International Political Economy
International Political Economy: Contrasting world views is a major new
introductory textbook for students of International Political Economy that
combines theoretical perspectives, real-world examples, and comparative
policy analysis. Written by an experienced teacher and scholar, the text
is intended to give students an in-depth understanding of the core
perspectives in International Political Economy, which will allow them to
critically evaluate and independently analyze major political and economic
events.
Features and benefits of the text:
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•
•
•
•
It is organized around the three major perspectives in the field: free
market, institutionalist, and historical materialist.
Each perspective is developed thoroughly via the presentation of its
unique thought model, its world view, and its application to real-world
problems.
It compares and contrasts different analytical and policy approaches
to a wide range of core issues such as trade, finance, transnational
corporations, development, and environmental sustainability.
It explains the role of key thinkers in the field, from Adam Smith, Karl
Marx, David Ricardo, and Thorstein Veblen to John Kenneth Galbraith,
John Maynard Keynes, Milton Friedman, and Susan Strange.
It contains boxed biographies, graphics, review questions, suggestions
for further reading, and a detailed glossary to enhance student
learning.
Raymond C. Miller has been national president of two professional
associations: the Association for Integrative Studies and the Society for
International Development. He was founding editor of Issues in Integrative
Studies. Professor Miller served as a member of the faculty at San Francisco
State University for 43 years, where he is now Professor Emeritus of
International Relations and Social Science.
International Political
Economy
Contrasting world views
Raymond C. Miller
First published 2008
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Avenue, New York, NY 10016
This edition published in the Taylor & Francis e-Library, 2008.
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Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2008 Raymond C. Miller
All rights reserved. No part of this book may be reprinted or reproduced or
utilized in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Miller, Raymond C.
International political economy: contrasting world views/Raymond C.
Miller.
p. cm.
Includes bibliographical references and index.
[etc.]
1. International economic relations. I. Title.
HF1359.M557 2008
337—dc22
2007050656
ISBN 0-203-92723-0 Master e-book ISBN
ISBN 10: 0-415-38408-7 (hbk)
ISBN 10: 0-415-38409-5 (pbk)
ISBN 10: 0-203-92723-0 (ebk)
ISBN 13: 978-0-415-38408-7 (hbk)
ISBN 13: 978-0-415-38409-4 (pbk)
ISBN 13: 978-0-203-92723-6 (ebk)
CONTENTS
List of illustrations
Preface for students
Preface for instructors
Acknowledgments
Abbreviations and acronyms
1 The Field of Study Known as “IPE”
Historical background
Classical political economy
Review questions
ix
xi
xiv
xviii
xx
1
2
9
14
2 The Market Model and World View
15
The seven premises of the market model
Internal interactions of the market model
Logical consequences of the market model
Answers to basic economic questions
Comments
Review questions
18
21
29
32
36
37
3 Market Applications
National income and product accounts
International trade and the market
Balance of payments
Foreign exchange
The gold standard
Monetary policy
39
40
43
51
53
58
61
v
CONTENTS
The Keynesian revision and fiscal policy
Global connections
Review questions
73
81
83
4 The Multi-Centric Organizational Model and World View
86
The Veblen and Polanyi institutionalist challenge to the market model
Sraffa’s neo-Ricardian critique
The Galbraith critique and alternative
Multi-centric organizational (MCO) model
Review questions
87
91
93
100
113
5 The Multi-Centric Organizational World View:
Critical applications
Problems of “free trade”
The global casino
Ecological degradation
Corporate colonialism
The MCO reform agenda
Review questions
6 The Classical Marxist Model and World View
Premises of the classical Marxist model
Interactions within the classical Marxist model
The capitalist mode of production
Outcomes of the classical Marxist model
Review questions
7 Contemporary Applications of Marxist Analysis
Imperialism
Regularization theory—the social structures of accumulation
Marxism and feminism
Review questions
116
116
123
132
144
154
167
171
174
178
183
189
191
193
193
201
211
213
8 Summation and Review
216
Three world views compared
Three views on trade
216
223
vi
CONTENTS
Three views on transnational corporations
Three views on development
Three views on the environment
Review questions
224
226
232
235
Glossary of concepts
Suggested further reading
Index
237
254
256
vii
Illustrations
figures
2.1
3.1
3.2
3.3
3.4
4.1
6.1
The market model—a circular flow diagram
Comparative advantage
Fractional reserve banking expansion
Typical hierarchy of interest rates
Global connections (macroeconomic variables)
Multi-centric organizational (MCO) world view
Capitalist mode of production
23
45
64
69
82
105
183
tables
0.1
3.1
3.2
3.3
3.4
3.5
3.6
4.1
5.1
6.1
6.2
7.1
8.1
8.2
8.3
8.4
8.5
Political Science and Economics compared
U.S. national product and income accounts 2006
U.S. balance of payments 2006
Commercial bank T account
Federal Reserve Banks’ T account
Instruments of monetary policy
Demonstration of Keynes’s “low-level equilibrium trap”
The MCO and market models compared
Top 100 rankings of countries and corporations, 2004–2005
Modes of production through history
Declining rate of profit from changing labor–capital ratios
Colonialism and imperialism
Three world views in IPE—a summary
Three IPE world views on trade
Three IPE world views on transnational corporations
Three IPE world views on development
Three IPE world views on the environment
xv
42
51
63
66
67
75
112
148
182
188
201
217
224
226
231
232
ix
Preface for Students
For 43 years I have been teaching political economy, first American and
then international. I chose political economy as my field of study and
teaching because I wanted to make a contribution to the improvement
of the human condition. I came to the realization that without a solid
foundation in political economy, improvement programs are not likely to
succeed. Not only do I still believe that is true, but I also believe that
persons cannot consider themselves truly educated unless they understand
the basics of political economy. After all, we are really talking about how
the human world works.
Based on feedback from students during my teaching career, I have
tried to continuously improve the effectiveness of my presentation. My
goal has always been to give students usable knowledge: after completing
my classes, students should be able to read or listen to statements made
about political-economic issues with a deeper level of understanding that
enables them to make independent and critical judgments. In other words,
educated people need more than a “gut feeling” about whether or not they
agree with statements being made or an argument being put forth.
The development of your critical faculties in the realm of political
economy requires deepening your skills in several areas. First, you need
an understanding of how important institutions work. For instance,
understanding how money works requires an understanding of how
monetary policy is supposed to work. Monetary policy is closely related
to movements in price levels, which in turn affect ratios of exchange
between currencies. These relationships are complicated, but without an
understanding of them you could not make an independent judgment
on questions such as: “What is the correct value of the Chinese currency
in relationship to the U.S. dollar?” Or for that matter: “Why is such a
question important in the first place?” In 2007 many American officials and
politicians were contending that the Chinese currency was “undervalued.”
What does that mean? Why do the Chinese disagree? Understanding this
xi
international political economy
type of issue requires both political and economic information. Information
of this sort should definitely be covered in a political economy course, but
it should be explained in a way that does not require the use of the language
of mathematics. In my experience some students are comfortable with the
language of mathematics, but others are very uncomfortable. Therefore,
my classes and this text take a rigorous but non-mathematical approach.
Second, you need to develop a whole new vocabulary. Words do count.
Careful analysis requires careful definition of terms. A great deal of
misunderstanding can come unnecessarily from the sloppy use of terms.
I have identified, defined, and consistently used key terms, and a glossary
is provided near the end of this book for quick reference. The semantics
of political economy can be tricky, because different people may be using
the same terms but with quite different meanings in mind. For instance, a
term such as “capital” has multiple meanings, dependent on the context.
Unfortunately, the language used in financial discourse (such as stock
market reports) is often different than the language and the explanations
used by economists. Until the differences are cleared up, confusion can
occur. A related concern is the plethora of acronyms. Remembering what
they all stand for can be a challenge. Yet it is necessary to use them because
there are many instances when only the acronym is used in the literature.
Who, for instance, uses the full name of UNESCO when discussing that
organization? Not many people know the exact terms for which the initials
stand. Actually, the correct identification may not be all that important. It
is what the organization does that is important. But it can be frustrating
when a reader comes across an acronym that “doesn’t ring a bell.” I have
tried to avoid that problem, either by spelling out the name or by using it
frequently. A list of acronyms is provided near the front of this book.
Third, it is important to understand “where people are coming from.”
When people comment on political-economic issues, they are
understanding those issues from some perspective. Undoubtedly that
perspective is embedded in a comprehensive world view, whether they
know it or not. My strategy in organizing the material for this text is to
organize everything explicitly around three dominant world views. In my
opinion, once a person has a good grasp of these different world views, it
is possible not only to know where a speaker is coming from, but also to
know what he or she is likely to think about any political-economic issue.
For example, at the global level the dominant political-economic world
view for the last several decades has been the “free market.” Following
logically from the free market approach are policies promoting “free trade”
and the “free transfer” of funds between countries. Supporting and
embedded within the free market world view is an intellectual model of
how a free market works. That market model is the centerpiece of the
academic discipline of Economics. Therefore, in order to understand the
rationale for the market world view, one needs to understand the underlying
xii
Preface for Students
conceptual model of Economics. World view, however, goes beyond what
one is likely to encounter in an Economics class. Articulating an underlying
world view brings out the assumptions that view comprises about human
nature, the nature of society, the morally most desirable behavior, preferred
future outcomes, and so on. For instance, advocates of the free market
approach, such as the late Nobel laureate in Economics, Milton Friedman,
believe strongly that not only is the market the best analytical device, but
it is also the morally preferred decision-making system.
