Political Economy 2020
Updated: Jun 25
U.S. Congressional TX CD8
Harvard University (extension studies 2018)
International Political Economy
The rise and development of the international political economy is one the raises many issues, among them are classical analytics such as taking a closer look at the interactions between actors and states, interest groups, and political institutions which could synergize or work adversely to the point of militarization along economically and politically divided fronts that have long lasting effects on the international political economy. Historically, the liberalization of the political economy begins with the emergence of the corn laws and ends with the dismantling of the Bretton woods system in the 1970s. As the global economy emerges, a series of attempts in adjusting the balance of payments is devised in the form of international transactions, interest group backed social capital, policy, and strategic interactions often times devised from adjustments subsidized by the gold standard. As states attempt to adjust the balance of payments, we see interactions occur that often times play on the needs and interests arising from societal needs. To begin, we will take a closer look at the heuristics and strategic interactions between domestic institutions and interest groups which will eventually weigh heavily on the economic and political fronts of conflicting parties.
In order to begin a strategic analysis for the train of thought in enforcing multilateral agreements that address the interactions between states, we must first take a look a game theory. Several models of game theory will help explain the most rational approach whereby states, and their actors base their rationale for either enforcing or defecting from agreement. Thomas Oatley’s 2016 text refers to an analytical tool known as the “prisoner’s dilemma”, whereby contractual agreements and multilateral agreements are either efficient or headed for defection (Oatley 2016). In the prisoner’s dilemma, agreements are drafted to be Pareto efficient or as Oatley more commonly refers to as “Pareto suboptimal whereby … one actor can be made better off at the same time without another actor being made worse off” (Oatley 2016). Often times, the sub optimality is derived in the context of the international political economy by referring to the likelihood of one of the parties defecting from an agreement. In Oatley’s text, he refers to the prisoners dilemma in terms of whether a state will choose to liberalize their economy or head towards protectionism.
A second important analytical tool which dissects the strategic interactions is Nash Equilibria whereby parties have no incentive to either stick to an agreement nor defect which is similar to hitting a stalemate in a negotiation (Oatley 2016). In order to enforce multilateral agreements, states often time negotiate in a tit-for-tat modality, whereby winners and losers try to hit the Pareto sub optimality in order to avoid a zero sum negotiation and thus head towards a win-win outcome (Oatley 2016).
We will begin the analysis of the international political economy with interest groups. During the repeal of the corn laws by the British during the late nineteenth century. The repeal of the corn laws was highly resisted by the landed aristocracy because it served the interest primarily of the middle, and industrialist class which at the time was highly underrepresented in British parliament (Frieden 2017). However, as the rise of the middle class and industrialist’s economic interests begin to take hold of the British economy, their monetary and social capital become stratified in such a way as to push toward equal representation in parliament (Frieden 2017). As such, as soon as industrial and middle class interests are represented in parliament, the repeal of the corn laws happens, and a liberalized economy begins to take hold of states and actors involved in the economic development of the newly minted geopolitical system which soon is backed by an attempt to normalize the economic theory centered on the balance of adjustments and payments backed by the gold standard (Oatley 2016).
The emergence of the gold standard is interesting in that it sets up the United States as a global power in the international political economy as well as the emergence of global conflict in Europe during World War 1 and World War 2 alike (Fireden 2017). Interest groups in the US begin to lobby in the interest of liberalizing the US economy so as to satisfy trade and industrial demands in order to maximize capital gains. As a result, from the desire to liberalize the American economy, interest groups achieve the goal of lowering tariff levels and thus maximize trade to the benefit of both farmers and the industrialist class (Frieden 2017). The highly liberal economy creates a polarized environment of both winners and losers, as such the winning coalition gains power, and thus we see the beginning of highly incentivized exports from the U.S. flooding the global economy. As such the flood of goods sets the global economy up for a disparagement between imports and exports leading to a trade deficit (Frieden 2017).
Some of the political interactions we see involve the massive trade deficit incurred by European dominants; and thus leads to the enactment of the systems of adjustments and payments enacted by the gold standard which according to Frieden (2017) was not without incurring high social costs and military costs (Frieden 2017). Because, the gold standard involved the transfer of wealth and power by one state into the hands of another this brings down both pricing and revenue bore by the industrialist and middle classes of the loosing state (Frieden 2017). Although, Britain plays an important role in the equipoise and stability during the first 100 years of trade liberalization, those years are interrupted by consolidation of wealth and growing disparity between states incurring a trade deficit (Frieden 2017). Because global elites had a collective interest in restricting supply and preserving hegemony we see competitive negotiation tactics emerge during world war 1 whereby the conflict halts liberalized economies and the world moves towards protectionism in order to finance the war (Frieden 2017). As such we see an interaction of high tariffs in order to protect the military interests of waring European actors (Oatley 2016).
