What is International Political Economy?

What is International political economy?

What is international political economy? International political economy focuses on the politics of economic phenomena that transcend state borders, whether be they trade transactions, exports imports, protectionism, tariffs, non-type barriers, production, the way multinational corporations operate across state borders and finance; with finance, the way money and capital can cross state borders and also; but also labour and migration. Those two lasts have not really been covered by International political economy in great detail.

Thus, International political economy examines the interaction between the economy and politics in individual states and the international system. It looks at the domestic sources of foreign economic policy: why a given state in a given international system pursues openness, closure, protectionism, liberalization, etc., and who are the winners and who are the losers from that transaction from those policies. That is the domestic sources of foreign economic policy. There is also the international system of domestic political economies. So, if since 2018, the dominant trend is openness, has been towards the breakdown of barriers to the free flow of trade investment and money, what are the consequences on the domestic political economy? These are the kinds of questions that relate to the term international or global in international political economy.

Political. Why? Because this is not just international economics and that is the main specificity of International political economy. Because international political economy introduces domestic and international political variables to understand the economic phenomena, it does so in particular in terms of the politics of international political economy. The main focus is the struggle between the winners and losers of globalization, or the winners and losers from a particular foreign economic or policy, or from a particular structure of the international of global capitalism.

Also, International political economy investigates the economic dimension of world politics. In the early days of the discipline scholars were mostly interested in global rivalries; state rivalries between the major powers, and what was the importance of economics to great power politics. That is still an issue, but today it is much less central than it used to be in the 1970s.

"Economy" obviously because international political economy is mostly about international economics, but also because international political economy draws on economic theories or other theories because there are various trends in International political economy. Trends that are based on neoclassical or mainstream economic theories, there are also International political economy theories that are Marxists, institutionalists, and so based themselves on institutionalized economy, not neoclassical economics. The idea is that international political economy scholars try to draw on economic theory to build models used to predict the way political actors behave, their preferences, their strategies, etc. International political economy also draws on economic history. There is also a lot of it that draws on the knowledge produced by economic historians, mostly in relation to the period before the Second World War. Therefore, "economy" because of the main subject topics are economic process outcomes and policies.

Politics can be both domestic and international domestic in the sense that to determine the foreign economic policy of a given state; there is a struggle within the domestic political economy between different socioeconomic actors, between different ideologies. There are also international institutions like the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO) who influence the way international political economy operates and the way international economic interaction processes operate; but also, the International Monetary Fund (IMF) the World Bank (WB), bilateral investment treaties or bilateral trade treaties and so. There was also in the beginnings of disciplining the 1970s a lot was made on how the politics of war interacted with the politics of international economics.

This graph shows the trade flows, the way capital flows, the volume of assets held by foreign actors in a given country and their impact on international politics. It also shows the way domestic political policies have an impact on the international political system and such things as the exchange rate regime, under evaluation or overvaluation of currencies, and crises. None of the two terms has primacy politics or economics. It is a constant interaction between the two. In international political economy, the attempt is therefore to understand the overall direction in which processes develop and outcomes are produced.

Subject Matter

If we look at trade, for example, why is it that state going to trade wars or into trade cooperation with each other? And, when they do so, who benefits and who loses out from outcomes? For example, why Trump has gone into a trade war with China and is threatening a trade war with the European Union? Over the last year, the Trump administration has raised tariffs on Chinese exports to the United States. Some experts have been very critical of the Chinese trade surplus with the United States and the German or the Eurozone trade surplus with the United States, and by extension have been very critical of the domestic economic policies that those states, the eurozone and China pursue, and the way those policies interact with American domestic policy to produce trade deficits for the United States.

So who is pushing Trump to do that? Is there anyone pushing Trump to do that? Who is going to win from Trump’s tariffs, who is going to lose out from Trump’s tariffs and under what conditions would Trump reverse the trade war into which he has gone with China and the European Union and pursue cooperation in trade matters with those states?

A similar question is what explains the interior economic nationalism of the 1920s and the 1930s, the fact that in the 1920s and even more so in the 1930s, states raised tariffs and raised trade barriers with each other, turned inwards resulting in trade volumes to collapse. What explains that and again who won out and who lost from that, who opposed it who favoured it. And why at that particular point in time was that policy pursued by a good number of states. And why is it that after 1945, after the war, the reverse took place? Again the same question comes up: who benefits, which domestic groups in which states benefit from the setting up of those institutions and that cooperation?