This text presents three major and rather different political-economic
world views. Initially they can be identified as free market, institutional,
and Marxist views on capitalism. This threefold division is not new in
the field, but the way in which the world views are presented is my own
construction. The pedagogical principles that I have tried to follow are
clarity, sufficient depth, and logical consistency. Each world view has its
own simple model of how things work, which are presented in the text.
The world out there is much too complex—“messy” if you will—to be
accurately and completely described by any model. Models, therefore, are
necessarily simplified “idealizations.” The intent of models is to provide
insight into how things work, not to capture every aspect of reality. For
instance, the market model assumes that the decisions of all actors are
determined by maximizing material interests. This assumption gives the
model logical consistency, but not descriptive reality.
For models to be helpful to your understanding, you need to put them
on a level of abstraction above everyday experience. On occasion that
elevation might prove difficult to achieve, but, based on my experience,
once you get there you will have a much clearer conception of how
different world views perceive the political-economic landscape. To assist
you in obtaining that clearer conception, I have included visual depictions
of the internal relationships of each of the three major models.
Good luck! I hope that my efforts reap intellectual benefits for you,
and that you will feel more confident making critical and independent
judgments about a variety of crucial political-economic issues.
Raymond C. Miller
Professor Emeritus of International Relations and Social Science
San Francisco State University
xiii
Preface for Instructors
I thought that it might be helpful to lay out for instructors as well as for
students the pedagogical strategy that informs the preparation of this
text. While doing that I will take the opportunity to identify the known
intellectual ancestors of my approach as well as to explicate some of my
pedagogical devices that might not be immediately evident.
As a graduate student at the University of Chicago, I learned that
all academic disciplines are creations of communities of scholars. Each
develops a theoretical consensus that changes over time, sometimes quite
dramatically. In my teaching, therefore, I wanted to make sure that my
students understood that what one thinks about anything depends upon
the perspective from which one approaches it. To me, the only way to teach
that insight was to show how every discipline has a perspective embedded
within it. But to effectively show how a perspective influences the way a
person sees the world, it’s necessary to show how contrasting perspectives
interpret the same events. That means teaching comparative perspectives.
That endeavor cannot be effectively accomplished without a schema of
common categories within which the perspectives are compared.
World view is the organizing concept that provides for me the schema
of common categories, the common questions to ask. My presumption
is that everybody perceives and acts under the influence of some world
view. It’s a very anthropological concept, in which my first mentor was
Robert Redfield. In the 1950s he argued that world view is the shared
philosophy of life of a people that includes assumptions about the nature
of life and moral norms. He contended that all cultures construct their own
world views. In the 1960s Thomas Kuhn applied the world view idea to
scientific communities, though he initially called disciplinary world views
“paradigms.” Kuhn did not think that the social science disciplines were
sufficiently coalesced around agreed-upon research strategies for them to
be studied in the same way as disciplines like Physics. But despite Kuhn’s
xiv
Preface for Instructors
Table 0.1 Political Science and Economics compared
Dimensions
Political Science
Economics
Core subject matter
Forms, qualities, and processes of
governments
Power, governance, and policy
Production and distribution
Central concepts
Explanatory strategies
Normative orientation
Data collection
Data analysis
Organization and systems theories and
ideologies
Superiority of democratic pluralism
Voting surveys, case studies, and “great
texts”
Statistics, comparative analysis, and
interpretation
Supply and demand, exchange,
and choice
Market model and rational choice
Superiority of competitive market
Quantitative indices
Statistics and mathematical
modeling
advice, other scholars went ahead anyway and applied his ideas to the
social sciences. I did that myself in the early 1980s, creating a world view
schema for comparing disciplinary modalities of the seven conventional
social science disciplines. I filled in the boxes with my impressions of the
dominant themes in American social science practice. My comparison of
Political Science and Economics is relevant background here, as they are
the constituent disciplines of Political Economy.
These impressionistic contrasts helped my students understand how
disciplines differed on many dimensions and even where their disciplinary
instructors were coming from. Kuhn and some disciplinarians would
probably have been skeptical about the exercise, but my purpose was a
pedagogical one, not the rigorous stipulation of research strategies.
After all, academic disciplines are specialized communities with their
own subcultures. Some observers have even compared them to tribes.
Therefore, I have found that the anthropological concept of world view is
a useful device for understanding each discipline’s “outlook on life.”
When I was first asked to teach International Political Economy, I was
delighted to discover that IPE had a multiple-perspective approach built
in to the field. Three major and presumably incommensurate schools of
thought provided competing perspectives on how the global political
economy does and should function. From the beginning I organized
my class around comparing the three approaches. However, the major
textbooks were not primarily organized that way. They were more likely to
organize their presentations around history and/or themes, such as trade
and development, and to discuss the three perspectives within the context
of a particular theme. I felt that students would get a more coherent sense
of the differing perspectives if each one was presented as a complete
package.
xv
international political economy
Furthermore, I was not comfortable with the way that the schools
of thought were sometimes labeled. One popular text identified them
as “liberalism, mercantilism and radicalism” (Lairson and Skidmore,
International Political Economy), but all of these three labels have
misleading qualities. In the current American political discourse, liberalism
has almost the opposite meaning of its classic, nineteenth-century free
market meaning. I agree with Susan Strange that mercantilism privileges the
nation-state and gives insufficient attention to the role that transnational
corporations play in the global political economy. Radicalism seems more
of a Cold War political label than an accurate designation. After all, in
many respects the tenets of the market society are actually more radical
than Marx’s critique of capitalism, presuming that radical means a sharp
break with the past.
Additionally, I felt that the presentations of the three schools should have
a solid foundation in their economic content. My guidance in that respect
comes from Ken Cole, John Cameron, and Chris Edwards. Their book,
Why Economists Disagree, lays out three schools of thought, significantly
differentiated by their contrasting theories of value. Chris Edwards then
carried this framework into the international arena with his book The
Fragmented World. Their approach is signaled by the subtitle of the first
book, The Political Economy of Economics. They provide sophisticated
presentations of each intellectual framework, note which political interest
group is likely to prefer which school of thought, and illustrate the policy
consequences of adopting one theoretical approach over another.
These works have provided the rationale for the approach taken in
this text. My approach to explicating world views leans heavily on the
economic component. Each of the three world views covered is presented
as a model, using an overall framework that sets up specific aspects of
each world view for comparison: assumptions or premises, internal
interactions, and outcomes. Two of the three models, the market model
and Marx’s model of the capitalist mode of production, are my versions of
relatively well-known mental constructs. The third model, to which I’ve
given the name multi-centric organizational, or MCO, is my composite of
several intellectual strands, in particular the institutionalists and the neoRicardians. The major institutionalist upon whom I rely is John Kenneth
Galbraith, and the work of Piero Sraffa is the foundation for the neoRicardian contribution. Cole, Cameron, and Edwards call this school of
thought the “cost of production” approach. In my classes for many years I
presented the ideas of institutionalists such as Veblen, Galbraith, Polanyi,
Strange, Korten, and others, but not as a coherent model-like package, till
one day a very bright student said, “How come you don’t present these
views in the same kind of logical structure as you do the other two major
points of view?” She was right; the presentations were not comparable. In
my subsequent classes and in this text I’ve tried to remedy that imbalance.
I hope you find my construct helpful in presenting this perspective.
xvi
Preface for Instructors
In the process of discussing the three models/world views, I tend to use
some of the terms associated with the originating scholars so that students
will recognize them when they see them in other literature. However,
there are a few important exceptions. In order to keep key term usage
fairly consistent over all three models and reduce confusion for students,
I made some modifications in the usage of terminology. The two terms
for which this is especially true are capital and surplus. As you know,
capital is a term used in many different ways. I use it throughout as it is
defined by neoclassical economists, making the distinction between the
actual production-enhancing goods and services investment on the one
hand and the financial facilitation of the saving process on the other hand
(simplistically characterized as physical vs. financial capital). This usage
has the most problematic implications for Marxism, but I think it works.
For Marx, the use of the term surplus is privileged, as in surplus value.
Consequently, I have to find other words for what Sraffa called surplus, as
his meaning is different than Marx’s. This semantic consistency approach
is a pedagogical strategy that I have found helpful for students. I hope it
works for you.
I have tried to give all three points of view a fair presentation. In my
classes I know that I have succeeded in that effort when students ask me
at the end of the semester, “So what world view do you prefer?” I can give
enthusiastic lectures on all three models. After all, each has an important
contribution to make. Each perspective illuminates the others. That’s why
I disagree with those authors who try to conflate the three perspectives
into one. I believe that students need to understand that it does make an
important difference for policy, and even for scholarship, which world
view decision-makers or scientists hold, especially if they are committed
to one point of view.
Because of the world view emphasis of this text, I have not given complete
historical accounts of the major conventional topics in the field such as,
for example, trade policy. There are many books that already accomplish
that task quite well. This text does give historical, institutional, and policy
examples in order to help students make sense of abstract ideas; but if
you want to include in your course comprehensive historical coverage of
all the major topics in IPE, in addition to presenting contrasting world
view perspectives, then this text is probably best used as a complement to
history-oriented materials.
Finally, my use of international rather than global as the primary modifier
of political economy does not imply a strong intellectual preference. It
actually arises from my sense that the designating phrase International
Political Economy has a more natural, historical fit with the field. Besides,
the acronym “IPE” just sounds right.
