Liberalism, Mercantilism, and Political Economy

Summary

Noah Zerbe's video explores key concepts in international political economy, focusing on liberalism and mercantilism. It traces the evolution of global economic systems from their capitalist roots in 16th-century Europe to the impact of the Great Depression and the emergence of embedded liberalism post-WWII. The video discusses the principles of private property, self-interest, and market competition in capitalism, contrasting mercantilist views on trade as a zero-sum game with liberal advocacy for free trade and open markets as a positive-sum solution for global prosperity.

Takeaways

• 🌐 The video introduces key concepts in international political economy (IPE), focusing on liberalism and mercantilism as the two main theoretical approaches.
• 🏛 The global economic system has its roots in capitalist economies that emerged in Europe around the 16th century, with distinct forms developing over time.
• 🏠 Capitalism is characterized by private property, self-interest, market-based competition, freedom of choice, and a limited government role, especially in protecting property and enforcing contracts.
• 🤔 Classical economic liberalism, attributed to Adam Smith, views capitalism as a natural expression of human nature and a result of historical barter and exchange processes.
• 📚 Marxist critiques see capitalism as a historically specific system tied to economic and property relationships, with its global spread driven by European colonial power.
• 🔄 Mercantilism, the dominant philosophy in the early 1500s, viewed international trade as a means to national power and wealth, emphasizing trade surpluses and the accumulation of gold and silver.
• 🌟 The shift from mercantilism to liberalism was influenced by the British Empire's rise and the Industrial Revolution, promoting free trade and open markets as beneficial for all parties involved.
• 💡 Liberalism's central idea is that specialization and trade can benefit everyone through the concept of comparative advantage, leading to a positive-sum game in the international political economy.
• 📉 The Great Depression of the 1930s challenged economic liberalism, with countries implementing protectionist policies that worsened the global economic crisis.
• 🛑 'Beggar thy neighbor' policies, such as the Smoot-Hawley Tariff Act, were ineffective and contributed to the deepening of the Great Depression by restricting international trade.
• 🌍 The end of the Great Depression was marked by the massive increase in government spending and employment during World War II, leading to the development of a new international economic system known as embedded liberalism.

Q & A

What are the two key theoretical approaches to understanding International Political Economy (IPE) discussed in the video?

The two key theoretical approaches to understanding IPE discussed in the video are liberalism and mercantilism.

What is the historical origin of the current global economic system of political economy?

The current global economic system of political economy is rooted in capitalist economic systems that emerged in Europe, particularly in England and the Netherlands around the 16th century.

What are the common features shared by all capitalist systems?

All capitalist systems share common features such as centering on private property, being rooted in concepts of self-interest, market-based competition, freedom of choice for individual agents, and a generally limited role of the government.

What is the concept of the 'invisible hand' as introduced by Adam Smith?

The concept of the 'invisible hand' introduced by Adam Smith suggests that the individual pursuit of self-interest ultimately leads to the collective good, as people pursuing their own advantages inadvertently benefit society as a whole.

How do liberals view the emergence of capitalism?

Liberals view capitalism as an expression of human nature, where individuals are naturally self-interested, and they believe that capitalism emerged from the historical process of barter and exchange, facilitated by reducing the role of the state.

According to Marxist critiques, what is the view of capitalism as a system?

Marxists view capitalism as a historically specific system that emerged due to economic and property relationships and the specific exercise of power in Great Britain and the Netherlands, with its global spread rooted not in human nature but in the power dynamics during the colonial period.

What is the fundamental belief of mercantilism regarding international trade?

Mercantilism views international trade as a function of or a key contributor to national prestige and power, with trade surpluses seen as the avenue through which states acquire wealth and strengthen their military power.

How did the industrial revolution and the British empire influence the shift from mercantilism to liberalism?

The industrial revolution and the growing power of the British empire sparked a fundamental transformation from mercantilism to liberalism, emphasizing free trade and open markets as the path to prosperity.