If we now look at investment or multinational corporations, the question is how multinational corporate activity affects the relation between states. So, what explains the conflict over Chinese toward foreign direct investment (FDI) into the United States? For example, there is the case of Huawei, a global provider of information and communications technology (ICT) infrastructure and smart devices, that is involved in the development of 5G technology. The United States has blocked investments by Huawei in the United States and is pressuring the European Union to block investments by Huawei, and not just investments, but also participation by Huawei in projects conducted in the European Union. What explains the fact that President Macron now, and Germany as well, are pushing for the idea that the European Union should set up a body to screen inward Chinese investment into the European Union and say which investment is going to be allowed and which investment is not going to be. That is a new case in terms of international investments because the United States and the European Union were the sources of international investment so far.

A typical question was about the relationship of international investment before the Second World War in colonialism, and the pattern of investment relationship at that time. Two thirds of the globe was under direct administration by the British Empire, the French Empire, Portuguese empire. What explains the fact that the United States was not, except the Philippine, colonial power and did not attempt to become one after the 1930s.

And what is the difference between that colonialism and global value chains today in a world? What is the relationship between global value chains, so the way multinational corporations operate today, and regional trading investment agreements and blocks? Is there a relationship between the way international investment takes place today and the setting up of Mercosur, NAFTA, ASEAN in the Southeast Asian region, the bilateral investment treaties agreed by Japan; is there a relationship between Russia investment in the setting of the European Union? International political economy deal with that kind of question.

We look more at countries that are a destination for foreign direct investment, what kind of relationship development countries develop toward foreign direct investment. There was a period; for example, between the 1920s and the 1970s where developing states tried to keep out foreign direct investment, multinational corporations. And, since the late and since the mid-1970s, there is a competition to attract capitals, attract international corporations. So what explains that change in policy?

A typical question in terms of the international monetary system and the exchange-rate system is why it is that China and the European Union today that want to reform the international monetary system. The governor of the Bank of England in August 2019 said that there should be a new international monetary system that is not dependent on the dollar, while the Chinese central bank has asked the same for the last 15 years. Why previous international monetary, such as the gold standard and the Bretton Wood System, broke down and who benefited from that and who lost out. Also, why is that President Trump attacked the European Central Bank in September 2019?

If we look at all of these things, international trade production, finance, what is their impact on domestic welfare systems and domestic politics? If you look at the history of that question in the 1920s and the 1930s, there were clashes between the rising union in trade unionism and socialism in the advanced countries and the gold standard. What explains that and how did that conflict play out historically; why is it that right populism like Trump today or like Marine Le Pen in France or other forces attack globalization and talk about economic nationalism?

Another typical question is, capital of financial liberalization does it lead to race to the bottom in terms of fiscal policies so that states compete with each other to attract investments by lowering their taxes, or does it stimulate greater demands for social protections to protect those segments of the domestic population that lose out from the process of liberalisation.

Some observations about international political economy

International politics scholars made three thematic distinctions: international trade; international production, international finance. Nevertheless, there is a fourth, one which is labor and migration because, of course, the way labor is organized, and the way labor moves across state borders is the main issue in international politics. It was even more of a making issue in the past than it is today. There is an unequal thematic focus.

There is also an unequal historical focus in terms of the way international political economy studies global capitalism. That is probably because the international political economy is conducted by political sciences today and is considered to be a subfield of political science at least in the American school. Political scientists mostly focus on the post-World War I period and in particular on the contemporary stage of the second globalization that began in the 1970s. Thus, they most look at contemporary development whereas the period before the Second World War is mostly studied by historians, although some of the leading scholars in international political economy have also produced studies on the pre-Second World War period.

Brief history of international political economy

Prehistory

The discipline is born in the 1970s, but of course, social scientists studying the way global capitalism functions did not wait until the 1970s. There were studies on the way the international political economy of global capitalism works from the very beginning of global capitalism itself. The term « political economy » dates back to the 17th century coined by Charles Gide who defines it as ‘the study of economic production, the supply and demand of goods and services and their relationship to laws and customs; government, the distribution of wealth and the wealth of nations including the budget’. The term stuck and then in the late 18th century the classical writers and political economy came along.

Why political economy? It comes from the ancient Greek economy (οἰκονομία / oikonomía), which is the way the household is organized, or the domestic order is organized. That refers to the economic aspect of things and political.

It is essential to understand that for authors until the late 19th century, there was no clear distinction, at least between politics and economics. It was two dimensions of the same issue that had to be understood, which were the way the social order evolved, its internal dynamics and the issues that it through.