Raymond C. Miller
Professor Emeritus of International Relations and Social Science
San Francisco State University
xvii
Acknowledgments
The process of preparing for and writing this book has covered many
decades. Consequently, there are many people to whom I owe my
gratitude. My professorial mentors at the universities of Denver, Chicago,
and Syracuse started me on the path of political economy. Since I taught
Political Economy for 43 years, I am thankful to many generations of
students for their patient attention and reaffirmation of our mutual
learning process.
The culmination of this long gestation process started several years ago
with a contract with Routledge. Craig Fowlie, Publisher and Editor, has
been supportive and flexible throughout. We agreed on four professional
reviewers who have read, commented, and made suggestions on the entire
manuscript. They are Professors Eric Helleiner of Waterloo University,
Joanna Moss of San Francisco State University, William Newell of Miami
University (Ohio), and Rick Szostak of Alberta University. Another one
of my colleagues at San Francisco State, Dr. Glenn Fieldman, has provided
me with extensive recommendations for textual improvement. I have had
the additional good fortune of recent teaching assistants (Beate Antonich,
Robin Chang, and Justine Miley) giving me the benefit of their feedback.
All three of the world views covered in the text are represented among
the reviewers. Asking for critical reviews from such a talented group is
indeed humbling. Thanks to their insightful suggestions, the text has been
through many revisions. Whatever I still have not managed to get right
certainly can not be laid at their feet. They did their best to straighten
me out. The same can be said of the excellent copy editor assigned to me,
Suzanne Peake.
My deepest and special thanks go to my “production team.” That
would be my wife Anja and daughter Elna. Not only have they been
personally supportive throughout the entire process, but they have also
xviii
Acknowledgments
been intimately involved in the production process itself. They both have
read and commented on the entire manuscript. In addition, my wife has
helped with the logistics, and my daughter has done the graphics. No one
could have a better team.
Raymond C. Miller
Bibliography
Cole, Ken, John Cameron, and Chris Edwards, Why Economists Disagree: The
Political Economy of Economics (Longman: London) 1983.
Edwards, Chris, The Fragmented World: Competing Perspectives on Trade, Money
and Crisis (Methuen: London) 1985.
Kuhn, Thomas S. The Structure of Scientific Revolutions (University of Chicago
Press: Chicago) 1962.
Lairson, Thomas and David Skidmore, International Political Economy: The Struggle
for Power and Wealth (Harcourt Brace: Fort Worth, Texas) 1993.
Redfield, Robert The Little Community (University of Chicago Press: Chicago)
1956.
Strange, Susan, States and Markets (Pinter: London) 1988; 2nd edition, 1994.
xix
Abbreviations and acronyms
BRIC
Brazil, Russia, India, and China
CEO
chief executive officer
ECB
European Central Bank
ECOSOC
United Nations Economic and Social Council
EU
European Union
FDI
foreign direct investment
Fed
Federal Reserve System (U.S. central bank)
FOMC
Federal Open Market Committee
GATS
General Agreement on Trade in Services
GATT
General Agreement on Tariffs and Trade
GDP
Gross Domestic Product
GEF
Global Environmental Facility
GM
genetically modified (e.g., crops)
GNP
Gross National Product
IBRD
International Bank for Reconstruction and Development
ICONE
Institute for the Study of Trade and International Negotiations
IMF
International Monetary Fund
IPE
International Political Economy
ISEW
Index of Sustainable Economic Welfare
LIBOR
London Inter-Bank Offer Rate
MCO
multi-centric organizational (model)
MEA
multilateral environmental agreement
xx
Abbreviations
MFN
most favored nation
MTBE
methyl tertiary butyl ether (gasoline additive)
NAFTA
North American Free Trade Agreement
NGO
non-governmental organization
NIEO
New International Economic Order
OECD
Organisation for Economic Co-operation and Development
OPEC
Organization of the Petrolem Exporting Countries
PPP
purchasing power parity
SAPs
structural adjustment programs
SDRs
Special Drawing Rights
TNC
transnational corporation
TNI
Trans-National Index
TRIMs
Trade Related Investment Measures
TRIP
Trade Related Intellectual Property
U.K./UK
United Kingdom
UNCTAD
United Nations Conference on Trade and Development
UNEP
United Nations Environmental Programme
UNESCO
United Nations Educational, Scientific and Cultural Organization
WIPO
World Intellectual Property Organization
WTO
World Trade Organization
xxi
Chapter 1
The Field of Study
Known as “IPE”
International Political Economy (IPE) is a central component of the
interdisciplinary field of International Studies. Its current version is only
about three decades old. IPE combines primarily the relevant parts of the
disciplines of Political Science and Economics. It also draws on relevant
facets of other disciplines such as Sociology, Geography, and Women’s
Studies to deepen and broaden the analysis. Contemporary IPE is a
reconstitution of a field of study that existed throughout the nineteenth
century. The generally recognized founder of the older and classical version
of IPE is Adam Smith, a Scottish moral philosopher, whose 1776 book The
Wealth of Nations is considered the originating treatise.
During the nineteenth century the European scholars who followed
in Adam Smith’s footsteps created the field of study that is now known
as classical political economy. Together they created a field that provided
comprehensive social analysis. However, near the end of the nineteenth
century, as an integral part of the evolution of the Industrial Revolution,
greater and greater specialization permeated all aspects of life. The university
was no exception. Consequently, classical political economy was divided
into the modern academic disciplines of Economics, Political Science, and
Sociology. Thus for most of the twentieth century these subject matters
were studied separately. However, by the 1980s the increasing evidence of
comprehensive global interdependences could no longer be ignored. The
issues that were being studied in disciplinary isolation required a more
integrative analysis. Therefore, the field of International Political Economy
was recreated (Wolf, Europe and the People without History).
1
international political economy
In the late twentieth century technological developments in
transportation and communications brought the world together in ways
that had never before been possible. Thanks to the Internet, international
financial transactions could now be carried on instantaneously 24 hours a
day, seven days a week. Manufacturing processes could now be located in
multiple countries, with the result that it has become almost impossible to
tell what the home-production country of any complex product such as an
automobile actually is. Transnational corporations operate globally with
decreasing loyalty to any particular nation-state. Nation-states, through
international organizations such as the World Trade Organization, try to
retain some kind of control. Countries such as China and India, which
hardly counted just 20 to 30 years ago in the post–World War II world
economy, are now major players. Studying a world of such complexity
required a new field that could effectively encompass all of these rapidly
changing circumstances (Amin et al., “Forum for heterodox international
political economy”).
Formally, therefore, International Political Economy is an
interdisciplinary social science field of study that investigates, analyzes,
and proposes changes in the processes of economic flows and political
governance that cross over and/or transcend national boundaries. These
flows include the exchange of goods and services (trade), funds (capital),
technology, labor, natural resources, environmental pollution, and so on.
The field attempts to provide explanations, to evaluate consequences, and
to propose possible policy initiatives. Within the field there are competing
perspectives that offer different analyses of the same phenomena.
To better understand the origin and development of the field, it should
be helpful to briefly recount the historical evolution of the politicaleconomic practices that it studies and the modern intellectual effort to
make sense of them.
Historical background
The subject matter of International Political Economy has a long history.
In fact, one of the main subjects, long-distance trade, goes back thousands
of years. During this long period trade has served as a major means of
exchanging commodities, accumulating wealth, diffusing ideas, imposing
control, and spreading religion. Organized long-distance trade was engaged
in by many civilizations, starting 6,000 years ago with the Assyrians,
who established regular trade between Mesopotamia (Iraq) and Anatolia
(Turkey) to the west and India to the east. One thousand years later the
Phoenicians (in what is now Lebanon) established the first civilization
based predominantly on trade. Within another thousand years the first
known laws regulating trade and commerce were promulgated in Babylon,
2
The Field of Study Known as “IPE”
as part of the Hammurabi Code. Long-distance trade was a very lucrative
but dangerous activity, and both the merchants and states who gained from
the trade had a strong interest in protecting it. One of the most interesting
examples of this connection was the overland trading route from China to
the eastern Mediterranean that has come to be called the Silk Road. It was
at its safest and most dependable when the Mongol Empire controlled its
entire length. For more than a thousand years the camel caravans on the
Silk Road provided the most cost-efficient method available of transporting
high-value goods. Ocean-going ships did not become competitive until
the thirteenth century, when significant technological developments in
ship design, construction, and navigation took place in both China and the
Italian city-states (Chanda, Bound Together).
However, largely due to the state of transportation technology, the
long-distance trade carried on for several thousands of years by these premodern civilizations was mostly limited to high-value goods for the benefit
of the elite, such as silk, spices, ivory, and precious metals. Furthermore,
most people would not have had any direct contact with the traders or the
commodities traded, as around 90 percent of the population lived in small
villages and gained their livelihood from agriculture. However, influences
from trade did diffuse out to the countryside, religion being one example.
Chanda argues that traders are especially comfortable spreading religions
that claim universal applicability, since they have to deal with people of
many different cultures, countries, and languages. The first religion to
follow this path was Buddhism, the second was Christianity, and the third
was Islam. In fact, Mohammed himself was a merchant and trader (Chanda,
Bound Together).