What was the policy response of the United States to the Great Depression, and how effective was it?

The United States responded to the Great Depression by imposing new tariffs and trade barriers under the Smoot-Hawley Tariff Act of 1930 and devaluing the dollar. These 'beggar thy neighbor' policies were ineffective and exacerbated the crisis.

How did the Great Depression affect the world's major economies, and what were some of the consequences?

The Great Depression led to a decline in industrial production, a drop in wholesale prices, a collapse in foreign trade, and a skyrocketing of unemployment rates in the world's major economies, with no social safety nets to protect the affected populations.

What was the term used to describe the new international economic system developed after World War II, and how was it different from the previous system?

The new international economic system developed after World War II is referred to as 'embedded liberalism,' which aimed to prevent global economic crises by embedding free markets within a framework of social welfare and state intervention.

Outlines

00:00

🌟 Introduction to International Political Economy

Noah Zerbe introduces the video series on international political economy (IPE), focusing on liberalism and mercantilism as key theoretical approaches. He explains that IPE examines the functioning of contemporary political and economic systems, rooted in capitalist economies that originated in Europe during the 16th century and evolved into distinct forms by the 18th and 19th centuries. Capitalism is characterized by private property, self-interest, market competition, consumer sovereignty, and limited government intervention. The origins of capitalism are debated between classical economic liberalism, which sees it as a natural human expression, and Marxist critiques, which view it as a historically specific system. The video also touches on the global transformations in the political economy over time.

05:02

🏛 Mercantilism and its Impact on Early Colonialism

This paragraph delves into mercantilism, a school of thought that dominated early international trade and colonialism. Mercantilists believed that international trade was crucial for national power and prestige, with a focus on achieving trade surpluses to accumulate wealth, particularly in gold and silver. This wealth was seen as a measure of national strength and was used to expand military capabilities and fund further conquests. Colonial policies under mercantilism restricted trade to the home country, aiming to secure monopolies over raw materials and markets. Mercantilism is described as a zero-sum game where one country's gain was another's loss, with policies designed to increase national power through trade surpluses and accumulation of gold reserves.

10:03

📈 The Emergence of Economic Liberalism and its Global Implications

The paragraph discusses the rise of economic liberalism in the mid-1700s, spurred by the British Empire's growing power and the Industrial Revolution. Liberalism, advocated by economists like Adam Smith and David Ricardo, promoted free trade and open markets, arguing that all parties benefit from specialization and trade due to the principle of comparative advantage. This new economic thought viewed the international political economy as a positive-sum game where increased trade could lift all nations. The shift from mercantilist to liberal policies led to changes in colonial models, with a focus on raw materials for industrial demand and permanent settlements in colonies. Liberalism encouraged reduced government intervention in the economy to foster competition in free markets, which became the dominant approach until the Great Depression in the 1920s.

📉 The Great Depression and the Return to Protectionist Policies

This final paragraph examines the Great Depression's impact on international political economy and the subsequent shift towards protectionist policies. The economic crisis began with the 1929 stock market crash, leading to soaring unemployment and a downward spiral in the US and global economies. In response, the US and other economies implemented protectionist measures, including the Smoot-Hawley Tariff Act of 1930, which raised tariffs to protect domestic industries. The devaluation of the dollar aimed to boost American exports. However, these 'beggar thy neighbor' policies proved ineffective and deepened the global economic crisis. The paragraph also reflects on the lack of social safety nets during the 1920s and the dire consequences of the Depression, highlighting the drastic increase in unemployment and the collapse of industrial production and foreign trade. The Great Depression eventually ended with the economic stimulus of World War II, leading to the establishment of a new international economic system known as embedded liberalism.

Keywords

💡International Political Economy (IPE)

International Political Economy (IPE) is the study of the interactions between political and economic systems on a global scale. It is the main theme of the video, as it discusses how political and economic systems function together in the contemporary world. The script mentions that the global economic system is rooted in capitalist economies that emerged in Europe, particularly England and the Netherlands, and how it has differentiated into various forms such as free market systems and state capitalism.