The key authors in classical political economy, at least today, is Adam Smith who wrote An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776. There is also David Ricardo, who was an English banker in London and who developed the theory of comparative advantage, which has become the key concept in international trade theory and international economics. John Stuart Mill was a liberal philosopher later in the 1840s, 1850s, 1860s again English. Friedrich List as a Prussian German-speaking historical economist in the 1840s and 1850s wrote a book called the system of the national economy. Alexander Hamilton, the first Secretary of the Treasury of the United States, was a politician and produced a couple of reports for the early American republic that included some of the most famous statements about mercantilist policy and who is quite close to Frederic List.

Classical political economy was pre-disciplinary. What does that mean? It was a total social science that was not broken up into distinct disciplines, social science disciplines, which is the way contemporary academia and contemporary research is organized. These authors dealt with everything: the movement of prices, law, ethics; they tried to blend all of these issues into a single system of political philosophy. In Towards a Unified Social Science? Published in 2008, Cohen wrote ‘a unified social science closely linked to … moral philosophy’.

Why is has stopped in the 19th century? It happened in the 1870s with the so-called Marginalist Revolution that has given rise to classic neoclassical economics. Neoclassical economics is today the dominant approach to the study of economic.

The neoclassicals and the marginalists are, obviously, liberals. So there is a continuity between the liberal classical political economists and the marginalists. But, in terms of method, and terms of approach to the subject matter, there is a break, following a fundamental revolution taking place in 1870s.

In terms of what is of interest to us, it has to do with the way the marginalists claimed that political economy should be broken up into politics on the one hand, and economics on the other hand. They postulate that political economy should be replaced by economics and the study of the way the economy works. They attempt to determine the laws that govern economic activity, and it should be modelled on the physical sciences, and the link to political considerations should be severed.

Of course, the discipline became much more normative in the sense that if an economist were to study the way the economy works, the primary issued would be what is the best policy to follow according to the way the economy works?

Thus, in 1890 Alfred Marshall, who was the main English liberal economist in Cambridge and the late 19th century early 20th, published a key textbook called Principles of economics. In contrast, the main textbook so far was the one of Mills, Principles of political economy. From that point onwards, the disciplinary separation of the social sciences in academia ensued. From then onwards, there was sociology which is an empirical discipline developed by authors who went on workplaces, who went to look at the way family work, how the family structures worked and developed an empirically based discipline. There were the political scientists who looked mostly at the way political institutions and constitutional issues worked, and they were closer to constitutional law than political economy. And then, there were the economists, who started from axiomatic postulates and attempted to understand on the basis of theoretical hypothesis.

There was also the discipline of international relations that developed sometime in the early 20th century. The field of international relations was preoccupied with high politics. It was in close relation to the study of geopolitics from the 19th century, and it mostly dealt with diplomacy, war and security. International relations did not look at the way economic relations between states took place because it was considered a low politics. With international relations, there was something related to high contexts.

From the late 19th century, the idea that political economy does not distinguish between the political and the economic disappeared. Of course, it does not entirely disappear because some counter-tendencies and exceptions remained influent even after the Marginalist Revolution.

The first obvious exception is the Marxists with the project to continue the work of Carl Marx on the capital. They produced a theory on the way capitalism works as a total social reality and not just as an economic system but as a social order in and of itself.

The key authors here are Hilferding who wrote Finance capital in 1910, Rosa Luxemburg, who wrote a book about imperialism around the same time in 1912. There is also Lenin whose book on imperialism became the key textbook for many people with Lenin becoming a central figure in the debate about imperialism. For the Marxists, the key concept in understanding global capitalism was imperialism.

After the war, Marxist theory, to some extent, became subsumed under anti-colonial preoccupations and gave rise to the dependency theory. Dependency theory was derived from more Listian and Hamiltonian tendencies of political economy. Dependency theory was very much a Latin American phenomenon mostly because Latin America was the first segment of the old colonial world that became independent in the 19th century and so, theoretically, also was in the vanguard of the anti-colonial struggle.

So Marxism and dependency theory were one major exception to the way the study of economics and politics was organized in academia after the marginalist revolution.

There is also the institutionalist economics tendency in the United States. The first of them was Thorstein Veblen who wrote strings of books in the early 20th century and that later on gave rise to what is today institutional economics whose leading exponent is now David North. Veblen was very much a radical and is referred to as belonging to as the Progressive Era, while the late 19th century were the years of populism. Veblen was very much at theoretical exponent of those developments. His most famous book is about the leisure class.

Polanyi was an anthropologist who wrote a major work in 1944 quote in the great transformation which has a canonical status today in the discipline. It is a major work about how the classical liberal era of the late 19th century-early 20th century broke down in the interwar years. Polanyi being an anthropologist, did not share the premises of neoclassical economics and so produced works that were distinct from the work produced by the economist.

