Three Ideologies of Political Economy

CHAPTER TWO

Three Ideologies of Political Economy

Over the past century and a half, the ideologies of liberalism, nationalism, and Marxism have divided humanity. This book uses "ideology" to refer to "systems of thought and belief by which individuals and groups explain . . . how their social system operates and what principles it exemplifics." The conflict among these three moral and intellectual positions has revolved around the role and significance of the market in the organization of society and economic affairs.

Through an evaluation of the strengths and weaknesses of these three ideologies it is possible to illuminate the study of the field of international political economy. The strengths of each perspective set forth here will be applied to subsequent discussions of specific issues, such as those of trade, investment, and development. Although my values are those of liberalism, the world in which we live is one best described by the ideas of economic nationalism and occasionally by those of Marxism as well. Eclecticism may not be the route to theoretical precision, but sometimes it is the only route available.

The three ideologies differ on a broad range of questions such as: What is the significance of the market for economic growth and the distribution of wealth among groups and societies? What ought to be the role of markets in the organization of domestic and international society? What is the effect of the market system on issues of war or peace? These and similar questions are central to discussions of international political economy.

These three ideologies are fundamentally different in their conceptions of the relationships among society, state, and market, and it may not be an exaggeration to say that every controversy in the field of international political economy is ultimately reducible to differing conceptions of these relationships. The intellectual clash is not merely of historical interest. Economic liberalism, Marxism, and economic nationalism are all very much alive at the end of the twentieth century; they define the conflicting perspectives that individuals have with regard to the implications of the market system for domestic and international society. Many of the issues that were controversial in the eighteenth and nineteenth centuries are once again being intensely debated.

It is important to understand the nature and content of these contrasting "ideologies" of political economy. The term "ideology" is used rather than "theory" because each position entails a total belief system concerning the nature of human beings and society and is thus akin to what Thomas Kuhn has called a paradigm. As Kuhn demonstrates, intellectual commitments are held tenaciously and can seldom be dislodged by logic or by contrary evidence. This is due to the fact that these commitments or ideologies allege to provide scientific descriptions of how the world does work while they also constitute normative positions regarding how the world should work.

Although scholars have produced a number of "theories" to explain the relationship of economics and politics, these three stand out and have had a profound influence on scholarship and political affairs. In highly oversimplified terms, economic nationalism (or, as it was originally called, mercantilism), which developed from the practice of statesmen in the early modern period, assumes and advocates the primacy of politics over economics. It is essentially a doctrine of state-building and asserts that the market should be subordinate to the pursuit of state interests. It argues that political factors do, or at least should, determine economic relations. Liberalism, which emerged from the Enlightenment in the writings of Adam Smith and others, was a reaction to mercantilism and has become embodied in orthodox economics. It assumes that politics and economics exist, at least ideally, in separate spheres; it argues that markets-in the interest of efficiency, growth, and consumer choice-should be free from political interference. Marxism, which appeared in the mid-nineteenth century as a reaction against liberalism and classical economics, holds that economics drives politics. Political conflict arises from struggle among classes over the distribution of wealth. Hence, political conflict will cease with the elimination of the market and of a society of classes. Since both nationalism and Marxism in the modern era have developed largely in reaction to the tenets of liberal economics, my discussion and evaluation of these ideologies will begin with economic liberalism.

THE LIBERAL PERSPECTIVE

Some scholars assert that there is no such thing as a liberal theory of political economy because liberalism separates economics and politics from one another and assumes that each sphere operates according to particular rules and a logic of its own. This view is itself, however, an ideological position and liberal theorists do in fact concern themselves with both political and economic affairs. Whether it is made explicit in their writings or is merely implicit, one can speak of a liberal theory of political economy.

There is a set of values from which liberal theories of economics and of politics arise; in the modern world these political and economic values have tended to appear together. Liberal economic theory is committed to free markets and minimal state intervention, although, as will be pointed out below, the relative emphasis on one or the other may differ. Liberal political theory is committed to individual equality and liberty, although again the emphasis may differ. We are primarily concerned here with the economic component of liberal theory.

