How Does Liberalism Compare with Mercantilism

International Political Economy

The international political economy is the convergence of political and economic powers to produce a particular set of forces and dynamics in the world. The contemporary global system can be explained through three theoretical paradigms of Liberalism, Mercantilism, and Marxism. They are essential in understanding the characteristics of the economic system and the challenges it faces. This essay will explore the fundamental political and economic ideas or assumptions that underpin each of the key theoretical perspectives as well as explain what assumptions they make about ‘Man’ and ‘Nature’. In addition, exploration of these paradigms will be assisted with further examples, and institutions will be used to display an understanding of how the paradigms engage in the contemporary scene of the International Political Economy.

In 1994, Policymakers gathered at Bretton Woods in the USA to resolve two problems. Firstly, to prevent the Great Depression of the 1930s from ever happening again by enduring an open world trading system and global monetary system. Secondly, they needed to restructure Europe’s economics (Woods, 2011:326). In 1946, the first Bretton Woods institutions emerged. The International Monetary Fund provided emergency systems to states and created a stable exchange to help trade. The World Bank dealt with planning development paths and providing a place where private investment could step in to recuperate (Woods, 2011:327). Lastly, in 1948 the General Agreement on Trade and Tariffs, later replaced by the World Trade Organisation, became a forum for developing countries to use collective bargaining power to negotiate trade liberalization and to counter the dominance of more established economies like the US (Woods, 2011: 327).

The Bretton Woods institutions predominantly advocate for policies aligned to liberal assumptions like cooperation and free trade. Although, if we take one institution, the WTO, and look at it from all three perspectives it will help to illustrate their differences. Multilateral agreements like those negotiated by the WTO are under threat in the contemporary world because of the slide to the right of more unilateral thinking. Mercantilism would see this as a way of allowing existing markets to move ahead and expand without restriction whilst liberalism might suggest that markets will take over from the WTO in order to find the best balance of trade. Marxism would argue that the negative impact of unilateralism will undermine multilateral agreements which protect developing countries and their economies. This leads us to the three key paradigms with specific moral and analytic stances on global economic relations. (Woods, 2011:332).

Emerging from the Enlightenment writings of Adam Smith, is an economic critique of the mercantilist practice in early modern Europe, Liberalism (Gilpin,1987:26). Liberal theory has two separate components, the political and the economic. For liberals a source of peaceful relations comes from trade and economic interaction, this is due to the mutual benefits and expanding independence which induces cooperative relationships (Gilpin, 1987: 31). The economy (market) dominates the political and the market should be left to sort itself out even when the political (the organized people) wants to challenge it. Under liberalism everyone can win, free trade and free flow of capital will shape government policies and the ‘invisible hand’ of competition will ensure order in the global market. Under free exchange, it is believed that individuals will be rewarded for their marginal productivity and overall contribution to society (Woods, 2011: 333).

Economic liberalism believes individuals are economic animals by nature and will pursue their interests in a world of scarcity and resource constraints. It argues that the world should be run on efficiency, to stimulate growth and that consumer choice markets should be protected from political interference (Gilpin, 1987: 26). There is the assumption that free trade and free flow of capital will ensure that investment will go to where it is most profitable (Woods, 2011: 332). They tend to focus on the realm in which nation-states show their peaceful, cooperative, and constructive natures through harmonious competition (Balaam & Dillman, 2011: 35). Political liberalism, on the other hand, is committed to individual equality and liberty (Gilpin, 1987: 26). In the international economy the individual is viewed as the main actor, a rational being who tries to maximize certain values at the lowest possible cost (Gilpin, 197: 31). Their self-interest allows for constructive, competitive engagement to take place (Balaam & Dillman, 2011: 29).

