Theoretical Approaches in IPE Lecture 2 PDF

THEORETICAL APPROACHES IN IPE VU THANH CONG, MPP.  Introduction ▪ Countries and non-state actors have historically pursued several different approaches to the international political economy: ▪ Mercantilism (Realism/Economic Nationalism) ▪ Liberalism (Capitalism) ▪ Ma...

THEORETICAL APPROACHES IN IPE VU THANH CONG, MPP.  Introduction ▪ Countries and non-state actors have historically pursued several different approaches to the international political economy: ▪ Mercantilism (Realism/Economic Nationalism) ▪ Liberalism (Capitalism) ▪ Marxism MERCANTILISM  The evolution of the IPE: Clashing Ideas and Practices The era from the late Middle Ages to the end of the 18th century: Age of Discovery: new frontiers in the Americas, Asia, and Africa. The exchange of good and people tied the colonies and the home states together. WHAT IS MERCANTILISM (ECONOMIC NATIONALISM)? ▪ Goal: maximize state wealth (originally gold and silver) A nation's economic health could be assessed by its levels of ownership of precious metals, like gold or silver ▪ Methods: Government interventions, Protectionism and Export Ex: Navigation Act of 1651, Sugar Act 1764 → The goal of mercantilist economic policy is to export more goods than you import, so that you bring more money into the country than you send out to other nations. Basic ideas of Mercantilism ▪ The state as the key actor, companies are subordinates of the state. ▪ The state is more important than the market. ▪ International anarchy, markets are zero-sum. Might is right. ▪ Economics is a zero-sum game ▪ One country’s gain is another’s loss ▪ Emphasis on relative gains ▪ Protection of national wealth (and culture) by barriers to foreign penetration. ▪ Trade is a strategic tool to enhance a state’s power in the world economy MECHANISM ▪ Establish colonies Increased new home construction, increased agricultural output, and a strong merchant fleet to provide additional markets with goods and raw materials. ▪ Control/regulate production & trade Export raw materials & resources from colonies to Mother Country (MC) Export finished products from MC to colonies Favorable Trade Balance for MC ▪ Wealth cannot be created, only acquired (and rent-seeking) MERCANTILISM: POSITIVE EFFECTS ▪ Guaranteed markets ▪ Protection of local industries from competition ▪ Promoting manufacturing and industry through research or direct subsidies. ▪ Augmenting state power at the expense of rival national powers. MERCANTILISM: NEGATIVE EFFECTS ▪ A bigger problem toward end of colonial period ▪ MC $↑ + trade surplus vs Colonies $↓ + trade deficit ▪ MC +/vs nation-supported companies vs emerging companies. ▪ Limited opportunities to trade, Fewer competition → higher prices ▪ Industrial development restricted (due to industrial protectionism) ▪ Today, mercantilism is deemed outdated, replaced by economic nationalism. However, barriers to trade still exist to protect locally entrenched industries (protectionism) → Ha-Joon Chang (Kicking away the ladder) (Economic) Liberalism Liberalism: Analytical Perspectives on IPE ▪ Became popular in 1800s ▪ Focus: the individual (households, enterprises), rational and self-interest ▪ Relationship between economics and politics: economics drives politics -> Markets are more important than states (CMTS) ▪ Nature of economic relations: harmonious; interests reconcilable -> Economics is a positive-sum game ▪ Emphasis on absolute gains: it is possible to expand the pie, not just fight over how it will be divided ▪ Furthering global economic integration is an aim, with increased peace the consequence. International regimes can hold together order. IR and Liberalism (Capitalism): Laissez-Faire figures Adam Smith: Wealth of Nations, 1776 ▪ “The individual, pursuing his SELF-INTEREST, will bring on general benefits to society” Ex: Those who produce the highest quality products at the lowest prices not only make consumers’ lives easier/more enjoyable but reap the highest profits. -> Absolute advantage + Specialization ▪ NEED for free markets (no gov intervention) ▪ Beginning of the industrial revolution  The Wealth of Nations ▪ “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” ▪ Absolute advantage: the idea that countries should produce goods in which their costs of production are lowest in comparison with other countries ➔ specialization (Adam Smith) ▪ Free trade enabled businesses to specialize in producing goods they manufacture most efficiently, leading to higher productivity and greater economic growth.  