New Bulgarian University Cost of Sustainable Development Questions

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What is the cost of sustainable development? Who is paying the costs and who is getting the benefits?


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1) Collect reliable sources, state your thesis in the introduction.

2) Make an analysis and give arguments support it by citing scientific articles or international organizations’ documents.

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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: • • • • • 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. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” 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 15 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 16 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. 17 international political economy 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 18 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. 19 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 20 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 21 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. 22 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, 23 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 24 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 25 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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