The liberal perspective on political economy is embodied in the discipline of economics as it has developed in Great Britain, the United States, and Western Europe. From Adam Smith to its contemporary proponents, liberal thinkers have shared a coherent set of assumptions and beliefs about the nature of human beings, society, and economic activities. Liberalism has assumed many forms-classical, neoclassical, Keynesian, monetarist, Austrian, rational expectation, etc. These variants range from those giving priority to equality and tending toward social democracy and state interventionism to achieve this objective, to those stressing liberty and noninterventionism at the expense of social equality. All forms of economic liberalism, however, are committed to the market and the price mechanism as the most efficacious means for organizing domestic and international economic relations. Liberalism may, in fact, be defined as a doctrine and set of principles for organizing and managing a market economy in order to achieve maximum efficiency, economic growth, and individual welfare.

Economic liberalism assumes that a market arises spontaneously in order to satisfy human needs and that, once it is in operation, it functions in accordance with its own internal logic. Human beings are by nature economic animals, and therefore markets evolve naturally without central direction. As Adam Smith put it, it is inherent in mankind to "truck, barter and exchange." To facilitate exchange and improve their well-being, people create markets, money, and economic institutions. Thus, in his "The Economic Organization of a P.O.W. Camp," R. A. Radford shows how a complex and sophisticated market arose spontaneously in order to satisfy human wants, but his tale also demonstrates how a form of government was necessary to police and maintain this primitive market system.

The rationale for a market system is that it increases economic efficiency, maximizes economic growth, and thereby improves human welfare. Although liberals believe that economic activity also enhances the power and security of the state, they argue that the primary objective of economic activity is to benefit individual consumers. Their ultimate defense of free trade and open markets is that they increase the range of goods and services available to the consumer.

The fundamental premise of liberalism is that the individual consumer, firm, or household is the basis of society. Individuals behave rationally and attempt to maximize or satisfy certain values at the lowest possible cost to themselves. Rationality applies only to endeavor, not to outcome. Thus, failure to achieve an objective due to ignorance or some other cause does not, according to liberals, invalidate their premise that individuals act on the basis of a cost/benefit or means/ends calculus. Finally, liberalism argues that an individual will seek to acquire an objective until a market equilibrium is reached, that is, until the costs associated with achieving the objective are equal to the benefits. Liberal economists attempt to explain economic and, in some cases, all human behavior on the basis of these individualistic and rationalistic assumptions.

Liberalism also assumes that a market exists in which individuals have complete information and are thus enabled to select the most beneficial course of action. Individual producers and consumers will be highly responsive to price signals, and this will create a flexible economy in which any change in relative prices will elicit a corresponding change in patterns of production, consumption, and economic institutions; the latter are conceived ultimately to be the product rather than the cause of economic behavior. Further, in a truly competitive market, the terms of exchange are determined solely by considerations of supply and demand rather than by the exercise of power and coercion. If exchange is voluntary, both parties benefit. In colloquial terms, a "free exchange is no robbery."

Economics, or rather the economics taught in most American universities (what Marxists call orthodox or bourgeois economics), is assumed to be an empirical science of maximizing behavior. Behavior is believed to be governed by a set of economic "laws" that are impersonal and politically neutral; therefore, economics and politics should and can be separated into distinct spheres. Governments should not intervene in the market except where a "market failure" exists or in order to provide a so-called public or collective good.

A market economy is governed principally by the law of demand. This "law" (or, if one prefers, assumption) holds that people will buy more of a good if the relative price falls and less if it rises; people will also tend to buy more of a good as their relative income rises and less as it falls. Any development that changes the relative price of a good or the relative income of an actor will create an incentive or disincentive to acquire (or produce) more or less of the good; this law in turn has profound ramifications throughout the society. Although certain exceptions to this simple concept exist, it is fundamental to the operation and success of a market system of economic exchange.

