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Slide:
The classical liberal political economy of England and Scotland at the beginning of the Industrial
Revolution:
In the long run, it is beneficial to all if markets are allowed to operate freely with each other.
Let the market work its way through and let it happen (laissez faire laissez passe)
Markets: commodities, industrial goods, financial, housing, credit etc.
Slide:
Why is the market good?
Because the market is seen as the most efficient means of organizing human production
and exchange (an ‘invisible hand’ guiding and coordinating economic activity).
Slide:
Some of the advantages of international markets over strictly national markets:
1. Facilitate trade across national borders, which in turn generates wealth and brings about
prosperity,
2. Create opportunities for economic co-operation that brings about interdependence among
states;
both of which reduce the likelihood of conflict.
Finally,
3. International capital markets, allocate money more efficiently than local ones;
Classical liberals held that it is in the best interests of all people, in the long run, if state
intervention (regulation) is kept to a minimum;
NOTE: Kept to a minimum but not entirely absent!!!)
How much state intervention is optimal has been the question to this day.
Continuum...
There is an ongoing debate among economists about this (particularly in the light of the
current financial and economic crisis).
This is an issue that is highly politicized both here in the US and abroad.
The liberal philosophy, of course, had an enormous influence on economic development
(especially in Great Britain and the US) and period of expansion of modern capitalism
globally.
But there were crises...
Including the current one, which has seriously compromised this philosophy.
Slide:
The argument in favor of free markets speaks:
against protectionism, which, from a liberal perspective, is a consequence of states acting
according to short-sighted conceptions of the ‘national interest’ (protection of jobs, domestic
corporations, small business owners) manifested by increased trade barriers, immigration
restricting free movement of labor, and obstacles to the free movement of capital.
against mercantilism (the dominant trade practice at in the early 1800s).
Under mercantilism the colonial power forced its colonies to trade with the mother country, to
enrich the government and its supporters.
Coercion:
The mercantilists compelled their subjects to sell many goods only to them, paying the
colonies less than world market prices for crops and raw materials (tobacco, sugar).
Mercantilist policy also required the colonies to buy many products from the mother country,
ensuring that the homeland could sell to its subjects at above world market prices.
So, generally speaking, markets are good.
Markets are efficient (especially relative to those two alternatives).
Slide:
Two important limitations of free markets:
1. Inherent inequality of participants
2. Room for speculation and excesses
First limitation:
States that participate in international trade (markets) are not all equipped with the same tools
to compete.
Some have manufacturers who are ready to compete in international markets, others don’t.
Some have financial institutions to facilitate international exchange, others don’t.
Some have capital to invest, others don’t.
This is why some are eager to expand while others are more interested in protecting domestic
markets from foreign goods (that are likely to push domestic industries out of business).
So you have different political interests of individual nation states.
Or even more accurately, over the last 200+ years there have always been a tension both
internationally and at the level of individual nation states between those who had strong
interest in free trade and those who don’t (specific industrial sectors).
Second limitation:
Periods of irrational behavior and speculative excess.
“Irrational exuberance”:
Markets are inherently prone to irrational behavior and speculative excess.
Here is how capitalism “works:
In order to make profits business owners (entrepreneurs) or corporations have an incentive to
expand the process of production.
What to they do with those profits?
Some of the profits are re-invested (in order to continue to expand),
Some of the profits are used for charitable aid.
Some of the profits are splurged on private consumption.
But there is still a lot of it left over to invest in stock markets, housing markets, etc.
Since there is frequently more money to be invested than the number of available assets to invest
in (stocks, real estate) there is a tendency of investors to overvalue assets.
Example: stock market.
Hence bubbles (inflated asset values): stock market bubbles, house market bubbles, commodity
(oil) market bubbles.
And when bubbles burst we have a financial crisis (that inevitably influences the economy).
Sometime it generates a recession (two quarters of “negative growth”).
This, of course is not the only cause of recessions (for example: recessions often coincide with the
tail end of a business cycle).
Or even worse. Depression (or a recession that lasts an extended period of time)
And it often happens both domestically and internationally.
These days there is a lot of talk about….
Slide:
The great depression:
The financial crisis that led to the economic collapse of 1929-1934:
World trade plunged by more than 60 percent .
Protectionism helped to make it “Great.” True, everybody sensible scoffs at Reed Smoot and
Willis Hawley, the lawmakers who in 1930 exacerbated the Depression by raising American tariffs.
