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The Liberal Perspective
on International
Economics
Liberals fear the heavy hand of
government
Liberals believe in freedom, individual
rights and free markets
Roots of liberalism are to be found in
the thinking of the physiocrats –
Francois Quesney 1694-1774
Physiocrats motto was “laissez-faire,
laissez-passer” meaning let the
economy produce and progress
Adam Smith 1723-1790 – “The Wealth of
Nations” 1776
“Every individual is continually exerting
himself to find out the most advantageous
employment for whatever capital he can
command. It is his own advantage, indeed,
and not that of society which he has in view.
But the study of his own advantage naturally,
or rather necessarily, leads him to prefer that
employment which is most advantageous to
society”.
Smith’s “invisible hand of the market”
For Smith the state is dangerous and
untrustworthy, and in 1776 this was a
state governed by the concepts of
mercantilism – protectionist and
strongly interventionist states
Liberals such as Smith saw society as
a positive-sum game
Mercantilists tended to see society as
a zero-sum game
Smith saw the promotion of enlightened
self-interest both in domestic
economics and in international
economics as the best route to
increased wealth for all
“By pursuing his own interests he
frequently promotes that of society that
more effectually than when he really
intends to promote it. I have never
known much good done by those who
affected to trade for the public good”
Smith also aware of the tendency of
traders even in a free market to collude
“People of the same trade seldom meet
together, even for merriment and
diversion, but the conversation ends in
a conspiracy against the public, or in
some contrivance to raise prices”
For Smith international free trade would
reduce the need for military solutions to
economic disputes
Smith’s view on trade “What is
prudence in the conduct of every family
can scarce be folly in that of a great
kingdom. If a foreign country can
supply us with a commodity cheaper
than we ourselves can make it, better
buy it off them with some part of a
produce of our industry employed in a
way in which we have some
advantage”
Liberals like Smith opposed tariffs
Mercantilists saw tariffs as tools for
concentrating wealth and distilling power
For Smith “Such taxes when they have
grown up to a certain height are a curse
equal to the barrenness of the earth and the
inclemency of the heavens”
Smith’s ideas were in tune with the economic
needs of the new class of industrialists and
traders in late eighteenth century Britain, the
class Marx would term “the bourgeoisie”
David Ricardo (1772-1823) –
developed Smith’s ideas on
international economics, in particular, in
opposing the corn laws (see box)
For Ricardo free commerce makes
nations efficient (a value highly prized
by liberals)
Free trade  industry  greater
competition  innovation  “general
benefit” (raised production)
J.S. Mill (1806-1873)– evolution of the
liberal perspective
Viewed liberalism as an important
deconstructing force which had
weakened central authority and
strengthened individual liberty
Mill, however, wanted to rehabilitate the
state so that it could SUPPLEMENT
the market correcting for market failures
or weaknesses better to achieve social
progress
Guiding principle still “laissez-faire” but some
limited government actions were desirable to
encourage free trade
Thus it is in the tradition of Mills that
GOVERNMENTS set up organisations such
as the World Trade Organisation (WTO) to
force the liberalisation of trade
The questions for Mill as for liberal thinkers
since his time are when, how, and how far
should the state intervene? When is
governments visible hand justified as an
assistant to or replacement for the invisible
hand of the market
John Maynard Keynes (1883-1946) –
his ideas were shaped by three defining
events of the 20th century
World War I – the outcome of undiluted
mercantilism
 The Great Depression – international trade
grinding to a halt
 The threat to capitalism itself from the
alternative models offered by Marxism and
Fascism

Keynes saw it necessary that capitalism must
be “saved from itself”
The state therefore could and should use its
power to fortify and improve the market not
along the aggressive nationalistic lines of
mercantilism, nor with the oppressive force of
communism
Keynes doubted that people were invariably
rational, the stock market he said was
influenced by the “animal spirits” of traders.
The crash of 1929 showed what can happen
when investors take fright and stampede
Keynes therefore envisaged a firm
guiding hand by the state in matters of
the domestic economy against a
background of a liberal free trade
regime in the international economy
Keynes views on international
economics were embedded in the post
world war II Bretton Woods System of
international political and economic
arrangements and institutions
Envisioning strong states with open
markets and free trade
The Theory of Hegemonic Stability observes
that international markets work best when
certain international public goods are present
Public goods such as free trade, peace &
security and a sound system of international
payments
Free rider problem
One nation dominates – the hegemon –
which benefits so much from success of
global economy that it is willing to bear the
costs of providing the international public
goods
Generally recognised three instances of
hegemonic stability in modern history
 the
United Provinces (Holland) 18th C
 Britain
 USA
19th C
post world war II
Questions arising
What happens when there is no hegemon?
Is the USA still a hegemon?
Could the United States be a hegemon in
decline?
Is a sort of group hegemon possible…
involving the USA and the EU?
Academics also debate the motive and
effects of hegemony – is the hegemon
unselfish eventually draining itself dry as it
tries to keep the international system running
or is the hegemon selfish and imperialistic
draining the rest of the world to fill its coffers?
Classical liberalism resurgent
Frederick A. Hayek (1899-1992) – The
Road to Serfdom (1944)
Milton Friedman (1912- ) – Capitalism
and Freedom (1962)
Both reacted to the increasingly
interventionist role of the state arising
from the post-war Keynesian orthodoxy
The Neo Conservatives greatly influenced by
the economic theories of Hayek and
Friedman
Exemplified by the free market oriented
policies of Regan and Thatcher in the 1980s
Neo conservatives continue to dominate
politically – George W. Bush in the USA
Neo-Cons have extended their suspicion of
the state in the domestic economy to a
disdain of international collaboration and
compromise … conflict between USA and
UN, USA refusing to sign Kyoto Agreement,
the war on Iraq
Globalisation puts increasing pressure on
states to adopt liberal economic policies …
“the competition state”
However, globalisation through reducing the
power of states to protect their economies
generates great resentment in the less
developed countries
The disparity of wealth in the world
encourages radical questioning of the
western values of materialism and
consumerism
One of the reactions to the global hegemony
of international neo-liberal is the growth of
fundamentalist Islam ……Watch this space…