5
Where We Are. Last week, we introduced the course and talked about the relationship between the power and wealth and the institutions that embody each: the state and the market. Then I argued that there are three ways that we are going to organize the relationship between the market and the state, with different goals in mind. The first way is efficiency, which means that you should organize the market and the state in the way that brings about the most efficient use of resources. The second way is distributive justice, which means that goods should be distributed in the most just way possible, not the most efficient way. The third way claims that the market and the state should be organized in a way that brings about the most solidarity in society: it should bring about a strong community. If we talk about community in international relations, then we are talking about a strong nation-state. There are three goals, and our theories of political economy are organized by which goals they purport to.
In the following three lectures, I look at three different ways to understand political economy, or the relationship between markets and states, particularly whether and how much the state should intervene in the market. I first pose the question we ended with last time: how much should states intervene in markets? I will then discuss the liberal answer to the question today.
Lecture 3 PEIS 101 Liberalism:
I. Philosophical and Historical Roots
A. The key factors: Importance of the individual, Importance of Freedom, Importance of Individual freedom, Importance of institutions that foster and protect the individual’s right to enter into contracts, own property, buy and sell, speak and practice religion freely, choose government officials, and be protected in those rights from the state and from others in society who would thwart them.
B. Economic liberalism
1. Individual freedom to enter into markets
2. Minimal state: strong enough to create a legal framework to ensure private ownership of the means of production, and powerful enough to enforce private contracts and adjudicate disputes.
3. Inequality is likely to be tolerated in private economic relations because the growth that should ensue from the efficient allocation of resources will make all better off than they would have been in the absence of markets.
C. Political liberalism
1. Political liberalism involves the creation of institutions that ensure representative government and universal citizenship.
2. For these institutions to be effective, however, the state must construct and enforce a complex web of legal relationships that guarantee equality before the law, protect individual rights and freedoms
3. Their effectiveness also requires the creation of institutions that diffuse political power, guarantee political accountability, and ensure free, fair, and competitive elections.
D. Social conservatives
1. believe that too much individual freedom destroys the common good.
2. too much social freedom means license to do anything without thinking about the common good.
3. Social conservatives often become political conservatives: The State must protect the common good in social issues
E. Political “Liberals”
1. free markets are generally a good idea, because they allocate resources efficiently and the market is blind to ascriptive characteristics.
2. But universal rights cannot be assured if resources are stacked to benefit some groups and not others.
3. The market is blind, but society is filled with power dynamics which interfere with true market functioning,
4. Political liberals see the state as an essential agent in eliminating biases within society which prevent the market from functioning as it ought to.
5. Political “Liberals” are opposed to Political conservatives, who believe that the market has the power to level the playing field, if it is just left alone. They do, however believe that in decisions that are not economic, the good of the community should outweigh the selfish choices of the individual.
F. Political “Liberals and the State
1.Political liberals believe in a strong state, but a liberal state.
2.They were opposed to capricious and oppressive authority.
3. They believe that oppressive states are weak states; A liberal polity is much better situated than a tyrannical one for enlisting citizen cooperation in the pursuit of common objectives.
4. censorship blocks the flow of information vital for the government of a large nation.
5. Heavy handed trade regulations decrease the private wealth that might be tapped for the public treasury.
Political liberals believe that no individual has, by nature, greater entitlements than another. Human equality extends across class, ethnic, recial, and religious lines. Therefore liberals see themselves as morally obligated to secure a “bottom floor” of subsistence to all humanity. Liberals argue about what this means. Does it mean providing a home for everyone? Food for everyone? A job for everyone?
II. Economic Liberalism
A. Assumptions
1. The Individual is the key economic and political actor
humans are economic animals and therefore markets evolve naturally without central direction.
It’s human nature to “truck, barder, and exchange.”
Liberals assume that markets arise spontaneously in order to satisfy human needs.
Economic liberals attempt to explain economic,
indeed all of human behavior on the basis of rationality. This means that we always act on a cost/benefit calculus.
Noone can possess complete information about the needs of society and economy. In a society of individuals who are “free to choose,” Markets provide the best information in the form of price which immediately tells us the relationship between the supply of a good and the demand for it.
4. voluntary, non-coerced exchange
Free exchange brings about coordination in the allocation of resources without coercion. Free exchange leads to a division of labor and specialization of function and no exchange takes place in which both parties do not benefit.
That freedom to exchange demands political freedom and decentralization so that there will be no coercion. The market should be removed from politics.
B. effects: efficiency, growth and welfare.
IV. Liberalism and the International Economy
A. Goal-efficiency, growth, and welfare.
B. Perspective: global—as opposed to the neo-mercantile perspective which is a nationalist one. The Liberal sees the international system as the appropriate arena for economic activity.
C. Instruments—by which global efficiency and welfare are to be produced: Comparative advantage.
Before Trade: 1)Portugal has an absolute advantage in that the input requirements for the production of both goods are less than for England. England is better at cloth than wine, 3)Portugal is better at wine than cloth, Therefore: They should trade and put productive resources where they are most efficient
Wine (steel) / cloth (electronics)England / 3 / 5 (Total production =8)
Portugal / 9 / 6 (Total production=15)
Total goods produced = 23
If Portugal specialized in accordance with its comparative cost advantage in wine, used the labor that went into producing cloth and used it to produce wine, it would be more efficient.
Before Trade: Resources put where they are most efficient
Wine / clothEngland / 1 / 10 (Total Production=11)
Portugal / 16 / 0 (Total Production=16)
Total goods produced = 27 note: efficiency increases total number of goods available
England trades Portugal 4 units of cloth for 4 units of wine
Exchange rate is 1 to 1.
wine / clothEngland / 5 / 6 (available goods =11)
Portugal / 12 / 4 (available goods =16)
Total goods produced is still 27 but each country is better off than before trade and both are better off than before “efficiency”
The Effects of Comparative Advantage, according to the Liberal are:
1) Free trade makes international relations more harmonious—no more conflict among states, because growth and welfare for all traders is increased.
2) The role of the state: To let producers produce most efficiently—to separate politics and economics: the key actors for liberals are firms and consumers, not states.
3.) An interdependent world economy is the normal state of affairs for most liberals. The functioning of the world economy is determined primarily by considerations of efficiency—this should be the basis of all political relationships in the world.