal assumptions of mercantilism? A negative-sum view of trade, you are either a winner or a loser when you trade with other countries (sound familiar?) The point of trade is to maximize state power and aggrandize Leaders to achieve national goals, glory, etc. (make America great again—MAGA) Strongly nationalistic, sometimes referred to as economic nationalism. Closely identified with realism and balance of power politics Mercantilists are obsessed with the balance of trade, states must always have a positive balance of trade, export more than you import. Accumulate treasure, especially precious metals, like gold and Silver, visions of the Spanish galleons and the Pirates of the Caribbean. 25 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Mercantilism requires the gold standard to anchor currencies, and states should have an inflow of gold, consistent with their large trade surpluses. 3. What are mercantilist policies? They are heavily statist, meaning that states must control Markets for nationalist purposes. Colbertiste, with states picking winners and losers. States should use all their instruments of power to control Markets—regulation, taxation (tariffs), and even military force if necessary. Protectionism and ‘beggar-thy-neighbor’ are the order of the Day. Most states have at least some mercantilist policies to protect industries and ‘save jobs.’ No question that President Donald Trump is a mercantilist, obsessed with the balance of trade and willing to use tariffs to achieve his policy objectives—reminiscent of the 1920s, America First, isolationism and protectionism of the interwar period, and the Smoot-Hawley tariff of 1930. B. Classical liberalism is very much an enlightenment philosophy that gains adherents in the 18th and especially the 19th century. 1. It will become the dominant ideology of the British Empire in Victorian England. Underpinning the Pax Britannica 26 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 The sun never sets on the Empire, a truly global order/system Contrary to mercantilism, the idea is that states can become Wealthy and powerful through free trade, allowing markets to operate freely, with minimal regulation and low taxes/tariffs. The liberal idea can be summarized with the French expressions laissez-faire or laisser passer, which translates roughly as ‘leave it (the market) alone. Liberalism facilitates the rise of multinational corporations, like the British and Dutch East Indies Companies, the Hudson Bay Company, etc., promoting the primacy of firms/markets over states as players in the IPE. Key moments in the development of classical liberalism: Publication in 1776 of Adam Smith’s The Wealth of Nations, principle of laisser-faire and the self-regulating market David Ricardo’s Principles of Political Economy and Taxation in 1812, principle of comparative advantage Repeal of the Corn Laws in 1846 John Stuart Mill’s On Liberty in 1859, the harm principle Agriculture, landed interests (Tories) are the scarce factor, hence they will seek help from state to protect their advantage and to prevent foreign competition, whereas industry/capital (Whigs and Liberals) is the abundant factor and they will seek to reduce to tariffs and open up to trade to take gain greater advantage. What about labor?? You can see the costs of protectionism are diffuse whereas the benefits are specific. 27 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Tories have the advantage. Rise of British hegemony Dominance of the pound sterling, backed by gold Bank of England as lender of last resort. British Navy as the enforcer of the new order. 2. How do we understand classical liberal theory, what are the Assumptions, who are the actors/players? Individuals and firms are the most important actors. They are utility and profit maximizers, the best decision-makers Because they know what is in their best interests and how to make tradeoffs in a world of scarcity, how to allocate resources, and what to consume and to produce Markets are the most efficient allocators of scarce resources. Since exchange is voluntary—the state is not holding a gun to your head telling you what to buy and what to make—therefore conflict in the market (and between states) will be minimal. Trade is a variable- if not a positive-sum game, there will be winners and losers, but more winners than losers, and in the long run everyone will be better off (John Stuart Mill, On Liberty, published in 1859. When states interfere with markets (imposing tariffs for example) they distort decision making, leading to inefficiencies, loss of wealth, and power. 28 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 But states must be willing to provide global public goods to stabilize and maintain the liberal order. 