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8.1: Liberal Approaches

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  • The writings of liberal political economists have become so broad a church that they can include advocates of uncontrolled markets as well as supporters of strong state intervention in the market. This is a reflection of some of the practical contradictions that Karl Polanyi (1957) first discovered in different historical manifestations of liberal ideas in the aftermath of the industrial revolution in the nineteenth century. Consider, in this respect, whether government policy takes freedom of choice away from individuals, or if the state should establish a legal order that enables individuals to make choices and function as participants in a market system. Polanyi’s reasoning offers an insight into the globalising economy of the twenty-first century. In this account, markets are not just abstract constructs that settle demand and supply for goods through a specific price, as economists would make us believe. Markets are, and always have been, much more. They are social phenomena embedded in broader communities and directly connected with deliberate forms of state action. As a consequence, economic, social and political life is always interconnected. In particular, the widely held belief in the advantage of a self-regulating market process carries with it a basic contradiction in so far as it leads inevitably to a severe disruption of the social fabric in different countries. This disruption can occur because of rising levels of income inequality (why some are paid more than others), foreign takeovers of companies, or fundamental disagreement on what needs to be done during economic recessions to prevent social decay.

    Essentially, Polanyi observed two interrelated processes that explain change in the international system. At first, free market principles dominate and the winners from liberal economic policies exert their influence for further political change. Over time, however, the political pressures created will inevitably generate a counter-movement that is opposed to the direction of reform. Other social groups within society will articulate their interests, slow down the speed of modernisation and demand a different form of economic management and policy making. Seen from this angle, the global political economy of the twenty-first century is an attempt to embed globalising markets in transnational social relations – quite similar to what we observed historically in terms of social and economic development at the level of the nation-state.

    The early heroes of the liberal approach were Adam Smith and David Ricardo. Smith argued in favour of government non-interference and the superiority of market exchanges guided by the ‘invisible hand’ of the price mechanism. This is a process whereby consumers seek the best quality for the lowest price and this, in turn, compels successful producers to find the lowest-cost method of production. Ricardo explicitly added the gains deriving from a system of free trade built around the principle of comparative advantage. Accordingly, ‘under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each’. And, ‘this pursuit of individual advantage is admirably connected with the universal good of the whole’ (Ricardo 1817). From this point, international trade liberalisation has been seen as a useful mechanism allocating labour to its most productive uses allowing in turn a much greater consumption of goods than what would be possible in the absence of such a system.

    For Smith, the specialisation in working patterns and the division of labour also created new opportunities for employees to achieve personal growth and professional careers. In the classic example, ten people working to produce pins could produce more in total if they worked together, dividing up tasks and performing each one better than if they all worked separately. Where Karl Marx identified repetitive work patterns and exploitation, early liberal political economy found skills, self-love and natural propensity (O’Brien and Williams 2010, 259). Taking these arguments into the modern era, if governments across the world de-regulated economic activity, cut taxes for the wealthy, privatised and contracted out traditional state services, then unprecedented levels of economic growth would follow. By allowing the free movement of capital, many more people can benefit from high levels of direct investment even if employees are less mobile and more tied to a particular workplace. Thus, in the modern liberal world view, often called neoliberalism, governments are expected to be active promoters and supporters of globalisation. Only left-leaning liberals, by contrast, recognise the increasingly global division of labour as responsible for rising levels of inequality.

    What unifies liberal thinking in terms of global economics is an analytical inclusion of a variety of state and non-state actors that form relationships of mutual dependence. Therefore, the historical focus of one country being dependent on another due to a surplus in a vital commodity, like oil or gas, has gradually given way to a much more complex understanding. This does not mean that the classic interaction between states has become obsolete, rather that it is enriched by including and explicitly recognising an everincreasing number of other international actors such as those explored in chapters five, six and seven. Hence, the policies of one international or regional organisation may rely on the policies of another. This has been the case with the European Union and the International Monetary Fund in the management of the 2008 global financial crisis as they adopted joint programmes to assist states such as Ireland. Another example is the successful implementation of a global environmental policy by the United Nations that benefitted significantly from collaboration with Greenpeace, an international non-governmental organisation. In the literature, however, it has been the multinational corporation (a private business operation with facilities and assets in at least two countries) that has received the most attention in the search for interdependent relationships across borders. Here, as elsewhere, the liberal account does show its broad remit, leaving room for positive evaluation as well as critical reflection. Some liberals praise the overall benefit from competition for international investments played out on the back of the rivalry between states and multinational corporations. Others, by contrast, stress the comparative disadvantage and limited success of less well-funded civil society actors when trying to change corporate behaviour on a global scale.