Besides long-distance trade, markets are another example of institutions
that have been around a long time. However, when people in pre-modern,
rural-based societies spoke about markets, they were not referring to
the larger realm of economic activity, as would be the case today. Instead
markets were once-a-week gatherings in the region’s biggest village or
town where people brought their chickens or turnips or wooden benches
to exchange, often through bartering, for something they needed.
The pre-modern market was a place, and its only purpose was the
trading of commodities. Sometimes, in pre-modern times, especially in
the larger markets such as those in Baghdad and Rome, slaves were among
the “commodities” traded, but the numbers were small. In medieval
Europe trading in the marketplace was supposed to be conducted at the
“just price,” that is, the seller was supposed to only recover costs, nothing
more. Official Church morality frowned upon merchants who made their
living from trade. Morally speaking, money-lending was even worse. At
that time Christianity shared with Islam the condemnation of usury, the
extraction of presumably undeserved interest payments from borrowers
(Heilbroner, The Making of Economic Society).
3
international political economy
The extent and intensity of long-distance trade varied over time,
reflecting the relative strength and objectives of the involved governments
and peoples. Trading centers and routes had to be protected from bandits
and arbitrary confiscation. With the collapse of the Roman Empire in the
fifth century, European-wide trade contracted significantly. But by the
eighth century the Vikings had established a trading network stretching
from Scandinavia to Constantinople. Arab trading, centered in the Middle
East, was most active in the tenth to thirteenth centuries, encompassing
most of the known world including southern Europe, northern and
eastern Africa, and central, southern, and southeastern Asia. The spread
of Islam follows quite closely the geographic spread of this extensive
trading network. In the Baltic and North Sea area the Hanseatic League
of northern European cities dominated trading from the thirteenth to the
sixteenth centuries. In the 1400s the Chinese had the biggest ships and
the largest merchant fleets in the world, but they allowed their control
of the ocean-going trade in Asia to slip away when the Emperor decided
to focus the regime’s economic energies inward. The trading prowess of
the Italian city-states in the Mediterranean area reached its peak in the
fifteenth century (Landes, The Wealth and Poverty of Nations).
Not until the fifteenth and sixteenth centuries did Western Europeans
begin to embark on expeditions and conquests that would result in a truly
global trading network. Thanks to developments in navigation, shipbuilding, and military technology (especially cannons), the Portuguese
began exploring the world and establishing trading enclaves in Africa, Asia,
and South America. Their basic technology was borrowed from the Arabs,
who had occupied southern Spain and Portugal for 500 years. The Arabs
in turn had acquired some of their knowledge from the ancient Greeks
and Chinese. For instance, the invention of the compass, an important
navigation instrument, has been attributed to the Chinese. These premodern connections demonstrate that there was a diffusion of information
and commodities over long distances, but there was not yet an integrated
global political-economic system.
The symbolic date of the beginning of the establishment of the first global
economy is 1492, when Columbus arrived in the Caribbean. Columbus was
financed by Spanish royalty, who were actually more interested in finding
(and stealing) gold and silver than in finding a direct trading route to
the spices, tea, porcelain, and silk in Asia. In an act of royal arrogance,
the Spanish and Portuguese kings divided up the world between them.
Columbus headed west across the Atlantic for Spain while the Portuguese
ships sailed around Africa. The ostensible objective of these expeditions
was a trading route to the luxurious commodities of the East that avoided
the merchants of the Middle East and the Mediterranean, who always
took a substantial cut of the trading profits. The Spanish had a special
interest in gold and silver because these precious metals were the basis of
4
The Field of Study Known as “IPE”
wealth, the means with which to buy the consumption goods necessary for
better living and war-making. Both kings experienced successful results.
Portuguese ships made it to the Indian Ocean and beyond. Meanwhile
the Spanish were so successful in their acquisition of gold and silver from
the Americas, especially from Mexico and Peru, that by the seventeenth
century the European money supply, which was based on gold and silver,
had doubled. Many observers believe that this massive transfer of wealth
was crucial in the ultimate rise of the European economies to global preeminence. An indigenous Latin American leader recently made the claim
that if the Europeans were to return these precious metals in bullion form
to their original home with 500 years of compound interest, the weight
would be greater than that of the planet earth (Guaicaipuro Cuautemoc, in
Simms, Ecological Debt).
Whereas the Portuguese initiated global trading in the 1500s, it was the
Dutch and then the English who really developed the global trading system
in the 1600s. They initiated a system of credit, built large fleets of ships,
greatly expanded the colonial production of cash crops such as cotton,
tobacco, and sugar, gave monopoly franchises to trading companies, and
militarily defended their global reach. Even though private firms were
involved, the key instigator of the system was the state. This state-run
commercial expansion was known as mercantilism. State-sanctioned
monopolies, or exclusive franchises, gave the trading companies the “right”
to establish colonies, which at first were small port enclaves and later
encompassed whole countries. The most famous of the trading companies
were the English East India Trading Company, which colonized India, and
the Dutch East India Trading Company, which colonized the group of
islands in Southeast Asia that is known today as Indonesia. Located within
the Indonesian archipelago was one of the biggest prizes of that time, the
Spice Islands, which were the world’s only source of nutmeg, cloves, and
mace (Landes, The Wealth and Poverty of Nations).
Even though the initial impetus for the colonial trade system was access
to the highly desired commodities of Asia—spices, tea, silk, porcelain,
and so forth—the most profitable endeavor turned out to be the socalled triangular trade between Europe, Africa, and the Americas. Sailing
south, the Europeans traded guns and other small manufactured goods
for African slaves. From there, going west, slaves were brought to South
America (especially Brazil), the Caribbean, and North America, where they
provided labor for the cash-crop plantations of sugar, tobacco, and cotton.
The cash crops were then shipped back east to Europe in exchange for small
manufactured goods and food. This cash-crop juggernaut lasted for several
hundred years, devastated the lives of millions of people, and destroyed
the environments of many areas. For example, the land in many Caribbean
islands was totally dedicated to sugar cane cultivation, which required the
destruction of all forest cover and other agricultural crops. Some places,
5
international political economy
such as Haiti, have never recovered. However, the triangular trade made
the successful merchants and the states that sponsored them very wealthy.
In the early mercantile period annual returns of 50 percent, especially
on sugar, were possible. The ultimate winners were the commercial and
government elites in Western Europe, especially the English, the Dutch,
and the French (Blaut, The Colonizer’s Model of the World).
Despite their early leadership role in trade and technology, the Spanish
and Portuguese lost their dominant position by the seventeenth century.
Their economies and their trading practices did not keep up with those of
their rivals, partly due to the intolerance of the Inquisition. Starting in the
sixteenth century the Spanish king and the Catholic Church imposed a
regime of strict religious requirements. All those who were deemed nonChristian or insufficiently orthodox were either deported or tried in the
Inquisition courts. Merchants, money-lenders, and scholars were targeted,
especially since many of them were Jews. As the business and intellectual
elites fled, were jailed, or were executed, the Spanish and Portuguese
economies went into a slump that was to last for several hundred years
(Landes, The Wealth and Poverty of Nations).
Mercantilism paved the way for the really profound economic
transformation that began in the eighteenth century, initially in the United
Kingdom. That massive change, which was destined to sweep over the
whole earth, affected all of society, not just a small elite. It was called the
Industrial Revolution. Thanks to the adoption of new energy sources,
new production methods, and many inventions, especially the steam
engine, production efficiency increased enormously. In some areas, such as
steel production, this increase was two-hundred-fold. It was the defining
transformation that created the modern world.
Since the Industrial Revolution is still under way as part of the
globalization process, it is instructive to inquire what were the circumstances
that came together in eighteenth-century England to generate the world’s
first experience of industrialization. It’s an interesting inquiry because
although many of the same circumstances had been in place in China many
hundreds of years earlier, the Industrial Revolution did not happen there.
Scholars have therefore sought to identify the historical conditions that
facilitated the emergence of the unique set of technological and societal
breakthroughs known as industrialization. It might have been necessary for
all of the conditions to be present simultaneously. We do not really know.
Listed below are the historical circumstances that have been identified as
playing a contributory role in the creation of the first Industrial Revolution
in England (Bernstein, The Birth of Plenty; Heilbroner, The Making of
Economic Society; Landes, The Wealth and Poverty of Nations):
1 Increases in agricultural efficiency. Because of the adoption of new
technologies and new crops, and the commercial consolidation of
6
The Field of Study Known as “IPE”
farming land via the enclosure process, higher yields were achieved
with fewer farmers. More efficient agriculture freed up labor and
capital resources for use in the building of the industrial economy.
The enclosure process of the seventeenth and eighteenth centuries
was a victory of private property law over customary rights to
hold land in common. Lands that peasants had previously used in
common for grazing and other agricultural purposes were fenced off,
that is, “enclosed,” as they were designated the private property of
landowners.
2 Middle-class revolution. In 1688 England experienced the first
European middle-class revolution, which gave more political power to
merchants and the guarantee of the protection of private property from
arbitrary government seizure. Because of this greater property security,
merchants were more inclined to invest in industrial ventures. Some
observers believe that the establishment of an effective legal system
that protected both property and liberty was the key foundation. The
more famous and comparable French Revolution did not occur until
1789, more than 100 years later.
3 Openness to technology and science. Already in the 1600s the English
were welcoming science and honoring inventors. This trend was
formalized in 1662 with the establishment of the Royal Society of
London for the Promotion of Natural Knowledge. In most other
countries at the time, the religious and political establishments
considered scientific innovations as threats to their authority. In
England, however, scientific and technical discoveries were put into
print and widely distributed.