IR and Liberalism (Capitalism): Laissez-Faire figures ▪ Thomas Malthus: predicted that the population would outpace the world’s food supply ▪ An Essay on the Principle of Population (1798) ▪ “Malthusian Population Trap”: food - people - land People should limit kids (preventive checks and positive checks) ▪ No government help for the poor, oppose any income or wealth redistribution Helping the poor would only serve to increase their numbers and hence increase aggregate misery remained. IR and Capitalism: Laissez-Faire figures ▪ David Ricardo: “iron law of wages”: competition among laborers for employment will drive wages down to the minimal level (subsistence level) Poverty is inevitable. ▪ “No government help for the poor”: They would become dependent and lazy They should help themselves by working hard, saving their earnings and having fewer children  Comparative Advantage Comparative advantage (David Ricardo): a state will still benefit if it specializes in the production of goods that it can produce at a lower opportunity cost (cheaper/ more efficiently) and trade for the rest. The number of products that China and Australia can produce given a fixed period of time. China has an absolute advantage in both iron ore and cars as it can produce more of both goods. Step 1: Calculate the Opportunity Cost of Each Good from Each Country. The number of unit of car/iron you lose when produce iron/car. China (iron): 80 iron/ 80 = 1 iron, 100 cars / 80 = 1.25 cars -> 1 iron = 1.25 cars (produce 1 iron lose 1.25 car) Aus (iron) : 70 iron / 70 = 1 iron, 50 cars / 70 = 0.71 cars -> 1 iron = 0.71 cars (produce 1 iron lose only 0.71 car) Car: China: 1 car = 0.8 iron ore vs Aus: 1 car = 1.4 iron ore Step 2: Plot the opportunity costs on the Two-Way Table Step 3: Identify the Comparative Advantage Choose the product with smaller opportunity cost (red value) to produce. -> China has a comparative advantage in the production of car -> Aus has a comparative advantage in the production of iron ore  Liberalism (Adam Smith, David Ricardo) ▪ Human labour is a key source of wealth ▪ Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better -> other countries should devote the limited resources and manpower to the production of other products in which they may enjoy an absolute advantage (specialization). ▪ Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production diversification. Countries should specialize in whichever good that has a lower opportunity cost (the value of whatever the country forgoes producing). (Should Lionel Messi cut grass in his yard by himself?) ▪ Key role of the market as an integrating force → invisible hand ▪ Key role of the state in maintaining a market economy: NOT intervening/interferencing ▪ State regulation of the national economy should be minimal to maximize growth and prosperity. CAPITALISM CHARACTERISTICS ▪1. Private Ownership ▪2. Profit Motive ▪3. Market Economy  CAPITALISM ▪ 1. Private Ownership: Capital belongs to individuals who are FREE to do what they wish with it. ▪ For this reason, capitalism is also called the “free-enterprise” system CAPITALISM ▪ 2. Profit Motive: self - interested Based on the economic laws of supply and demand, when enough people want something, producers make it because they want a PROFIT CAPITALISM ▪ 3. Market Economy: a money value can be placed on everything in the marketplace: land, goods, time, and labor. ▪ Buyers and sellers are free to exchange goods and services at prices determined by…..”SUPPLY and DEMAND” Critiques of Capitalism ▪ Uneven distribution of WEALTH ▪ Encourages inequality in society ▪ Poor people live in SQUALOR ▪ Working conditions are miserable (negative effects of Industrialization) ▪ Downfall of work ethics Marx’s critiques of capitalism Capitalism is a brutal system where there are few winners and many losers. Three main criticisms: 1. Capitalism is outmoded. It has outlived its usefulness. 