3. Simple but powerful ideas emerge from liberal thinking: absolute (Adam Smith) v. comparative (David Ricardo) advantage. The idea is that trade leads to specialization, to greater efficiency and wealth, hence the wealth of nations. Look for comparative cost advantages, illustrate with simple 2x2 table, 2 countries and 2 products, costs of production (numbers) are man hours/unit of production, a bolt of cloth or a keg of wine ABSOLUTE ADVANTAGE CLOTH WINE PORTUGAL 120 80 ENGLAND 100 120 Look at the ratios for cloth: 6/5 (favoring England) And wine: 2/3 (favoring Portugal) Clearly England has ABSOLUTE advantage in production of cloth While Portugal has the advantage in the production of wine. This makes sense intuitively—England has industry Portugal has sun Hence England will make cloth and trade with Portugal to get wine Both countries (their consumers and producers) are better off to specialize in making and trading what they do well and that for which 29 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 they have a natural advantage But of course, markets are not static—comparative advantage changes COMPARATIVE ADVANTAGE CLOTH WINE PORTUGAL 90 80 ENGLAND 100 120 The ratios have changed. Cloth is now 9/10 (favoring Portugal) Wine is still 2/3 (also favoring Portugal) Does this mean that there is no longer a basis for trade? No, there is still a reason for the two countries to trade, why? Clearly absolute advantage is no longer a sufficient explanation. Because the cost of both goods is lower in Portugal. And Portugal has an absolute cost advantage. How to solve this problem? Compare the cost ratios: 9 to 10 for cloth 2 to 3 for wine The cost of producing cloth in Portugal is 90 percent of what it is in England 30 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 But Portugal has a big comparative cost advantage in producing wine True that England has higher labor costs in producing both products But England has the least comparative cost disadvantage in producing cloth. ERGO, both countries can profit from trade. Portugal trades a keg of wine (80-man hours) for a bolt of cloth (90 man hours By doing this Portugal saves 10-man hours, which can be shifted to producing more wine Likewise, by trading cloth (100 man hours) for wine (120 man hours), England saves 20-man hours England will use the savings to produce more cloth By trading and specializing both England and Portugal are better off, with more of both products to sell (hence achieving economies of scale—the more of something you produce, the lower the costs of production per unit, declining per unit costs of production) and consume (lower prices for everyone) Lower inflation Greater competition means more innovation and efficiency If states interfere with trade by imposing tariffs, for example, they will raise the costs of production, prices of those products will go up, and quality of goods will go down. So why do states engage in protectionism? This raises the issue of 31 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 policy. 4. The implications for policy from this illustration are straightforward. Laisser faire and laisser passer… But this is politically difficult. Remember the example of the Corn Laws. Protection leads to an increase in the income of a nation’s scarce Factor (land). It therefore follows that free trade would be a threat to a nation’s scarce factor (land), and that a nation’s abundant factor (capital) will support free trade. In the U.S. labor is scarce, therefore trade unions seek protection, whereas capital and land are abundant, therefore industries and farmers favor free trade. This is called the Stolper-Samuelson theorem. States should pursue policies of free trade. But how to do this given the security dilemma, the lack of trust (remember the PD)? States must establish trust, someone/country must take the first step by lowering tariffs—examples include repeal of the corn laws (1846), US giving favorable deals to countries of Western Europe and Japan after WWII (creation of GATT in 1947) Provide global public goods Institutionalize the norms and rules of free trade, GATT & WTO Maintain exchange rate and financial stability Hegemonic stability… is necessary but not sufficient condition for free trade. 32 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 C. The radical or Marxist-Leninist critique. 1. History of this critique, begins in the mid-19th century and gains more prominence in late 19th and early 20th centuries, also after WWII Communist Manifesto (Marx & Engels, 1848), main Points and demands 1. Abolition of property in land and application of all rents of land to public purposes. 2. A heavy progressive or graduated income tax. 3. Abolition of all rights of inheritance. 4. Confiscation of the property of all emigrants and rebels. 5. Centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. 6. Centralization of the means of communication and transport in the hands of the State. 7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan. 8. Equal liability of all to work. Establishment of industrial armies, especially for agriculture. 9. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country. 10.Free education for all children in public schools. Abolition of children’s factory labor in its present form. Combination of education with industrial production, etc. Rise of socialist & communist parties from 1860s Das Kapital is published in 1867, where was Marx living at the time and why? 33 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Lenin publishes What is to be done? (1902) and Imperialism (1916) Rise of socialist and social democratic parties in Europe, Germany and France Debates in the 1st and 2nd Internationals (Bernstein v. Kautsky) British Labour Party founded in 1900, Clause 4 Russian/October Revolution of 1917 Death of Lenin and rise of Stalin, nationalization of all industry, in USSR collective farms, abolition of private property in 1920s Purges of 1930s, invasion of USSR by Nazi Germany in 1942 Beginning of the Cold War Chinese Revolution in 1949 Anti-imperialism and decolonization Cultural Revolution (1966-1976) and the Great Leap Forward Collapse of the Berlin Wall, end of Cold War (1989) Triumph of liberalism and ‘end of history?’ Transition of PRC from Cultural Revolution to state capitalism in the 1980s and ‘90s—Deng 2. Theory and principal assumptions of Marxism-Leninism (structuralism or a structuralist approach to IPE) Historical or dialectical materialism, still an enlightenment 34 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Philosophy, with a different telos Unlike liberalism, progress is not linear but punctuated by revolutionary breaks Thesis (feudalism), antithesis (capitalism), synthesis (communism) Different modes of production, but what drives history are material interests and means of production Always ask who (what group or social class) controls the means of production and what are the ‘relations of production’ Land and labor during the feudal era (feudalism and manorial economies) Capital and labor during the capitalist era (capitalism and industrial economies) Labor will cease control of capital and land through revolution (communism and socialist economies) The actors/players in the IPE are social classes (not states or individuals) The state is simply the ‘executive committee of the ruling or capitalist class’ and ideas are irrelevant, religion, for example, is the opiate of the masses. Each social class seeks to maximize its material interest leading to class struggle or conflict The capitalists’ overarching drive to accumulate and control Capital leads to extremes of wealth and poverty (haves and have nots, see Thomas Piketty, and his magnum opus, Capital 35 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 in the 21st Century But Marx shares one assumption with Ricardo and the liberals, The labor theory of value (only workers generate value and profits) In this view, even though labor is the most important factor of Production, workers are unable to benefit from their work, because capitalists expropriate the surplus value Workers are exploited but once they are mobilized they will rise up and cease the means of production and overthrow the capitalist or bourgeois order Marx called England the ‘workshop of the world’ and he predicted that the revolution would begin in England Why was he wrong? He underestimated the ability of markets to adapt, innovate, find new outlets for investment—no crisis of capital accumulation He did not foresee the expansion of the franchise, democratic revolutions, strength of trade unions, and the rise of working class parties Plus, Marx really had no theory of the IPE or international relations, other than the spread of capitalism via colonization and imperialism and subjugation of other peoples and societies 3. Lenin and Imperialism as the highest stage of capitalism (1916) Lenin extended Marx’s argument to the IPE Plagiarized J.A. Hobson 36 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 By arguing that imperialism was the highest (and last) stage of Capitalism, before a global communist revolution, to be led by A vanguard party (the Bolsheviks) and by the Communist International or Comintern What did he mean by ‘highest stage?’ Imperialism saves capitalism (temporarily) Providing new outlets for productive investment New markets, new consumers Imperialism required massive outlays of capital (it is expensive) Therefore this stage of capitalism would be dominated by monopoly capitalism, finance, and banking Governments, banks, and trading houses working hand in hand in the imperial project Why should we be so interested in Lenin’s theory? It provides a theoretical framework for dependency and world systems theory, which will be heavily influential in thinking about development and underdevelopment in the 1950s-70s. The critical idea that opening your country to trade and foreign investment only leads to dependency, exploitation as corrupt elites get into bed with western banks and MNCs (comprador class), to sell off country’s resources, siphon off profits into unnumbered Swiss bank accounts, etc. The political sociologist Immanuel Wallerstein would build on Lenin’s work to propose world systems theory, wherein there 37 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 arises an international division of labor, with a core, semi- periphery, and periphery, each region with its own relations of production and systems of exploitation. 4. What are the policy conclusions/recommendations that flow from a Marxist-Leninist or structuralist approach to IPE? The goal of economic policy in general and international economic policy in particular must be to foster greater equality and a more equitable distribution of wealth. New International Economic Order (NIEO) In its original version, going back to the early days of the Cold War, both the Soviets and the Chinese sought to foment communist revolutions throughout the developing world. Supporting decolonization, independence movements for national liberation. Once independent, these new states should follow communist principles and policies, nationalizing industry, strictly controlling finance and investment, etc. With respect to trade, newly independent states should be wary of dependence (dependencia) and they should pursue mercantilist policies, like Import Substitution Industrialization (ISI) Rely on USSR and PRC for trade, aid, and investment (Cuba, Vietnam, North Korea, many states in Africa, etc.) Recount story of my friend working in Niger… Essentially a neo-mercantilist strategy to avoid being sucked into the Western, liberal, IPE 38 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Three axes within the IPE during the Cold War The Western system (liberal) The Eastern system (communist) The North-South system (a mix, including non-aligned countries) 5. End of the Cold War, triumph of liberalism, end of history (Francis Fukuyama)? 