4 Financial system. At the initiative of a Scottish businessman, the
English established the first national central bank (1694) and a relatively
stable system of credit and money. The existence of flourishing capital
markets in which those wishing to build manufacturing plants could
borrow at reasonable rates encouraged economic development.
Though the financial innovations came first from the Italians and then
the Dutch, it was the English who first developed a truly national
financial system. One of the innovations the English copied from the
Dutch was the regular provision of financial information. Starting in
1697 traders had access to publications that followed the prices of
stocks, government bills, and foreign exchange.
5 Natural resources. Besides being an island with plentiful rainfall and
navigable rivers, Great Britain possessed the key raw materials for the
beginning of the industrial system of production: coal and iron ore.
6 Wealth transfer. Through trade, a superior navy, piracy, and colonial
extraction, the English had developed a dominant system of
7
international political economy
obtaining the wealth and raw materials necessary to promote their
industrialization. One of those raw materials was cotton, which
initially came from their North American colonies and later from
India and Egypt. Many Spanish galleons loaded with gold and silver
were hijacked by English pirates.
7 Nation-state. The English were the first to effectively implement the
principles established in the 1648 Treaty of Westphalia. In particular,
the government exercised full territorial control within its recognized
borders by eliminating internal barriers to trade and imposing
standardized systems of measures, money, governance, and language.
They also built a national transport system of canals and roads that
facilitated commerce. By contrast, Germany did not come together
as a nation-state until the nineteenth century, which delayed its
industrialization.
8 Market society. Great Britain had the first nationally integrated market
economy functioning within its borders. In order for a comprehensive
market to work, all of the ingredients in the economy must be
considered available for sale in the market. That especially meant
making land and labor available for sale at a price determined by supply
and demand. In other words, land and labor had to be transformed
into commodities so that they could be bought and sold in the same
way that a bushel of wheat or a bolt of cloth was bought and sold.
Great Britain was well on its way to becoming a market society by
the middle of the eighteenth century. As pointed out above, having a
market society is very different from just having a number of localized
market places.
9 Favorable religion. During the Middle Ages, Catholic doctrine taught
that seeking material gain was immoral. This stance is antithetical to
the market/capitalistic system, which is driven by individuals seeking
material gain. Consequently, a moral revolution had to occur if a
market society were to come into being. This moral revolution did
occur thanks to the Protestant Reformation of the sixteenth century.
England became and remained Protestant by a series of historical
accidents, in particular King Henry VIII’s break with the Pope over
his wish to get approval for his divorce. Thus, over time, the United
Kingdom developed a religious environment that facilitated the
necessary changes in moral values, including not only the acceptability
of material gain as a motive in personal and business behavior, but also
the tolerance of empirical science and technological change.
8
The Field of Study Known as “IPE”
Classical Political Economy
Whenever a society experiences this kind of pervasive change in all of its
major institutions, its intellectuals set out to make sense out of what is
happening. Three new institutions that required explanation were:
1 the worldwide system of trade and investment;
2 the industrial system of production; and
3 the market system of decision-making.
In the process of writing pamphlets and treatises to explain the nature
of these new institutions, a new field of study was invented. As mentioned
above, one of the first and most important scholars in this endeavor was
Adam Smith (1723–1790). Smith had no way of knowing that his creative
masterpiece, The Wealth of Nations, would become the foundation for
a whole new field of knowledge. That field would eventually be called
Political Economy. In time Adam Smith and other pioneers who followed
him would become known as the classic scholars of this field. The reign
of classical political economy lasted from about 1770 to 1890. From its
beginning, Political Economy tried to make intellectual sense of this new
set of decision-making institutions—the nation-state, the all-pervasive
market, complex financial systems, newly emerging forms of business
organization (especially the corporation), and capitalism itself (Heilbroner,
The Worldly Philosophers).
ADAM SMITH
1723–1790
Scottish moral philosopher. His 1776 book, The Wealth of Nations, is considered
the originating treatise in classical and neoclassical economics. Famous for
inventing the concept of the self-regulating market and for using the phrase “the
invisible hand.”
One of Adam Smith’s great contributions was his explication of the selfregulating market. He argued that a competitive, demand-and-supply–
driven market could make decisions for a nation’s economy without
the intrusions of government guidance or business control. He called
this market-organized decision-making system the “invisible hand.” He
considered the competitive market an exceptionally positive mechanism,
as it forced businesses to produce the goods and services that people
really wanted and to sell them at the lowest possible prices. Furthermore,
Smith thought that these desirable social outcomes solved a difficult moral
dilemma. Smith believed that though the market was driven by individuals
9
international political economy
seeking the highest material gain (a morally suspect motivation), the
positive outcomes of the competitive market for the whole society justified
the self-interested motivations of the individual participants. Not only
would members of the society get more of what they wanted at reasonable
prices, but also there was a built-in proclivity for continuous economic
expansion. That occurred because businesses were responding to real
economic opportunity, not monopolistic price-gouging or governmental
favoritism. Consequently, Adam Smith was optimistic about the future of
the market society because he believed that it would raise the standard of
living across the board (Heilbroner, The Worldly Philosophers).
It followed from his belief in competitive markets that Adam Smith
was opposed to the state-franchised trading-company monopolies of
mercantilism. He also opposed the state protection of local producers
via taxes (tariffs) on imports of cheaper products from other countries.
The most infamous example of this protectionism was the so-called Corn
Laws, which imposed tariffs on the importation of grain into the United
Kingdom. They had been in place for several hundred years during the whole
period of mercantilism. They were not fully repealed until 1849, nearly 60
years after Adam Smith’s death. After their repeal, England became the
major promoter and supporter of a global free trade regime that involved
most European countries and their current and former colonies. This
British-led free trade regime lasted until the beginning of World War I in
1914. Because of the worldwide extent of trade and investment during the
period 1850 to 1914, it was known as the first era of globalization.
Adam Smith also challenged another central tenet of mercantilism,
namely, what constitutes the best indicator of a country’s wealth.
Mercantilists focused on the store of precious metals, especially gold.
Gold was earned when countries sold more than they bought, because
those on the short end had to make up the difference with gold. The
winners had a favorable balance of trade, that is, they had more exports
than imports. As a consequence they accumulated larger stores of gold.
Smith argued that a country’s real wealth is not its stockpile of gold but
its capacity to produce. The more goods and services a country has the
means to make, the better off its population and the greater its security.
One cannot eat gold, nor fight a battle with it. Once gold is expended,
it’s gone. But once a country has developed its ability to produce, it turns
out goods and services year after year. Of course, gold could be used to
finance the development of a country’s production system. And that is
what the English did, in contrast to the Spanish, who did not understand
Smith’s insight. The Spanish frittered away their substantial gold reserves
on massive military expenditures and luxurious consumption.
England had already demonstrated its superior production abilities
by the time that Smith was writing, but his views were overwhelmingly
confirmed by the production expansion brought about by the Industrial
10
The Field of Study Known as “IPE”
Revolution. However, gold did not go away. In fact, it remained the basis
of monetary systems, both within and between countries, for almost 200
years after the publication of his monumental book. London was not only
the center of the most powerful production system in the world, but also
the center of the world’s gold-based financial system until 1914. The United
States played the same role from 1945 to 1971, when the world economy
weaned itself away from gold (Heilbroner, The Worldly Philosophers).
With the emergence of the more specialized social science disciplines
in the late nineteenth century, the question became which one would
claim Adam Smith as its founder. The answer was the new discipline of
Economics. Economists set out to elaborate on Smith’s self-regulating
market, focusing on detailing the decision-making processes associated
with production and distribution. The political and social dimensions
were largely left to other disciplines. Of course, there were scholars who
considered themselves economists, such as Thorstein Veblen (1857–1929),
who resisted this narrow focus. But they lost out to the school of thought
that has come to be called neoclassical economics. The “neo” before
classical recognizes that this new disciplinary perspective significantly
differs from the broader classical tradition. The neoclassical economists
developed a tightly deductive model of how a market makes decisions. They
relied on more mathematically precise formulations; and they went beyond
the classical political economists, who identified labor as the essential
source of value in the production process, by adding capital and natural
resources as independent creators of value. Economists share Smith’s
belief in the market’s superior qualities as a decision-making mechanism.
As the discipline has grown and evolved over its approximately 130-year
existence, its members have developed a highly articulated world view that
specifies how they understand the workings of a market economy and what
policies should be followed in order to maximize its inherent efficiencies.
The underlying market model of neoclassical economics forms the basis
of the first school of thought in IPE that this text will present.
Over the course of the nineteenth century Adam Smith was followed
by a number of great classical thinkers. The first who is of special interest
to us is David Ricardo (1772–1823). Ricardo was a successful trader
in the financial markets and a member of the British Parliament. His
family history traces the shift of technological and financial leadership
in the sixteenth to eighteenth centuries in Europe. His ancestors were
Portuguese Jews who had escaped the Spanish and Portuguese Inquisition
by migrating to the Netherlands. When the economic leadership of the
Netherlands began to fade, the family moved to the new leading country,
England. In contrast to Adam Smith, who was optimistic about the
equitable distribution of the growing income from the market-industrial
society, Ricardo was pessimistic. He thought that those who own a scarce
and limited resource—land, in his day—would reap unequal benefits while
11
international political economy
others would suffer. Ricardo was one of the authors whom an English
essayist of the time had in mind when he labeled Political Economy the
“dismal science.” However, Ricardo agreed with Smith on the advantages
of free trade, even coming up with a more sophisticated justification for it
called “comparative advantage” (Heilbroner, The Worldly Philosophers). It
will be further discussed in the next chapter.