2. Capitalism creates alienation between workers and their work. 3. Capitalism is prone to internal contradictions. Capitalism creates its own gravediggers – working class with nothing to lose, and everything to gain by overthrowing the capitalist system. Marxism/Communism  Analytical Perspectives on IPE - Marxism ▪ Focus: classes, social forces ▪ Nature of economic relations: conflictual (zero-sum game) -> Revolution ▪ Relationship between economics and politics: economics drives politics Ex: Vietnam’s Đổi mới (economic renovation, 1986) vs The collapse of USSR (1991) Communist Manifesto (1848), Capital (Das Kapital, 1867)  Marxism ▪ A response to the social consequences of the Industrial Revolution of the 19th Century and the economic liberalism that accompanied that period. ▪ Prominent perspective in the 20th century (particularly after the Bolshevik Revolution in 1917), but popularity has declined since the fall of communism and the success of market model among “Asian tigers,” etc. ▪ Focus on the role of class struggles in systemic economic, social, and political change. ▪ Class conflict arises due to contradictions between the material interests of the oppressed and exploited proletariat—a class of wage laborers employed to produce goods and services—and the bourgeoisie.  Basic concepts of Marxism ▪ Market economies are social arrangements created by specific historical forces ▪ Key actors: social classes, MNCs, and transnational elites (states are tools of these elites and cogs in the capitalist system—not independent entities) Division of society into classes based on their roles in the economy and the state Power is rooted in ownership and control of capital impoverishment of workers Struggle between classes for power & control of the economy and the state Bourgeois defence of their property was also a defence of their power  Basic concepts of Marxism ▪ Private property is a social construct, not something created by nature Property for all? ▪ Workers produce surplus value, but Owners of capital (capitalists) take all or most of it. Accumulation of capital in the hands of capitalists Imperialism as highest stage of capitalism (Lenin) and cause of war among capitalist powers Capitalism contains seeds of its own destruction Capitalism will inevitably collapse due to its inherent contradictions Marx’s Key Ideas for Communism 1. View of History- all history has been a class struggle 2. Labor Theory of Value: Value of an item is set by the amount of labor required to produce it. 3. Nature of the State- gov’t is a tool for oppression. 4. Dictatorship of the Proletariat- once everyone agreed with idea of a “classless society” the gov’t would wither away. Karl Marx’s Theory of Communism ▪ Idea: that History is shaped by ECONOMIC FORCES (the way goods are produced and distributed) ▪ Historical materialism ▪ CLASS STRUGGLE has always existed between the “haves” and the “have-nots” ▪ In industrial times, the “haves” are the bourgeoisie/middle class capitalists; the “have- nots” are the wage-earning laborers 5 progressive stages of human socio-economic formations How Communism is Supposed to Happen: ▪ Poverty and desperation drive MASSES of workers (proletariat) to: ▪ seize control of the government and the means of production ▪ destroy the capitalist system ▪ wage a VIOLENT REVOLUTION ▪ establish a “dictatorship of the proletariat”  After the “dictatorship of the proletariat” occurs….. ▪ All property and the means of o No incentive to work harder production are owned by “the people” o No competition means no ▪ Those who cannot contribute may still reward to be innovative participate (disabled, elderly) ▪ All benefits are “shared equally” ▪ Everyone’s basic needs are met ▪ A “classless society” emerges ▪ The “state withers away” Effects of Marxist Thought ▪ “Red Scare” = hysteria over perceived threat of communism/ civil liberties revoked -> Domino Doctrine ▪ US foreign policy based on fighting spread of communism after World War II ▪ “COLD WAR” with USSR and allies ▪ Proxy wars fought on both sides. ▪ Any thoughts on the development of these theories?  The evolution of the IPE: Clashing Ideas and Practices The era from the late Middle Ages to the end of the 18th century: Age of Discovery: new frontiers in the Americas, Asia, and Africa. The exchange of good and people tied the colonies and the home states together.  The evolution of the IPE: Clashing Ideas and Practices Mercantilism (statism): The common practice of many governments and a dominant economic doctrine for more than three centuries (16th - 18th). Mostly associated with the colonization era. Goal: build economic wealth to build the power of the state. Economic nationalism: boost exports by backing a powerful state protecting domestic monopolies (I.e. British East India Company). o Jean-Baptiste Colbert (1617-83): states should accumulate gold and silver as well as build a strong central government. o Alexander Hamilton (1757-1804) made similar arguments in the United States. Mercantilism  The evolution of the IPE: Clashing Ideas and Practices ▪ (Economic) Liberalism Adam Smith wrote of the idea that human are rational and self-interested. To Smith, markets develop through individual, rational action. Markets need to be free from government action to function properly.  