💡Capitalism

Capitalism is an economic system characterized by private ownership of the means of production and the pursuit of profit. It is central to the video's discussion on the evolution of the global economic system. The script explains that all capitalist systems share common features such as private property, self-interest, market-based competition, and limited government intervention, with examples including the English-speaking world's free market systems and China's state capitalism.

💡Self-Interest

Self-interest, in the context of the video, refers to the concept that individuals pursue their own good with limited concern for the collective good. It is a fundamental aspect of capitalism, as mentioned in the script, with the idea that the individual pursuit of self-interest ultimately leads to the collective good, as famously articulated by Adam Smith in 'The Wealth of Nations'.

💡Invisible Hand

The 'invisible hand' is a concept introduced by Adam Smith, suggesting that individuals' self-interested actions in a free-market economy will unintentionally promote the general good of society. The video script uses this concept to illustrate how capitalism operates, with individuals pursuing their own interests, which, according to Smith, results in societal benefits.

💡Mercantilism

Mercantilism is an economic theory and practice that dominated the 16th to 18th centuries, emphasizing that a nation's wealth and power are directly related to its reserves of gold and silver. The script explains that mercantilists viewed international trade as a means to achieve a trade surplus, thereby increasing national wealth and power, which was central to early colonialism.

💡Trade Surplus

A trade surplus occurs when a country exports more goods and services than it imports. In the script, it is mentioned as a key goal of mercantilist policy, where a nation would strive to export more than it imports to accumulate gold and silver reserves, which were seen as indicators of national strength.

💡Colonialism

Colonialism is the policy or practice of acquiring full or partial control over another country, area, or people. The video discusses how the mercantilist approach to international trade was closely tied to colonial practices, particularly by the Spanish, Portuguese, and Dutch, who sought to secure monopolies over raw materials and markets in the colonial world.

💡Liberalism

Liberalism, in the economic context of the video, refers to a school of thought that emerged in the 18th century, advocating for free trade and open markets. The script describes liberalism as a transformation from mercantilism, with thinkers like Adam Smith and David Ricardo promoting the idea that free trade benefits all parties involved due to specialization and comparative advantage.

💡Comparative Advantage

Comparative advantage is an economic concept that suggests that even if one country can produce all goods more efficiently than another, it should still specialize in producing the goods for which it has the greatest advantage and trade for others. The video script explains this as a central proposition of liberalism, illustrating how free trade can benefit everyone.

💡Great Depression

The Great Depression was a severe worldwide economic depression that took place during the 1930s. The video script discusses the impact of the Great Depression on the international political economy, noting the collapse of international trade, skyrocketing unemployment, and the implementation of protectionist policies like the Smoot-Hawley Tariff Act, which attempted to alleviate the crisis but ultimately exacerbated it.

💡Embedded Liberalism

Embedded liberalism is an economic and political philosophy that emerged after World War II, aiming to create a balance between the openness of international trade and domestic welfare policies. The video script mentions it as the new international economic system developed by the United States to prevent another global economic crisis, although a detailed explanation is covered in another video.

Highlights

Introduction to key concepts in international political economy (IPE) with a focus on liberalism and mercantilism.

Roots of the global economic system in capitalist economies that emerged in Europe around the 16th century.

Differentiation of capitalist systems into free market-based and state interventionist systems.

Common features of capitalist systems including private property, self-interest, and market-based competition.

Adam Smith's concept of the 'invisible hand' and its influence on the belief in individual pursuit of self-interest leading to collective good.

Limited government role in capitalist systems, with a focus on protecting property and enforcing contracts.

Two schools of thought on the origins of capitalism: classical economic liberalism and Marxist critiques.

Mercantilism's view of international trade as a means to national prestige and power through trade surpluses.