DAVID RICARDO
1772–1823
Classical political economist whose pessimism about equity in income distribution
helped Political Economy acquire a reputation as the dismal science. Also a
successful London trader, who is probably best known as the inventor of the
theory of comparative advantage.
Ricardo can also be considered the father of a modern, but much smaller,
school of thought, the neo-Ricardians. It is based on his insight that the
market does not necessarily create a fair and equitable distribution of
income. The modern scholarly architect of this school is an Italian, Piero
Sraffa (1898–1983). Sraffa spent most of his professional life in England
because of intellectual oppression in his home country. Both Sraffa and
Veblen rejected the narrow market approach of the neoclassical economists.
The scholars who followed Veblen’s lead have been called institutionalists.
By putting the insights of the two schools together, it is possible to create a
coherent world view that pays primary attention to the role of power, that
is, organizational politics, whether those organizations are governments
or corporations. This combined world view of the neo-Ricardians and
the institutionalists becomes the second school of thought that this text
presents. The members of this school have also created a model of how
things work in the political economy. The scholar who has done the most
to create that model is John Kenneth Galbraith (1908–2006). This text
calls it the multi-centric organizational (MCO) model.
After Adam Smith and David Ricardo, the third great classical political
economist who is of special interest to us is Karl Marx (1818–1883).
Because he lived later than Smith and Ricardo, he observed more of the
development of the Industrial Revolution and its spread around the world
than either of his predecessors. Even though he was born and educated in
Germany, Marx spent most of his professional life in London, at the center
of the Industrial Revolution. He came to England, as did many others, to
escape intellectual oppression. Marx earned some small fees as a freelance
journalist; in fact, one of the newspapers that Marx wrote for was The
New York Tribune. But his major financial support came from his close
collaborator, Friedrich Engels. Marx died before neoclassical economics
became the dominant point of view in England and the United States, but
he was critical of what he called “vulgar economics.” He saw the market as
12
The Field of Study Known as “IPE”
a mechanism of exploitation and not a liberator, as Smith and his followers
saw it. However, Marx agreed with his fellow classical political economists
that it was foolish to separate politics from economics analytically because
societies can be understood only in their holistic interconnectedness and
in their historical context. The historical context on which he focused
was capitalism. Marx developed his own model of how capitalism works,
what was wrong with it, and what was going to happen to it (Heilbroner,
The Worldly Philosophers). This text identifies it as the capitalist mode of
production model, and it is the centerpiece of the third world view that
will be presented, classical Marxism.
KARL MARX
1818–1883
Last of the great classical political economists. Founder of the major school of
thought critical of capitalism. Born and educated in Germany, but lived and wrote in
London from 1849 until his death. Worked as a journalist, serving as the European
correspondent for The New York Tribune. Famous for The Communist Manifesto,
which he wrote with his long-time collaborator Friedrich Engels in 1847, and for his
three-volume work on capitalism, simply titled Capital (1867, 1885, and 1894).
Therefore, three different and competing world views are descended
from Smith, Ricardo, and Marx, respectively. They compose the analytical
core of the field of International Political Economy. Though all three
scholars were a part of classical political economy, they have spawned three
quite different perspectives. Smith is associated with the market model
of neoclassical economics. Ricardo is associated with the organizational
power model of institutional political economy. Marx is associated with his
critical model of capitalism and subsequent elaborations. The three schools
of thought differ on many dimensions. For instance, on the dimension of
who are the central actors in the political economy, the market school sees
them as individuals; the institutional school sees them as organizations;
and the Marxist school sees them as classes. Consequently, whatever issue
one picks in the realm of international political economy, such as trade, or
investment, or equity, or economic growth, or ecological sustainability, the
three world views will have different ways of explaining how they work
and how they should be addressed.
The overriding purpose of the following chapters is to explicate these
three perspectives, the differences between them, and their implications.
Each world view and its model will be covered in two chapters. The first
chapter articulates the underlying model. The second chapter demonstrates
how the model has been or could be applied in actual current global
circumstances. Finally, a summation chapter will juxtapose the three world
views in comparisons of their approaches to several key issues: trade,
transnational corporations, development, and the environment.
13
international political economy
Review Questions
1 What are the ways in which trade connects peoples?
2 Discuss the configuration of conditions that facilitated the emergence
of the first Industrial Revolution in Great Britain.
3 Explain the historical conditions that are related to the emergence of
classical political economy in the nineteenth century and International
Political Economy in the twentieth century.
4 Why is Adam Smith considered such an important person? Present his
key ideas.
5 On what key ideas did Adam Smith agree with David Ricardo and Karl
Marx? On what ideas did they disagree?
6 What is the field of study known as “IPE?”
7 Briefly describe the three contrasting perspectives in IPE that will be
presented in this text.
bibliography
Amin, A., B. Gills, R. Palan, and P. Taylor. “Forum for heterodox international
political economy,” Review of International Political Economy (Vol. 1, No. 1)
Spring 1994, pp. 1–12.
Bernstein, William J., The Birth of Plenty: How the Prosperity of the Modern World
Was Created (McGraw-Hill: New York) 2004.
Blaut, J. M., The Colonizer’s Model of the World: Geographical Diffusionism and
Eurocentric History (Guilford Press: New York) 1993.
Chanda, Nayan, Bound Together: How Traders, Preachers, Adventurers, and Warriors
Shaped Globalization (Yale University Press: New Haven, Connecticut) 2007.
Heilbroner, Robert, The Making of Economic Society (Prentice-Hall: Englewood
Cliffs, New Jersey) 1986 (first published in 1962).
Heilbroner, Robert, The Worldly Philosophers: The Lives, Times and Ideas of the
Great Economic Thinkers, 6th edn. (Simon and Schuster: New York) 1986.
Landes, David S., The Wealth and Poverty of Nations: Why Some Are So Rich and
Some Are So Poor (W. W. Norton: New York) 1998.
Simms, Andrew, Ecological Debt: The Health of the Planet and the Wealth of Nations
(Pluto Press: London) 2005.
Smith, Adam, The Wealth of Nations (Prometheus Books: Amherst, New York)
1991 (first published in 1776).
Wolf, Eric R., Europe and the People without History (University of California
Press: Berkeley) 1982.
14
Chapter 2
The Market Model
and World View
The first school of thought that we will address uses the self-regulating
market as its underlying world view. As mentioned in the first chapter,
Adam Smith was the first to conceptually develop this approach in the
latter part of the eighteenth century. Over the course of the nineteenth
century, in conjunction with the rise of industrial capitalism, the idea of the
market as decision-maker was further refined. The scholars who developed
this perspective were philosophically inspired by liberalism, the view that
individuals should be free to make their own decisions, especially without
interference from the government. The idea of a self-regulating market
was highly attractive to them because it meant that the central economic
decisions of production and distribution could be made in a purely
non-political way. Individual choices would rule, not governments. The
intellectual pursuit of this idea resulted in a fully articulated model of how
the market works. This chapter presents that model through a discussion
of its premises, its internal interactions, and its logical outcomes.
The market model provides not only insight into how a market economy
ideally works but also guidelines for setting up an actual market society.
The model demonstrates the superior outcomes that follow from marketbased decision-making. The basic model as presented in textbooks is
known as the purely competitive market model. It is a simplified abstraction
of conditions that exist only partially in market societies—conditions that
presumably flourished in Western Europe and the United States in the latter
part of the nineteenth and the early twentieth centuries. The model was
codified into textbook form before World War II by Cambridge University
professor Alfred Marshall (Heilbroner, The Worldly Philosophers) and after
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international political economy
World War II by MIT professor Paul Samuelson. Marshall was the one who
invented those ubiquitous supply-and-demand graphs that appear in all
Economics textbooks.
The inventors of the market model believed that they were improving
upon Adam Smith’s original formulations. Since they modified a number
of the elements of classical political economy, they have been called
neoclassical economists. The pioneers in the late nineteenth century were
mostly Austrian, but there were important figures in the United Kingdom,
the United States, and elsewhere as well.
Some of the key ways in which the neoclassical approach differs from
the approach of classical political economy include:
1 The economic dimension is separated out from the political. As noted
in Chapter 1, neoclassical economics replaces the holistic approach
of the classicists with a more specialized and focused division of
intellectual analysis. The market system provides a way of achieving
purely economic decision-making without the intervention of politics.
Government and political decision-making can then be set aside and
studied by another discipline, Political Science. Thus, the rise of
neoclassical economics split political economy into two realms, each
with its own academic discipline.
2 The market is ahistorical, that is, the analysis is focused on the
interactions that are happening in the present. In neoclassical
economics the broader historical context need not be referenced as
it will be reflected in the decisions that are made within the market.
Implicitly, the cultural context is not relevant either as the market
interactions between supply and demand are universal.
3 The role of labor is diminished. In classical political economy labor is
the basic input to the production process and the underlying source
of relative value. That is, prices, or the values of specific goods and
services, reflect the amount of labor involved in producing the item.
In the neoclassical version, labor is only one of three inputs, the other
two being land and capital. Land refers to all natural resources, and
capital refers to all things, such as machines, that are used to make
other things. Furthermore, and most significantly, the value of
anything exchanged in the market reflects only the relative supply and
demand for the item. There is no underlying or inherent value.