But reasonable people opposed them at the time, and failed to stop them: 1,028 economists
petitioned against their bill.
US economy shrank by 30 percent between 1929 and 1933.
During the great depression: industrial output dropped by 20 percent.
Unemployment went above 25 percent of the labor force almost everywhere.
Depositors would not keep money in banks fearing that banks would close.
So a run on the banks developed at the first sign of difficulties.
We are not there yet, but we are also in the initial stages of the crisis.
There are important similarities with the current crisis:
2/09: Economists at the World Bank predicted that the global economy and the volume of global
trade would both shrink this year for the first time since World War II.
Economic nationalism—the urge to keep jobs and capital at home—is both turning the economic
crisis into a political one and threatening the world with depression.
The links that bind countries’ economies together are under strain.
For example, by the end of 2008, U.S. demand for imported goods fell drastically, shrinking the
country’s trade deficit by almost 30 percent.
In China, imports dropped 21 percent and exports nearly 3 percent.
Also: Private flows of credit and investment across borders have temporarily plummeted.
Last November, capital flows to emerging markets reached their lowest level since 1995 (and
issuance of international bonds ground to a halt).
The banking crises so crippled credit markets that lending virtually stopped.
Some emerging markets are highly vulnerable to financial implosion. Collapses have begun
to happen in Brazil, Hungary, Iceland, Indonesia, Pakistan, Russia, the Baltic republics, and
Central Asia, as investors stampede away from risky assets.
It is expected that the current economic crisis (a protracted global recession)
will lower life expectancy,
alter life-opportunities,
change demographic patterns,
and affect politics in many places, probably for the worse.
In response to the crisis….
F.D. Roosevelt: adopted emergency programs to regulate industrial prices,
support agriculture
and build and manage large public works.
It introduced job-creating government programs,
social insurance, and labor rights.
Congress approved a large unemployment relief.
Slide
The US federal government dramatically increased its role during the New Deal.
It imposed significant controls on trade.
There was a decreased reliance on markets and more on state regulation and state-induced
consumption (large public projects, etc.)
Regulated economy.
Demand-side economics (something associated with British economist John Maynard Keynes)
This model of economic development (in varying degrees) has been adopted in much of the
western world (and was kept in place until late 1970s).
Social welfare state.
The pendulum swung away from unregulated economy (laissez-faire laissez passé).
The Great depression was a reminder that markets, specifically financial markets are inherently
unstable.
(This view was famously expounded by Hyman Minsky, a 20th-century American economist.
Minsky argued that economic stability encouraged ever ambitious debt structures. Stable finance
was an illusion).
This kind of thinking led to alternative models of economic development and alternative
political ideologies.
Socialism as an alternative model of economic development did not come out of the blue.
Nor did communism.
What are we to conclude from this?
Slide:
Markets can do wonders, but
Markets are imperfect.
All markets operate within a political framework.
Domestic markets depend on domestic structure of power (set of institutions).
There is a significant variation across countries.
Global markets depend on an international structure of power.
To the extent to which international power structures are supportive of global markets,
global markets are likely to be sustained.
But international power structures are fragile and prone to instability, which often
undermines the stability of international markets.
Slide:
In order to have international trade you need to have stable monetary relations – fixed exchange
rates.
This is something you don’t need to worry about domestically (the dollar is as good in Seattle as it
is in Houston or Boston. But how good is it in Paris, Jakarta, or Buenos Aires?).
The Gold standard (the period of classical liberalism, the first attempt to expand
international trade; roughly between 1860s and 1914)
Created a system of fixed exchange rates (and helped both investment and trade).
1. World trade volume doubled every 20 to 25 years.
2. Free movement of capital.
The Gold standard was undermined by political and geopolitical rivalries that eventually led
to the First World War.
Global capitalism was unable to overcome the troubles of the period between 1914 and 1939
and come up with a solution for a stable monetary system.
After WW2:
The Western Allies began to plan the peacetime economic order as soon as WW2 broke out.
August 1941, Roosevelt and Churchill announced an Atlantic Charter stating joint war aims.
International negotiations (mainly British-American) determined the shape of the world’s
economic system, as governments wrote the rules of the global economic game.
John Maynard Keynes and Harry Dexter White:
The Bretton Woods System created the IMF, the IBRD and the GATT
system of rules,
values and norms,
The Keynesian belief that government intervention was required to direct markets toward the
greater good dominated the B-W system (the international system)
both the West and some parts of the Third World.
Keynesian model prevailed!!!!