Gourevitch pitches the rise in tension during world war 1 by framing his argument through the lens of competing interests of high tariffs in agriculture vs. finished manufactured goods; whereby the tariffs enacted led to conditions primed for a trade war which eventually led to a global military conflict between competing interests by causing a disparity between imports and exports highly incentivized through political institutions (Frieden 2017). His frame of reference addresses the prisoner’s dilemma in that if states incurred too much debt or deficit, they were more likely to defect from payment (Frieden 2017). Similarly, a precursor to World War 1 which led to the enactment of the Smooth Hawley Tariffs was due to the uptick in liberalization in the global economy due to British hegemony stemming from increasing competition rooted in the British supply of both capital and technology to developing global economies. As such Geurevitch pitches the gold standard defection due to the rise of competing interests such as rising U.S. hegemony and competing German and French interests and power. By the time World War 1 happened, the U.S. and Germany alone had surpassed British production may times over (Frieden 2017).
After the first global conflict, collective overrepresentation occurs in the disinterest of the U.S. during Woodrow Wilson, due to an overrepresented of industrial and farming lobbies which leads to a defunding for the reconstruction of the European economy via the smoot Hawley tariffs (Frieden 2017). The reason this is in the disinterest of the U.S. is that ultimately this will pit the United States against Germany as Germany succumbs to the prisoner’s dilemma and defects from paying U.S. backed loans for the reconstruction of Germany (Frieden 2017). According to Eichengreen, the tariffs worked to the chancellor’s advantage in that land size and agricultural returns via U.S. importations into Germany of agricultural products were presented in such a way so as to be a disservice to the German middle class; pitting the U.S. and German interests on a collision course due to a rationalized defection from the treaty of Versailles (Frieden 2017).
A third dimension in the analysis of the international political economy is the role that political institutions played during the late nineteenth century. Political institutions played a huge role in the institutionalization of liberalized trade in Britain, via the repeal of the corn laws, and the emergence of the equal representation of the middle and industrialist class by lowering the tariffs established by the mercantilist system (Frieden 2017). The mercantilist system implemented protectionist policies due to the Napoleonic era whereby Britain feared the by allowing the global market to compete for the sale of wheat and grains in Britain, that the interdependence could harm the stability of their military interests.
Krasner argued that potential economic power stems from hegemonic systems derived from multipolar structures in the form of institutions as well as international economic ones (Freiden 2017). Thus what we see is that London’s economic institutions like banks and parliament open up trade and begin to loan developing countries capital, leading to the empowerment of London society via multilateral trade and economic lending (Frieden 2017). Thus what Krasner is saying is that state interests in relationship to the “structure of international trade”, meaning its banking and tariff policies, can lead to an upsurge in “political power, aggregate national income, economic growth and social stability” (Frieden 2017). Yet, in turn, it was the highly unregulated trade policies of the late eighteenth century that really led to global conflict during the first world war, as opposed to the highly protectionist republican institutions of the U.S. and congress that caused the conflict during the second global war of the early 20thcentury.
The mercantilist system instituted by Britain’s political institutions and thus colonialisms aggressive and competitive nature may have also escalated the race towards the first world war which according to Frieden (2017), “destroyed the remainder of the Pax-Britanica” (Freiden 2017). The effect is that now leadership is divided and the U.S. is now poised for lending via its own banking institutions due to residual wealth incurred by the competitive interactions between states (Fireden 2017). As the U.S. banking systems amass wealth they are able to lend the devastated states capital post world war 1 and capitalize on the interest. As American interest groups begin to flood the global economy, they are also able to organize and lobby in the American House of Representatives as well as Senate in order to liberalize trade agreements via American domestic institutions (Frieden 2017).