4 Supply and demand determine the value of anything at the point where
they meet. This is called determination of value at the margin, or the last
item considered in the exchange. Whatever is paid for the last item
offered will become the price or the value of all other similar items.
That includes inputs, such as labor, as well as outputs, such as goods
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The Market Model and World View
and services. The marginal analysis of price determination facilitates
the application of mathematical reasoning to the neoclassical economic
approach.
5 The logical form of the model is deductive. Its premises and
assumptions about the attributes of the actors in the market and the
conditions under which they function are not strictly empirical. The
model takes observed proclivities to their fullest extent and transforms
them into absolute conditions, or “totally true” statements. For
instance, decisions by the actors in the model (who are not real people
but “logical entities”) are always based on maximizing their material
interests. By assuming that the basic conditions always hold, the
model necessarily produces “true” conclusions, or predictable logical
consequences. Such is the nature of a deductive model.
Within the social sciences the use of a purely deductive model as the core
of the discipline is unique to Economics. The more usual approach in the
convention of science is “inductive.” With an inductive approach scientists
make observations of a sample of things or behaviors and try to formulate
generalizations about them. Since they are studying only a sample of a
much larger population, they can only guess on a probabilistic basis about
whether the generalizations hold for the full population. Conclusions can
never be absolutely “true,” as is the case using a deductive approach.
The three aspects of the deductively structured market model that we
will look at in this chapter are:
1 Premises. These are the conditions that are assumed about the activity
in the model. They hold 100 percent of the time. They set out the
underlying “truth.”
2 Internal interactions. These are the dynamics of the relationships
between the actors in the model as they make economic decisions (in
accordance with the preset premises of the model).
3 Outcomes. These are the logically predictable consequences that
inevitably flow from the actors’ decisions in the market. Since the
premises are absolutely true, then the outcomes that follow must be
absolutely true.
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The Seven Premises of the Market Model
1. Free, rational individuals
The actors in the market are freely acting independent individuals whose
behavior choices in the market context are influenced solely by market
criteria. Neither custom (the way it has always been done) nor political
dominance (orders from government officials) constrains this freedom.
The word “rational” refers to the use of economic (market-defined)
calculations in the decision-making process. Irrational behavior involves
straying from market-maximizing calculations and actions. This use of the
term “irrational” differs from the vernacular, in which it generally refers to
behavior based on emotion, passion, or superstition. In the market model
irrationality refers specifically and exclusively to not perfectly following
market-derived objective criteria. The market is based on this “rational”
exercise of free choice, especially by individual consumers. Because the
market model is driven by these individual or subject preferences, the
value theory of the neoclassical approach is called subjective preference
theory.
2. Decision-making via aggregation of individual choices
Decisions in the market are reached by aggregating, or adding up, the
innumerable rational choices of all the individual actors in the market.
These individual decisions, when summed up into demands (what actors
or buyers are willing to pay) and supplies (what price actors or sellers
are willing to accept) for all the products and resources in the economy,
provide the information that enables the market to answer the production
and distribution questions in the society. Economic decisions are not made
by some central authority, nor even a democratically elected government,
but only by supply and demand. The price or value of anything exchanged
is determined at the point where what demanders are willing to pay equals
what suppliers are willing to accept. That point is the equilibrium price.
But those points in the market model are the sums of many individual
decisions.
3. Monetization
All things involved in production and distribution are exchanged through
the medium of money, and thus have a monetary value established by the
market. By placing a monetary value on all ingredients in the economic
process, a simple calculus can be used by which to compare any item
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The Market Model and World View
exchanged to any other item, and by which the aggregation process can
be made meaningful. Money is the universal solvent by which the market
assumes its impersonal form.
Money has three functions. The first function is as a universal medium
of exchange, one that is accepted by society as a whole, such that it
facilitates fluid transactions in the market. Almost anything can serve as
money, as long as it is relatively scarce and easily portable. Historically,
shells and even cigarettes have served as money. Precious metals, especially
gold and silver, have been in widespread use as money. More recently paper
notes and bills have been utilized. In modern economies, however, the
most frequent form of money is deposit or checking accounts in banks
and other financial institutions. Monetary amounts are offered in payment
of obligations through checks, debit cards, or electronic account transfers.
Credit cards are considered “near-money.” In order for the exchange
comparisons that the market model is based upon to be effectively
implemented, all economic transactions within its purview must take place
in the same unit of account.
The second function of money is as a measure of relative value. That
is, money provides a universal measuring stick by which all items in the
market can be compared with each other. For example, if a leather jacket is
priced at $200 and a pair of running shoes costs $100, you could compare
the relative value of one jacket as equivalent to two pairs of running shoes.
The costs of production—the land, labor, and capital used in producing
anything—must be measured by the same monetary measure, so that a
business can compare its costs with its sales revenue and determine whether
or not it is profitable.
Finally, money is a store of value over time—it is not by definition
perishable, it can be saved, and it maintains its relative value into the
future. By maintaining its value over time it provides businesses with
stability and predictability for making future contracts; it enables actors to
save funds that can be exchanged for anything of value in the future; and
it makes possible a single measure of the price of time (the interest rate).
The market values immediacy. Therefore, one should be compensated for
delaying pleasure, that is, consumption. Thanks to the market’s single
monetary measure, time trade-offs can be priced the same as any other
exchanged item.
Since rational decisions in the market depend on an all-pervasive
use of stable money, threats to its stability are serious impediments to
well-functioning markets. That is why neoclassical economists are very
concerned about instability in the average level of prices, either inflation
that would raise the average price level or deflation that would lower it.
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international political economy
4. Material gain
All actors in the market model seek the maximum material result from
all of their decisions. Because all items transacted in the market have
monetary value, it is always possible to calculate which option will provide
the highest return. This is the famous “economic man” dictum pronounced
by Adam Smith. All other objectives, whether altruistic, sentimental,
religious, or social, are subordinate to the material maximization decisionmaking process. Material objectives are presumed to be insatiable, thus
creating a state of relative scarcity in which all actors are trying to get
as many of their wants satisfied as possible. Because wants always exceed
available material means, choices must be made. The market is the vehicle
for making those choices.
5. Mobility
Everything that is exchanged in the market must be free to move from
one position to another without any artificial barriers. All of the resources
or factors of production (land, labor, and capital) are free to move from
one use to another in response to market signals. There are no geographic
barriers, and no ethnic or class or gender discrimination barriers. No
psychological impediments exist. Anyone is free to set up a business.
The latest technology is available to anyone (no patents or copyrights).
The actors can purchase anything they can afford. The basic idea is that
everything in the market economy should be used where it can provide
the most material value, which is only possible when no non-economic
barriers exist that might interfere with that objective.
6. Competition
The accepted mode of interaction between individuals in the market model
is competition. However, this mode is impersonal, as all actors—necessarily
many buyers and sellers in all markets—compete for maximum gain without
any noticeable effect on the market from their individual actions alone.
Each individual actor is such a small part of the total realm of activity that
his/her impact is minuscule and cannot noticeably affect the aggregated
outcome. Consequently, individual decisions are independent of each
other so that only price affects decisions. A fully competitive environment
requires perfect information, open and easy access to productive activity,
and no “artificial” distinctions between things exchanged in the market
(brand names). Actors need access to all the correct information about
the qualities and prices of all feasible options in order to make the best
maximizing decisions. No institutional arrangements can exist that
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The Market Model and World View
would impede the fullest implementation of competition. Therefore, no
monopolies, whether by private producers, governments, or resource
controllers (e.g., labor unions), are allowed in the perfect model.
7. Government support
Even though the market is supposed to make the production and
distribution decisions for the economy and the role of government is
limited, the market model presumes that government will play an essentially
supportive role. Government is responsible for (1) establishing the rules—
laws on contracts and protection of property, laws against monopoly and
discrimination, and so on; (2) interpreting the rules—the judicial system;
and (3) enforcing the rules—regulators and police. In addition, government
is responsible for ensuring the provision of the essential infrastructure
(e.g., energy, water, education, transportation, banking, hospitals, and
communications), even though some or even all of the components of the
infrastructure may be provided by the private sector. Government also has
the responsibility of providing security for its citizens, both within and
beyond the borders. Adam Smith recognized that defending the country
against external attacks was the special responsibility of the state.
Internal Interactions of the Market Model
Roles
Based on these premises, a continuous flow of decision-making
interactions—exchanges—occurs among the actors as they play their
roles in the market. There are three fundamental roles: (1) consumers, (2)
controllers of resources, and (3) managers of productive organizations.
Individual actors may play all three roles, but each role requires a different
orientation and type of activity. Each role involves a different type of
material gain objective.
When actors are thinking like consumers, they have to match their
preferences with the available goods and services. Their decision-making
is constrained by the amount they have to spend (their budget), how
much satisfaction they anticipate receiving from consuming the goods
and services that they prefer, and the prices of their preferred products.
Consumers are then presumed to go about maximizing their satisfaction
by obtaining the most preference pleasure possible from the budget
available to them.
The term product encompasses both goods and services. Consumer
goods can be either durable or non-durable. Durable goods are items
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international political economy
such as computers, refrigerators, and automobiles. Examples of nondurable goods are food and clothing. Consumer services are things such
as entertainment, medical care, appliance repairs, banking, and haircuts.
Goods are physical in nature whereas services are intangible. In the most
economically developed societies, services are the biggest sector in terms
of both employment and value.
