International political economy examines the ways in which political factors shape public policies and define who the winners and losers of these policies are. During the absolutist era, the amount of wealth in the world was considered finite—determined by a fixed supply of precious metals—and powerful monarchs amassed wealth in gold and silver. Within a mercantilist system, monarchical governments engaged in protectionist policies to safeguard their riches.
The Enlightenment and the Industrial Revolution marked the introduction of the concept of civilization as opposed to savagery, transforming European societies and the world. With this concept came the possibility of wealth creation. Adam Smith played a key role in defining wealth creation, the functioning of the market, and the role of the government in a market-based society. His ideas promoted trade liberalization in Europe.
At the end of World War II, representatives of the United States and Great Britain, among other nations, met to discuss the post-war international order at the Bretton Woods Conference. The conference established two international financial institutions, the International Monetary Fund (IMF) and the World Bank. A third proposed institution, the International Trade Organization (ITO), was never established. Participants agreed to create the General Agreement on Trade and Tariffs (GATT) instead. Even though a formal institution was not created during the conference, negotiations continued and resulted in the World Trade Organization (WTO) in 1995.
During the Cold War, economic transactions between the East and the West were rare, and thus the preferences of Western financial powers dominated the IPE agenda. The end of the Cold War brought relevant changes and shifted the focus of IPE from an exclusive interest in developed Western nations to incorporating the promotion of development across developing countries in different regions of the world. As a result of these changes, modernization theory gained the spotlight. Modernization theorists, who investigate links between economic development and democracy, had been searching for ways to promote economic growth and democracy to developing societies since the 1940s. Modernization is an empirically supported hypothesis about the suitable conditions for democratization. Several studies have found statistical evidence indicating that economic development is highly correlated with democratization, even though the exact mechanism by which economic growth spurs democracy has not yet been uncovered.
The end of the Cold War opened new doors for IPE. Over the last four decades, numerous developments, such as intensifying globalization, trade liberalization, international migration, poverty reduction, growing inequality, and climate change, embedded in an unprecedented wave of technology development, have profoundly altered what IPE examines and how it does it.
Three key issue areas have risen to prominence in contemporary IPE: globalization and international trade, international finance and crises, and exchange rate regimes.
Many authors argue that poverty, inequality, and environmental crises are inescapable consequences of capitalism. The argument is that the same mechanism that produces wealth and innovation also creates poverty, inequality, and environmental crises. The generalized suffering among the poor during the Industrial Revolution prompted several political philosophers, who became known as socialists, to search for answers to solve the problems of growing poverty and inequality. Socialist thinkers proposed forms of societal organization that upset the foundations of the market economy.
The process that creates affordable goods for mass consumption has undesirable consequences: it contributes to poverty and inequality and harms the environment. Some scholars propose that society must alter the mechanisms that generate the environmental crises, and since the crisis is caused by the unwanted consequences of industrial production, these scholars argue for degrowth. Another group of scholars claims that the mechanisms that generate the crisis may be altered through sustainable development. These scholars argue that it is possible to combine economic growth and environmental quality as long as the production process is improved through innovation, technology development, and regulatory intervention.