Colonialism's role in the mercantilist approach to securing wealth and power for the state.

The zero-sum game perspective of mercantilism where one country's gain is another's loss.

The emergence of economic liberalism in the 18th century, advocating for free trade and open markets.

Adam Smith and David Ricardo's contributions to the liberal school of thought and the concept of comparative advantage.

Liberalism's view of international political economy as a positive-sum game where all parties can benefit.

The shift from gold and silver-driven colonialism to a focus on raw materials for industrial demand.

Policy prescriptions of liberalism advocating for reduced government intervention and free market competition.

The Great Depression's impact on the international political economy and the failure of 'beggar thy neighbor' policies.

The rise of embedded liberalism post-World War II as a response to the economic crisis.

The historical context of the Great Depression, including the lack of social safety nets and the drastic increase in unemployment.

The end of the Great Depression through massive government spending and employment during World War II.

Transcripts

Hey everyone. Noah Zerbe here. This is one of a series of short videos introducing

key concepts in international political economy.

In this video, we're going to look at the two key theoretical approaches to

understanding IPE: liberalism and mercantilism. So let's get started!

When we're talking about international

political economy, we're broadly talking about how the

contemporary political and economic systems function.

Remember that the current global economic system of political economy is

rooted in capitalist economic systems that emerged in Europe, particularly in

England and the Netherlands sometime around the 16th century. But it

would not take the form familiar to us until sometime during the 18th or even

the 19th century. Since then, it's differentiated into a

number of distinct forms. Think of the differences between the more heavily

free market-based systems common, to the English-speaking world

as opposed to the more socially democratic state interventionist systems

commonly found in much of Europe, to the system of state capitalism of

contemporary China. But all capitalist systems share some

common features. First, they center on private property,

whether property is tangible--like land or houses--or

intangible--like stocks and bonds. Second, they're all rooted in concepts of

self-interest through which people pursue their own good without--or at

least with limited--concern for the collective good.

But remember that capitalism holds that the individual pursuit of self-interest

ultimately leads to the collective good. Indeed this

idea was central to Adam Smith's concept of the invisible hand.

Writing in The Wealth of Nations in 1776, Smith famously comments that "It's not

from the benevolence of the butcher the brewer or the baker that we expect

our dinner, but from their self-regard or their regard to their own interest.

We address ourselves not to their humanity but to their self-love

and never talk to them of our own necessities but of their advantages."

Third, market-based competition governs relations between buyers and sellers and

determines prices not just for goods and services but for wages as well.

Fourth, individual agents--that is buyers and sellers--

have freedom of choice with respect to the consumption, production

and investment. This is sometimes referred to as the idea of

consumer sovereignty. And finally, the role of the government

is generally limited. In the most extreme form, it's limited to

the protection of private property and the enforcement of contracts.

In more moderate forms, the government may also provide a social safety net

of varying scope or scale, but it's the market that's the ultimate arbiter of

success and failure. There are two broad schools of thought

as to the origins of capitalism. While they agree on the broad historical

contours--i.e that capitalism emerged broadly between the 16th and 18th

centuries and England and the Netherlands and gradually spread across

Europe and around the world-- they differ as to the dynamics of that process.

The first group is rooted in classical

economic liberalism and is most commonly attributed to the

work of Adam Smith. Liberals tend to view capitalism as an

expression of human nature. That is, as individuals we're naturally

self-interested. Liberals point to the fact that people

have traded since time immemorial to support their argument.

From the liberal perspective. capitalism was rooted in this historical process of

barter and exchange, and that the gradual expansion of this

process was facilitated by reducing the role of the state freeing individuals to

buy and sell as they wished. Essentially, from the liberal perspective,

capitalism was always in us just waiting to be let out.

The second group is rooted in the Marxist critiques of Karl Marx and Frederick Engles.