During the initial phases of the U.S. entering the global financial markets, the U.S.’s lack of iteration with actors in the European markets creates some trepidation in the 1930’s and leads to defection. This interaction then leads to a disinterest by U.S. domestic institutions to continue to fiancé the reconstruction of the European markets and thus we see the emergence of the smoot Hawley act a highly protectionist policy enacted by the wining republican party in the late 1920’s and early 1930’s (Frieden 2017). According to Frieden, (2017) U.S. institutions became aware of the caveats of protectionism through the emergence of nationalist sponsored defection in Germany, and thus tried to compensate by enacting the Reciprocal Tariff Acts or (RTAA) as a response to the limited returns seen from lending Germany capital which in turn created an artificial recession which soon begins to strangle the U.S. economic powerhouses responsible for unrestricted lending to European markets (Frieden 2017). The RTAA was intended as a means of slashing tariffs by as much as 50% in order to open up markets and regenerate capital (Frieden 2017). In doing so, U.S. political institutions especially the Roosevelt Administration risk avoiding a prisoner’s dilemma by incentivizing the idea of sticking to the treaty of Versailles agreement to re-pay lending capital lent to European markets. In fact “Democratic Senator Pittman (Nevada), and Walsh (Montana) warned him that support for such a measure would be politically dangerous” (Fireden 2017).
The risk Roosevelt took in order to avoid defection from lent capital is a risk one could associate with the prisoner’s dilemma, due to the high risk of defection from domestic institutions in re-electing Roosevelt. Thus what Roosevelt really did was try to take a position that was really Pareto suboptimal in trying to make U.S. financial institutions poised for capital gains, dislodging the strangle hold of the depression while also, trying to not adversely affect European markets (Oatley 2016). The outcome is that Germany still defected from the agreement and war erupted between the U.S. and nationalistic Germany.
After the emergence of World War 2, the previous global financial system failed, in that they were unable to re-institutionalize the gold standard, and thus we see the emergence of a more cooperative financial market that is the current markets and system we see today. The International Monetary Fund or (IMF), is created in the 1940’s in an effort to reduce the anarchy felt in the international arena between competing interests and institutions for global financial positioning (Oatley 2016). Also, the Institutionalization of a litigating party like the World Trade Organization or (WTO) is able to mediate any disputes emerging from global conflict handling a whole range of issues like land disputes, financial, and human rights violations in an attempt to reduce the global anarchy seen in the lack of mitigating bodies on the global scale. According to Oatley 2016 memberships subscription is completely voluntary and increases the likelihood of cooperation while also decreasing defection due to a prisoner’s dilemma (Oatley 2016). The aim of having mutual cooperation is to decrease military conflicts and increase stability in financial markets as well as secure land investments which are all important factors in global stability (Frieden 2017). We also saw the rise and fall of the Bretton Woods System, a system that truly was a compromised agreement to try to re-institutionalize the gold standard while also remaining cognizant of more modern market forces (Oatley 2016). Truth be told, the termination of the Bretton woods system today seems like a failure in that it is difficult to gauge what the tru wealth of a state actually is. As our economy continues to evolve more and more into a global market, the elimination of the gold standard as an accurate reference point seems likely to end up in conflict. In fact my personal opinion is that the elimination of a reference point is leading to a political climate similar to what we saw on he eve of World War 2 and thus rebalance seems unlikely without a reference whereby the adjustments and payments is unlikely, although does alleviate austerity measure in the short run. This leads to opening a dialogue as to where is this all headed? It will most likely end up in a third global conflict likely to address the loop holes created by the abolishment of a liquidatable standard that was once aimed at balancing our national deficits and improving the budgets.
The international political economy lends the argument that mutual cooperation or defection is optimized by understanding the global system and analyzing it through varied lenses. Several models yield the strategic analysis for the train of thought in enforcing multilateral agreements that address the interactions between actors and states, interest groups, and political institutions which could Synergize or work adversely to the point of militarization along economically and politically divided fronts that have long lasting effects on the international political economy. As long as the study of international relations maintains its focus through these three lenses, the field of study, though the educational institutions should be able to produce a set of professionals, better able to address the intricate nature if the political economy and the interactions that ensue from multiple layers of complexity for the betterment of humanity, as well as the stability of global markets and rising competing interests in the near and distant future.
In Frieden, J. A., In Lake, D. A., & In Broz, J. L. (2017). International political economy: Perspectives on global power and wealth(6th ed.). New York, NY: W.W. Norton & Company Ltd.
Oatley, T. H. (2016). International political economy(5th ed.).
London, NY: Routledge.