1989 put an end to East-West rivalry, presumably Unilateral moment, acceptance of US hegemony Samuel Huntington disagreed, Clash of Civilizations D. Constructivism (Alexander Wendt, largely a critique of realism and rationalism/liberalism/structuralism) 1. IPE is not driven purely by material or national interests and rational states, balance of power, etc. Interests are ‘socially constructed’ Beliefs, traditions, customs, ideologies, identities, shape interests and behavior of individuals and states Agency is as important as structure Heavy normative element in IPE Norms are as important as legal rules 39 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Power relations and structures must be ‘deconstructed,’ taken apart to examine all their biases and underlying assumptions (Foucault). This will reveal true or hidden interests behind state actions Not so wedded to the hypothetico-deductive method/reasoning Analysis of discourse, for example Exploring ‘epistemic communities,’ networks of specialists and professionals, who drive policy (environmentalism, for example) 2. What are policy implications of constructivism? Always look for ulterior motives of policymakers Example of Bretton Woods system, showed a normative Preference for mixed capitalist systems Keynesian economics (demand management) and a strong welfare state to protect individuals and groups from wild swings in markets (Ruggie, embedded liberalism) Hence a managed IPE, fixed exchange rates, etc. Culture and epistemic communities (a group of Keynesian economists) matter E. Summing up: what are the main takeaways from these competing perspectives on the IPE and what next, where do we go from here? 1. Mercantilism is still a dominant force in the IPE, return of protectionism and beggar-thy-neighbor policies (Trump) 40 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 States are the main players, every country must pursue its Narrow national interests (America first) Balance of power (realist logic) Obsession with balance of trade and trade deficits Desire to save jobs for native-born, fear of immigration, outsourcing, FDI, etc. 2. But liberalism is deeply institutionalized and it drives the way we (elites, political economists, economists, most policymakers) understand the IPE Institutions lock in and formalize state behavior to achieve liberal outcomes like free trade, exchange rate stability, capital mobility, and migration Individuals and firms are most important players in the IPE Need to find a way to promote free trade, solve collective actions problems, create public goods Hegemonic stability (also realist and liberal logic), creation of global public goods, solving collective action problems, punishing free riders Theory of comparative advantage widely accepted But we need to critique the Ricardian model and expand it Get beyond the ‘labor theory of value’ and simple comparative cost models Production is far more complicated than that Move from classical political economy to neo-classical 41 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 economics. Still we have learned the basics of the political economy of trade as understood through a liberal lens Costs (diffuse) and benefits (specific) of trade Stolper-Samuelson Theorem, why is this neo-classical argument so important? Helps us predict ‘commerce & coalitions’ (Rogowski, Gourevitch, Eichengreen) 3. International relations and all the ‘isms… Realism/rationalism cuts across all three perspectives, focus on Power and pursuit of national interest/security No escaping power, security dilemma, etc. balance of power structures or determines state behavior Idealism leaves room for more cooperation and less conflict Same is true of liberalism, heavily rationalist, focused on agency of individuals and firms. Marxism-Leninism is all about class conflict and structure, which will determine behavior of individuals and groups in society… states are more or less irrelevant, mere reflections of the interests of the ruling class Constructivism says all interests are socially constructed, based on norms, ideas, identities, etc. Reality must be deconstructed to grasp the true relationship between structure and agency. 4. What next? More on the history and political economy of trade 42 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Rise of protectionism following Great Depression of 1878 (Peter Gourevitch, read and study for Thursday), collapse of prices and deflation. WWI and the collapse of the IPE The Interwar Period from Versailles, Keynes, Economic Consequences of the Peace, to Smoot-Hawley (Barry Eichengreen, Bailey et al.) The financial collapse (1929), the Great Depression, FDR & the New Deal, RTAA Keynes, The General Theory, how to get out of depression? Bretton Woods & postwar consensus (social democracy) GATT, Politics of Trade in the USA, EU, etc. More on modern trade theory Critique of Ricardo, relaxing some of his assumptions Pure trade theory or ‘opportunity cost theory of trade’ Effects of a tariff Heckscher-Ohlin (H-O) theory, factor-price equalization Offer curves More on trade policy Principles of GATT 43 James F. Hollifield | Lecture Outlines | International Political Economy | 8/24/2020 Different rounds of GATT Geneva (1955-56), Kennedy (1964-67), Tokyo (1973-79) OEEC EEC, Common Market OECD ISI & NIEO Collapse of the Bretton Woods end of postwar consensus in the 1970s The ‘neo-liberal’ revolution and new waves of democratization SEA, EMU, and Maasstricht Uruguay Round (1986-94) and creation of WTO (Baldwin) NAFTA and today USMCA Sovereign debt and financial crises Failure of Doha Round (2001-???) Populist backlash (2010s, Ehrlich, Mansfield & Mutz) 44