The market model divides resource inputs into three categories:
land, labor, and capital. These are also called factors of production. Land
includes all natural resources, from trees to sheep, from uranium to gold,
from water to soil. Labor includes all varieties of labor contributions to
production, from managers to custodians, from assembly-line workers to
teachers, from police officers to nuclear physicists. Capital refers to those
human-made things that are used to make or enhance the making of other
products. They range from a hammer to a steel plant, from a tractor to an
oil refinery, from a grocery store to an airport.
The role of controllers of resources involves the provision of these
resources or factors to the production process. These actors provide
their resources where they can obtain the best return. Each resource has
a specific type of return. Land gets rent; labor gets wages; and capital gets
interest. Each return is a form of income, so that one could say controllers
of resources seek to maximize their incomes. The control over these
resources is seldom distributed equally, so that the only resource that is
widely controlled is labor.
The third role is that of the managers of productive organizations. The
managers have the complex task of figuring out what consumers are likely to
buy on the one hand while on the other hand finding the best combination
of resources to make those products at a cost less than what consumers are
willing to pay. Therefore, the managers’ maximization objective is to obtain
the largest difference possible between their productive organizations’
earnings and costs, or, in other words, to maximize profit.
Market model diagram
The ways in which these roles dynamically interact with one another can
be graphically portrayed in what has been called the circular flow diagram
of the market model, or the market model diagram (see Figure 2.1).
The flows connect two locations: households and productive
organizations. Households contain the actors who play two roles, those
of consumers and controllers of resources. The provision of the controlled
resource, usually labor, to the market generates the income that provides
the budget that the household members use to play the role of consumer.
In a basic sense, consuming allows the household to stay alive and capable,
therefore, of continuously providing resources to the market.
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The Market Model and World View
Market Model
Factors:
land
labor
capital
Households
Satisfaction
(maximize)
–
–
–
Incomes:
rent
wage
interest
Budget
Controllers of
resources (Factors)
Consumers
Spend
Income
(maximize)
Save
D
S
S
Products market (D=S)
Resources market (D=S)
Saving
Capital
goods & services
Consumption
goods & services
Interest
Investment
D
D
S
Revenue
Managers of
Productive
Organizations
Profit
(maximize)
Costs
Least-cost
D: Demand
combination
S: Supply
Total value of Products market = Total value of Resources market
Spending = Consumption
Saving = Investment
Figure 2.1 The market model—a circular flow diagram.
Productive organizations are places where resources are brought
together in order to make goods and services that consumers have an interest
in purchasing. The managers need to access the appropriate amounts and
types of land, labor, and capital that enable their organizations to meet
market demands. Since their profit-maximizing objective requires them to
keep their costs as low as possible, they put together their resources in the
least-cost combination. If labor is relatively expensive, they will use more
capital in their production mix. As economies industrialize, they usually
move toward less labor and more capital in their resource combinations,
especially in the manufacture of goods.
As can be seen in the market model diagram, the activities of these
two locations, households and productive organizations, are connected
by two circular flows. One is the flow of things, which moves in a
clockwise direction. Resources leave the households on their way to
the productive organizations where they are transformed into goods
and services, which are then made available to the consumers of the
households. The counterclockwise flow is that of money. In the market,
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international political economy
as assumed by the monetization premise, all exchanges are made through
the medium of money. Thus, land, labor, and capital are exchanged for
monetary incomes. Those incomes become the monetary budget that the
households expend on consumer goods and services. The expenditures of
the consumers become monetary revenue to the productive organizations,
which enables them to pay their costs of obtaining resources. The costs
of the productive organizations when paid to the controllers of resources
become the controllers’ monetary incomes. So in the circular flow we are
back to the location where we started. It’s an ongoing cycle in which things
are exchanged for money. But the form and name of the flows differs,
dependent on their position in the exchange process. For instance, when
money comes in to the productive organization it’s called revenue. When
it leaves, it’s called costs. If revenue exceeds costs, then profit is made.
Thus, in the market, only productive organizations can receive profit. That
is the only circumstance to which the term “profit” correctly applies.
Supply–demand relationships
But we have not discussed two other crucial meeting places in the market,
namely, the places where the prices of the things exchanged are determined.
These are the market for products and the market for resources. In the
market for products, consumer goods and services are supplied by productive
organizations in response to the demands of consumers. Consumers
express their demands for specific goods and services by indicating how
much they are willing to pay for them. Suppliers will respond to those
demands as long as their costs do not exceed the prices that consumers are
willing to pay. In the market for resources, the suppliers are the controllers
and the demanders are the productive organizations. The prices, or
exchange values, of resources are established by these supply–demand
relationships. Therefore, in the market model, rent, wages, and interest
(the prices of land, labor, and capital, respectively) are determined by their
relative supply and demand. The higher the demand in relation to supply,
the higher the price will be, and vice versa. The market presumes that the
incomes determined by the interaction of supply and demand provide an
accurate valuation of the contributions that the resources make to the
production process.
The interactive flows of the market are very dynamic as any change
anywhere causes multiple changes elsewhere. A change in any supply–
demand relationship may have repercussions throughout the whole market
economy. For instance, if consumers decide that they want to cut their meat
consumption to only 10 percent of the previous level, the immediate effect
will be a dramatic fall in the price of meat, as supply will be much greater
than demand. All of the suppliers of meat, from the butchers, through
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The Market Model and World View
the meat-processing plants, to the ranchers, will have their revenues
and incomes reduced or eliminated. The only way to replace the lost
revenues and incomes is to shift the productive capacities and resources to
supplying products for which there is an effective demand. Of course, that
will be easier for some than for others. This shifting around of resources
will change the supply–demand relationships and therefore the prices
of all other resource applications. In turn, that will induce managers of
productive organizations to change their calculations of their production
cost situations. In the meantime those people who have reduced or lost
incomes will have their ability to demand consumer products significantly
changed. That changes the production decisions of production managers
as well. Although supply–demand relationships throughout the whole
market are affected, it is that very interconnectedness that demonstrates
the market’s exceptional capacity to adjust the entire range of production
and distribution decisions in response to the new prevailing prices. The
prices will be accurate reflections of the changing circumstances, as all
actors are assumed to be behaving in a rational, fully informed, maximizing,
competitive fashion. Note also that the initiating change came from
consumers. The market model privileges consumers as the dominant force
in the economy. This attribute of the market is sometimes called consumer
sovereignty.
Economic growth and capital investment
When the output of an economy increases from one year to the next,
then economic growth has occurred. Economic growth is a highly valued
objective as it provides the potential for raising the society’s standard
of living. The two major methods for obtaining this objective are (1)
adding to the capacity of the means of production and (2) improving the
efficiency of the means of production. Both of these methods involve the
process of capital investment. Capital investment entails making things
that produce other things. These producing things are known as “capital
products”; and, similar to consumption products, capital products can be
either goods or services. Capital goods range from a weaver’s loom to a
textile factory, from a windmill to a nuclear power plant. Capital services
involve intangible ways in which products and production processes can be
improved, such as through research and development, training, education,
and so on. Enhancing human knowledge and skills is a capital service, but
the benefiting humans are still considered labor. Drawing the line between
consumption and capital products is not always easy. The same automobile
can be used for both business (capital) and pleasure (consumption). A
home computer has the same mixed-uses potential. Though some of the
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international political economy
research and development contracted by the Defense Department is of a
capital nature, most military expenditures are consumption.
If an economy is using all of its production capacity to make
consumption products, then no capital products can be made until some
of that capacity is diverted. The process that enables the freeing-up of that
capacity starts with saving. Saving occurs when households (or productive
organizations when they earn profit) are not using all their claims for
consumption, that is, they are not expending all of their budgets. Because
not immediately consuming all they could is considered a sacrifice (a
reduction in possible satisfaction), the act of saving requires material
compensation. The compensation that savers receive is called an interest
payment. In effect, interest income allows savers to consume more in the
future as they get back their saving plus interest. Of course, that works
only if the purchasing power of the saving in the future remains essentially
the same. Interest is paid by the productive organizations, as they are the
ones interested in making the capital investments. Therefore, productive
organizations generate the demand for capital-making production capacity
while households, through their saving, provide the supply. This set of
relationships is portrayed in the market model diagram (Figure 2.1).
There are productive organizations that specialize in bringing savers
and investors together. They are called banks. Because they play this
connecting role, banks are also known as intermediaries. Their revenue is
derived from the difference between what they pay savers on the one hand
and what they charge investors on the other hand. In the market model
that difference is probably best understood as a fee for financial services.
That’s because the interest rate that both savers and investors face should
be the same as they are on different sides of the same supply–demand
relationship. There will be more discussion of the banking system in the
section on monetary policy in the next chapter.
Interest is the special price of capital investment. It is over and above
the other resource costs involved in making a capital product, building
a factory for instance. Productive organizations are willing to pay
interest as a necessary cost of expanding or improving the efficiency
of their operation, which in turn will lower their production costs. If a
productive organization does not take advantage of available technology,
it will fall behind competitively and eventually be forced out of business.
Technology, incidentally, is defined as knowledge or ideas about products
or production processes. The capital investment process, through
research and development, often plays a role in inventing technology. The
potential of new technology is not realized until it is actually applied in the
production process. Rational managers of productive organizations will
not take that step until they have ascertained that the cost of making the
capital investment, including the interest paid, will be more than cove...
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