On the supply side of the economy, liberal economics assumes that individuals pursue their interests in a world of scarcity and resource constraints. This is a fundamental and inescapable condition of human existence. Every decision involves an opportunity cost, a tradeoff among alternative uses of available resources. The basic lesson of liberal economics is that "there is no such thing as a free lunch"; to get something one must be willing to give up something else.

Liberalism also assumes that a market economy exhibits a powerful tendency toward equilibrium and inherent stability, at least over the long term. This "concept of a self-operating and self-correcting equilibrium achieved by a balance of forces in a rational universe" is a crucial one for the economists' belief in the operation of markets and the laws that are believed to govern them. If a market is thrown into a state of disequilibrium due to some external (exogenous) factor such as a change in consumer tastes or productive technology, the operation of the price mechanism will eventually return it to a new state of equilibrium. Prices and quantities will once again balance one another. Thus, a change in either the supply or the demand for a good will elicit corresponding changes in the price of the good. The principal technique of modern economic analysis, comparative statics, is based on this assumption of a tendency toward systemic equilibrium.

An additional liberal assumption is that a basic long-term harmony of interests underlies the market competition of producers and consumers, a harmony that will supercede any temporary conflict of interest. Individual pursuit of self-interest in the market increases social well-being because it leads to the maximization of efficiency, and the resulting economic growth eventually benefits all. Consequently, everyone will gain in accordance with his or her contribution to the whole, but, it should be added, not everyone will gain equally because individual productivities differ. Under free exchange, society as a whole will be more wealthy, but individuals will be rewarded in terms of their marginal productivity and relative contribution to the overall social product.

Finally, most present-day liberal economists believe in progress, defined most frequently as an increase in wealth per capita. They assert that the growth of a properly functioning economy is linear, gradual, and continuous. It proceeds along what an economist colleague has called "the MIT standard equilibrium growth curve." Although political or other events-wars, revolution, or natural disasters-can dramatically disrupt this growth path, the economy will return eventually to a stable pattern of growth that is determined principally by increases in population, resources, and productivity. Moreover, liberals see no necessary connection between the process of economic growth and political developments such as war and imperialism; these political evils affect and may be affected by economic activities, but they are essentially caused by political and not by economic factors. For example, liberals do not believe that any causal relationship existed between the advance of capitalism in the late nineteenth century and the upheavals of imperialism after eighteen seventy and the outbreak of the First World War. Liberals believe economics is progressive and politics is retrogressive. Thus they conceive of progress as divorced from politics and based on the evolution of the market.

On the basis of these assumptions and commitments, modern economists have constructed the empirical science of economics. Over the past two centuries, they have deduced the "laws" of maximizing behavior, such as those of the theory of comparative advantage, the theory of marginal utility, and the quantity theory of money. As Arthur Lewis has commented to me, economists discover new laws at the rate of about one per quarter century. These "laws" are both contingent and normative. They assume the existence of economic man—a rational, maximizing creature—a variant of the species homo sapiens that has been relatively rare in human history and has existed only during peculiar periods of favorable conditions. Further, these laws are normative in that they prescribe how a society must organize itself and how people must behave if they are to maximize the growth of wealth. Both individuals and societies may violate these laws, but they do so at the cost of productive efficiency. Today, the conditions necessary for the operation of a market economy exist, and the normative commitment to the market has spread from its birthplace in Western civilization to embrace an increasingly large portion of the globe. Despite setbacks, the modern world has moved in the direction of the market economy and of increasing global economic interdependence precisely because markets are more efficient than other forms of economic organization.

In essence, liberals believe that trade and economic intercourse are a source of peaceful relations among nations because the mutual benefits of trade and expanding interdependence among national economies will tend to foster cooperative relations. Whereas politics tends to divide, economics tends to unite peoples. A liberal international economy will have a moderating influence on international politics as it creates bonds of mutual interests and a commitment to the status quo. However, it is important to emphasize again that although everyone will, or at least can, be better off in "absolute" terms under free exchange, the "relative" gains will differ. It is precisely this issue of relative gains and the distribution of the wealth generated by the market system that has given rise to economic nationalism and Marxism as rival doctrines.