Mercantilism emphasizes one of the basic coercions of nation-states, to create and sustain power in order to protect national wealth and security (Balaam & Veseth, 2008: 22). It arises partly from the tendency of markets to concentrate wealth and establish dependency or power relations between strong and weak economies (Gilpin, 1987: 33). Power lies with those states that seek to maximize their wealth and independence, the most powerful states define the rules and sustain order through hegemony (Woods, 2011: 333). Economic activities should be secondary to the goal of the state (Gilpin, 1987: 31). Mercantilists do not focus on the individual and their choices but rather view the world economy as an area of inter-state competition. To remain competitive, states implement protectionist policies (limits on exports and imports like tariffs) and subsidies (Lim, 2014:34). This limitation generates trade surpluses which creates wealth and therefore power (Balaam & Veseth, 2008: 22). Mercantilists have a zero-sum world view, meaning there can only be one winner in the economic market (Balaam & Veseth, 2008: 23).

Man is viewed as an autonomous being who operates in a state that is molded through an inevitable result of the anarchic system. All mercantilists ascribe to national security, the dominance of the state, and military power in the functioning of the international system (Gilpin, 1987: 31). There are two strands of mercantilism that emerge, a defensive position known as ‘benign’ mercantilism focused on protecting the economy against external forces (Balaam & Veseth, 2008: 30) and a more aggressive strand known as ‘malevolent’ mercantilism a more intimidating version of economic warfare and expansionary policies (Gilpin, 1987: 32).

Gaining power and hegemony to maintain order is the main goal for mercantilists. Power determines the relationship between the market and authority. Those who exercise authority will derive power from three main sources, force, wealth, and ideas. In the political economy structural power, having the ability to influence how things will take place, and having control over the mode of production shaping frameworks within inter-state relations, and relative power, determining the surrounding structure of the relationship, are both exercised (Strange,1988: 24). Structural power creates the ordered state of nature which enables increased relative power over individuals producing hegemony. Mercantilism is generally cited as being the driving force behind colonialism and imperialism (Balaam & Veseth, 2008: 34). Robert Keohane illustrates how mercantilists view hegemonic stability and power by stating that the strongest, most well-ordered international regimes are a result of hegemonic structures of power dominated by a single country. A classic example of this is the eras of imperialism pax Britannica and pax Americana in which strong powers used coerciveness to gain hegemony and influence (Cox, 1981: 139).

The third paradigm is Marxism which views the world economy as an arena of competition amongst capitalists, workers, and social groups not among states. Capitalism is the driving force behind the constant class struggle between the oppressor and the oppressed (Woods, 2011: 333). The oppressors/capitalists own the trade and industry and the oppressed/working class are the cogs in the system. The mode of production is the basis of class power and so when capitalists seek to increase their profits it usually leads to the exploitation of the working class (Strange, 1988: 29). The capitalist system has been used to describe the imbalanced exchange between the core, industrialized countries, and the periphery, developing countries. Order is only achieved where capitalists succeed in obtaining the compliance of all others in the state. But, Marxists will argue that Capitalism is becoming increasingly unstable as demonstrated by the Global financial crisis of 2008 (Lim, 2014: 36).

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Additionally, Marxism focuses on the structure of production. In this case, capitalists, and the state in which they operate, can use structural power to defend and strengthen the social and political institutions and legal administrations, making it tough for others to challenge its hegemony (Strange, 1988: 29). Class conflict drives social change and therefore, the more structural power gained, the more the working class is driven to revolution (Strange, 1988: 30). Marx understood capitalism as a necessary stage in human history, as it provided the social basis for the final stage of communism to succeed. (Lim, 2014: 64).

For the purpose of showing the differences between the three perspectives and understanding them in a more contemporary world, the 2011 military intervention in Libya will be investigated from each perspective respectively. This example demonstrates how the global balance of forces allows powerful military interests to manipulate international systems, like the UN Security Council, to create a pretext for violating the sovereignty of member states in pursuit of their own economic and political interests. It shows where economic and political interests subvert international law and international agreements, allowing foreign powers, in this case, the US and NATO, to pursue their military interests. Owing to oil being central to the invasion of Libya it points also to how militarily commandeering the economic assets of another country is part of the International Political Economy.

On the 17th of February 2011, the peaceful protests against the rule of Qaddafi began advocating for democratic change and respect for human rights. The unarmed demonstrators were met with violent shutdowns by the Libyan authorities and the situation turned into a mass revolt. Within a few weeks, the demonstrators started an armed rebellion and established a transitional national council. The response from the government was to push back on areas now under control by the rebels (Ulfstein & Christiansen, 2013:159). The UN Security Council adopted Resolution 1973 permitting member states to protect Libyan civilians. Resolution 1973 represents the first mandate by the Security Council for a military intervention based on the responsibility to protect against the request of a functioning government (Ulfstein & Christiansen, 2013:161).