Unlike liberals who see capitalism as a simple expression of human nature,

Marxists tend to view capitalism as a historically specific system

that emerged because of economic and property relationships

and the specific exercise of power in Great Britain and the Netherlands.

Its global spread was rooted not in human nature but in the power of Europe

during the colonial period. Now regardless of which theoretical

explanation as to the origins of capitalism we adhere to,

it's undeniable that the global political economy has undergone some

radical transformations over time. So let's look briefly at that development now.

Tthe foundations of the global political

economy are historically rooted in the dramatic expansion of international

trade and colonization that emerged in the

16th century. Early on--beginning about the 1500s when

the technology permitted large-scale international trade

and the social context of the state began to emerge--

thinking about international trade was dominated by the philosophical approach

or the theoretical school of mercantilism.

Put simply, mercantilists view international trade as a

function of or a key contributor to national prestige and power.

Trade surpluses were viewed as the key avenue through which states would

acquire wealth, and that wealth could be used to expand

armies and pay for further conquest. Mercantilism thus viewed international

trade as closely tied to national security.

It argues that wealth material wealth, especially the possession of large

reserves of gold and silver, was a key indicator of national strength.

Trade was an avenue--perhaps the key avenue--to secure

specie--gold and silver--and acquire wealth to empower the state.

The goal was to export more than you imported, running a balance of trade surplus

and securing gold reserves for the state.

This theory was at the heart of early periods of colonialism, especially the

colonialism practice by the Spanish and Portuguese,

and their search for gold and silver in the Americas. But it also helps to

explain Dutch colonialism and control over the spice trade,

and other efforts to secure monopolies over raw material imports and markets in

the colonial world. Colonial ports were restricted from

doing business with traders from other nations,

and only the home country was permitted to import and sell goods there.

In the broadest terms, mercantilist approaches view the international

political economy as fundamentally a zero-sum game,

meaning that one country's win was necessarily offset by another country's loss.

There were no win-win scenarios, no

rising tide that raises all ships. The policy prescriptions that flowed

from this theoretical approach were pretty straightforward.

Running a positive balance of trade--that is, exporting more than you imported--

would force other countries to pay for that deficit by

shipping you gold and silver. This surplus would be transformed

into greater power for the state, particularly military power.

Mercantilism dominated thinking about international political economy for more

than 250 years, but the growing power of the British

empire and the industrial revolution that was taking place in that country

would spark a fundamental transformation. Indeed beginning in the middle of the

1700s, a new school of economic thought began to emerge,

one that placed a greater emphasis on free trade and open markets.

Dubbed liberalism, this work was advanced by thinkers like Adam Smith and

David Ricardo. The central propositions of liberalism

were that free trade benefits all parties involved,

that specialization and trade could benefit everyone.

This was the result of an idea called comparative advantage--

a concept we explored in another video. But put simply,

it's the idea that all countries benefit from free trade and open markets.

It was the idea that international political economy was best viewed as a

positive sum game in which everyone could benefit.

The rising tide that raised all boats. By specializing and trading, countries

could consume more goods and more diverse goods

than they could if they were cut off from international trade and attempted

to be self-sufficient. Now to be clear, colonialism was still

the order of the day. But the Spanish and Portuguese model of

colonialism as driven by the search for gold and silver

increasingly gave way to a new model of colonization led by the British and the French.

While gold and silver were certainly

still welcome, colonies instead became viewed primarily as sources for raw

materials to feed the ceaseless demand for factories in the home country.

We also see colonies rooted in the permanent political expansion of the

home country, with permanent settlements established in places like Australia,

Canada, South Africa, and the United States.

The policy prescriptions that flowed from liberalism differ dramatically from

those of mercantilism. Rather than limiting foreign trade and

attempting to control the economy, according to liberalism government

should reduce their role in the economy and establish the conditions for

competition in free markets. Free markets, not state intervention, was

viewed as the path to prosperity. The idea took hold, especially in Britain,

the major power of the day. Britain used its dominant position in

the global system to push for free trade, reducing its own trade barriers like the

corn laws, and instead relying on its dominance

over the market and its market position to expand its

power and wealth. During the 18th and 19th centuries,

economic liberalism was the predominant approach to global political economy.