The evolution of the IPE: Clashing Ideas and Practices From 19th century to WW I: Colonialism expanded greatly European states industrialized ▪ Radicalism (Marxists) emerged as a response to the excesses and inequalities of the time. Society was conflictual. Competition between classes/groups. Owners of wealth versus workers ➔ Tensions and seeds of the destruction of the system as a whole. Question for groups – Lecture 3 ▪ How do governments intervene in international trade? ▪ Why do some countries want to intervene in international trade, like the US? ▪ Mercantilist arguments are based on the idea that... a) free trade between nations is always beneficial to all. b) merchants should not be allowed to influence politics. c) only merchants should be allowed to influence politics. d) national wealth and military power are fostered most effectively by protecting domestic producers from overseas competition. In contrast to the liberal emphasis on cooperation, mercantilism/realism highlights the situation in which one side can gain only at the expense of another. This relationship is called a. rational action b. comparative advantage c. zero-sum game d. positive-sum game ▪ Adam Smith’s theory of absolute advantage explains: A. How the market ensures that everyone profits by invisible means B. Why nations will profit from specialization in what they produce cheaper than others C. How nations can acquire a competitive edge over others D. How firms prefer absolute over relative advantages. Comparative advantage occurs when: a) A country can produce more goods than anyone else b) A country has a lower opportunity cost in the production of a good than other countries c) A country has more product lines than other countries d) The exchange rate appreciates ▪ The theory of comparative advantage has been closely associated with which theory of international relations? a. Realism b. Economic structuralism c. Liberalism d. Marxism ▪ The theory of comparative advantage illustrates that specialization can lead to a. a rise in poverty among many groups of people b. an increase in overall consumption and efficiency c. greater equality among all people d. the rise of powerful international organizations ▪ In Marxist theory, those who own property and the means of production are the _____. a. wealthy b. proletariat c. bourgeoisie d. nihilists ▪ Laissez-faire economics characterizes which of these political economic systems? A. liberalism B. social democracy C. communism D. mercantilism E. monetarism ▪ In economics, what does laissez-faire mean? a) People should be left alone to do whatever they want. b) Life should be made as fair as possible. c) The state should exercise detailed control over the economy. d) The state should not interfere in the detailed operations of the economy. Why do liberals favour the free market economy? a) They feel that individuals are rational enough to be left to pursue their own economic interests. b) Most of them are closely connected to big business. c) They think that poverty is a good way of ensuring social control. d) They regard human existence as taking place in a 'state of nature', in which cut-throat competition is perfectly justified. ▪ For Marx, the system of government that would emerge in socialism would be A. a centralized state with a command economy. B. a democracy. C. one global nation. D. a loose confederation of city-states. E. a stateless anarchy. Marxism argues that the exploitation of underdeveloped countries will only end through social revolution led by the working class. a) True b) False ▪ In Marxist theory, the ____ is the working class. a) proletariat b) left c) lex talionis d) bourgeoisie ▪ __________ exemplifies the interaction between the forces of supply and demand. A. Political economies B. Markets C. Public goods D. Regulations E. Social expenditures ▪ __________ seeks to replace the free market with a centrally planned economy and an extensive welfare state. A. Liberalism B. Social democracy C. Communism D. Mercantilism ▪ Which best describes a command economy? a) It uses the free market to determine prices. b) It uses central planning to determine the economy. c) It is usually associated with monarchies. d) It produces tremendous economic growth.  ▪ Thank you very much! ▪ Email: [email protected]