Disagreement emerged about the Resolution and concerns were raised about military overreaches, like whether or not the bombing carried out by NATO and its allies on Qaddafi’s forces was within the mandate provided. By June 2011 NATO attacks had weakened Qaddafi’s forces (Siebens & Case, 2012: 20). In October, a US predator drone and French warplane attacked a convoy attempting to assist Qaddafi’s escape. However, the strikes failed to kill him, and he managed to get away. He was later caught by a group of rebels who filmed him being beaten up and then executing him as he tried to surrender. The success of the anti-Qaddafi rebels in 2011 must be largely attributed to NATO air power, it essentially acted as the air force for rebel troops. The international intervention in Libya was more concerned with facilitating the overthrow of Qaddafi’s government than preventing a humanitarian crisis (Siebens & Case, 2012: 21).

Seen through the lens of Liberalism, the weakening of the Libyan state would be viewed as a positive outcome (Woods, 2011: 333). The weakened state opened up the economy, allowing the market to determine the price of assets and goods, aligning with the liberalist assertion that market forces should be left to operate without interference. The state could become more cooperative and trade relations could take place with the West, since Qaddafi was dead, they would no longer have to face the “tyrant” that had ruled Libya and threatened their hegemony.

This same event can be looked at from a mercantilist perspective. Mercantilists focus on where their power lies with other states and how they seek to maximize their wealth and independence (Woods, 2011: 333). Therefore, they would have viewed the regime change positively. A post-Qaddafi Libya, more under the control of NATO and its allies, would be more likely to negotiate terms of inter-state trade that would benefit the powerful amongst the mercantilists. Qaddafi was able to use the wealth generated by the resources in Libya to somewhat isolate Libya from the rest of the world economy. While he maintained a strong state, with strong control over the economy, he refused to cooperate with the global economy in a manner that made it easy for the established dominant states to take advantage. For Mercantilists the regime change might have been an opportunity to change the economic policies of the country and allow easier access and more opportunities for inter-state trade. Maybe, in the short term, the instability may have been seen as a concern, but with an eye on medium-term recovery and the emergence of new state order, the longer-term outlook would have been seen as potentially lucrative.

Marxists did understand that capitalism was necessary for the final stage of communism to prosper (Lim, 2014: 64). Marxists look at things through a class lens and so it is necessary to see how the Libyan conflict impacted each layer differently. This is a representation of what the classes may have experienced. At the level of the capitalist, the ones who own the means of production, the Libyan invasion shifted the ownership of assets from one part of the capitalist class to another. Assets, in this case, would be the oil fields and much of the other extractive and industrial assets, including the land that was taken in Libya. They shifted Qaddafi, his family, and others who benefited from their role in society to new owners who divided up the spoils of the war.

The middle classes would have adjusted to the new conditions. They were initially affected by the economic downturn and unpredictability that the invasion and civil war brought but would have started stabilizing as the Libyan economy recovered a bit. The poor and working-class bear the brunt of it, victims of the upsurge in violence on all sides were forced into armies and insurgency movements without much to say about it. The closing and damaging of industries due to the violence meant jobs were lost. They remained the marginalized victims in a system where they were exploited and oppressed.

Each of the three paradigms interprets and explains the convergence of political and economic power in a distinct way. The use of the Libyan invasion example, as well as the WTO, showed just how differently each perspective interprets the same circumstances through applying their respective assumptions. Liberalists assume that man is a rational being who maximizes value at the lowest possible cost while ensuring minimal state intervention. For Mercantilists man is an autonomous and self-interested creature, operating in an anarchic state system that seeks to gain hegemony by increasing power. Lastly, Marxism says man is malleable and corruptible and operates within an evil manifestation of capitalism known as the state, a strong focus is put on the class system (Gilpin,1987: 31). These underlying assumptions are the foundation of the three distinct paradigms through which the international political economy can be viewed.