Indeed the liberal international system worked fairly well until the 1920s, when

the Great Depression threw the international political economy into

crisis. Beginning in 1929, the US economy--and

later the rest of the world's economies-- entered into a period of crisis.

The stock market crashed, unemployment spiked, and the US economy

spiraled downward. In response, the United States, following

other leading economies around the world, established a series of policies

intended to bring the US out of crisis. It imposed new tariffs and trade

barriers under the Smoot-Hawley Tariff Act of 1930,

and devalued the dollar in an effort to promote american exports and protect the

US market from foreign competition. The thinking essentially went something

like this: By imposing tariffs and trade barriers,

the United States could make imports more expensive relative to domestically

produced goods. As a result, American consumers would

purchase more US-made goods and fewer foreign produced goods.

This would generate more employment in the United States,

as factory hired more workers to expand production.

At the same time, by devaluing the us dollar,

it would make American exports cheaper relative to foreign produced goods.

This would increase the sale of American goods abroad, thus generating more

production and increasing employment in the United States.

In some sense, it represented an attempted return to mercantilist

policies of nearly two centuries earlier. Collectively, these policies came to be

referred to as "beggar thy neighbor" policies. Essentially,

they were attempting to protect the US economy by exporting the American

economic decline to the rest of the world.

But other countries around the world were suffering similar economic problems

and were pursuing similar economic policies. As a result, the policies were

totally ineffective and merely served to exacerbate the crisis.

The US and the rest of the world continued to sink further into

economic depression. And as an aside, this is another good

example of the prisoner's dilemma we talk about elsewhere in the course.

Ferris Bueller's Day Off: "In 1930, the Republican-controlled House of Representatives,

in an effort to alleviate the effects of the...

Anyone? Anyone? The Great Depression, passed the... Anyone? Anyone?

A tariff bill. The Hawley-Smoot Tariff Act which... Anyone? Raised or

lowered? Raised tariffs in an effort to collect

more revenue for the federal government. Did it work? Anyone? Anyone know the

effects? It did not work and the United States

sank deeper into the Great Depression." So just how bad was the Great Depression?

Before we get into the numbers, let's think a bit about what life was like in

the 1920s. There was no social safety net. If you

lost your job, there were no food stamps, no unemployment insurance.

There was no medicare or medicaid, no social security.

Private soup kitchens were established by local charities and often organized

crime families to feed the poor and unemployed.

But there was no guarantee, and there was no governmental program to

protect people who lost their jobs. So just how bad was the Great Depression then?

We can look at some macro numbers to get

a broad sense. Between 1929 when the Wall Street crash

occurred, and 1932, when the Great Depression reached its peak,

all of the world's major economies were in crises.

Industrial production had declined by between one quarter in the

United Kingdom and France, by up to 50 percent in the United States

and Germany. Wholesale prices--the price paid for

retailers to purchase goods for commercial sales--

declined by about one-third, signaling a sharp decline in consumer demand due to

lack of wages. Foreign traded collapsed, declining by

between half in France and three quarters in the United States,

as countries imposed new trade barriers and restricted imports.

And unemployment skyrocketed. In the United Kingdom it more than doubled.

In France and Germany, it more than tripled. And in the United States,

unemployment increased by more than 600 percent.

The Great Depression was ultimately brought to a close by the massive

increase in government spending and employment sparked by World War II.

To prevent the outbreak of another global economic crisis,

the United States--as the world's leading economic and military power

after World War II--led the development of a new international economic system,

often referred to as embedded liberalism. Those ideas are covered in detail in another video.

So that's it for now. I hope you found

this video useful. Please be sure to check out the other videos in this

series and thanks for watching Bye.