Albert Hirschmann wrote canonical books in political science about how change happens in organizations. He is very much an essential figure in institutional economics, in organization theory, in the international political economy today.

Ernst Hass, who wrote an early major work on European integration in the 1950s and then developed regional integration theory, was a political scientist. He looked at the processes of economic integration. Carl Deutsch wrote a significant study of the way political integration takes place in the 1950s. Those authors are neo-functionalist theorists of the European integration and inspired notably Robert Keohane in Joseph Nye.

Then there is one major exception with John Maynard Keynes, who was an economist, and a policymaker. Keynes developed the premises of what later became Keynesianism, which is a revised version of neoclassical economics in particular about the way the macroeconomy works.

However, Keynes spent a lot of his energy in the 1920s writing political tracts attacking the policies that were pursued by the major powers in Versailles and then in the 1920s in terms of their domestic and foreign economic policies. Keynes was the first one in the 1920s to say that the structures of the classical era should not be reproduced because there were shifts in domestic political economies.

Alongside Keynes, there is Jacob Viner who was an American economist in the US Treasury Department, and Charles Kindleberger, a historian who started his career as an advisor to the US Treasury in the 1940s. Kindleberger would then become one of the major administrators of the Marshall Plan, the plan that the United States came up with to reconstruct Western Europe after the Second World War. Kindleberger is a very important figure in early international political because he wrote the classical analysis of why the global capitalism broke down in the 1930s and then he came up with the first major global theory in international political theory that structured the debate.

BIRTH

Why was international political economy born in the early 1970s? The first thing is the historical context of the early seventies which highlighted the accent to which the structure of the international economy could not be understood without reference to international politics.

The Bretton Woods system was fracturing. There was a dollar crisis in 1968–1971, which saw the collapse of the international monetary system in 1971–1973. There were the oil shocks of 1973 and 1978. There was also a revival of Western Europe in Japan, and there was the interference of growing international economic flows in particular capital flows with domestic policies particular after the Bretton Woods monetary system broke down.

That context led scholars, in economic and political science discipline but also from history economic to attempt to bridge the gap between international politics and international economics. They saw themselves as intellectual entrepreneurs who wanted to create something new.

The discipline was born independently at the same time both in the United Kingdom and the United States. Of course, the developments in the United States are more relevant and also the course here at the University of Geneva is much more aligned on development in the American trends of international political economy.

In the United States, two scholars were instrumental. Those were Robert Keohane and Joseph Nye, the author of the concept of soft power from the early 1990s. They are political scientists, who were influenced by the functionalists and took over the journal International Organization in the early 1970s and shifted its focus away from the study of international organizations to the study of international political economy. They organized two key conferences, and specifically, that dealt with world politics and the concept of interdependence. After 1975, International Organization becomes the main venue for international political economy in the United States. International political economy is more or less identified with the journal to the extent that some people refer to as the American School as the International Organization School.

Pretty much at the same time in the United Kingdom. Susan Strange who was a professor of international relations in the London School of Economics wrote Mutual Neglect in 1970 which was a kind of manifesto calling for international economists and international political scientists to work together and to try and bridge the gap between the two disciplines. EVOLUTION How those two schools developed? Murphy and Nelson in xxxx published in 2001 refer to the development of the international political economy as a tale of two heterodoxies. Why heterodoxy? Because international was heterodox in relation, both to mainstream economic and to mainstream political science.

Despite that, in recent years, over the last two decades, more or less, the American international political economy has tried to mimic the methods of mainstream economics.

There are very broad divergences in the sense that American international political economy is very much state-centric and conceives of itself as a branch of international relations. International political economy is considered as the political economy of international relations in the United States. It is state-centric with the main preoccupation to determine how states behave in terms of international economics. American international political economy is suspicious of normative judgements. It is more preoccupied with explaining how the system works rather than with criticizing the way the system works and prescribing alternative ways in which the system should work. It has tried since the mid-1980s more or less to mimic the positivist and quantitative bias that is a methodological hallmark of mainstream political science in particular mainstream economics, and neoclassical economics.

If you read Benjamin Cohen who was one of the major characters in developments of international political economy from the early 1970s, he explained this by saying that it is because, from the mid-1980s, international political economy authors wanted to enjoy the same kind of prestige. So they try to mimic their methods their methodologies in order to advance their careers.

British international political economy is the opposite on pretty much every score. British international political economy refers to itself as the global political economy, to begin with, and not the international political economy most of the time. Again because global and not international because it is not state-centre. It is very much preoccupied with the erosion, the place that the state occupies within the international system and the rise of importance of non-state actors in the international system works.

British international political economy is also the home for contemporaries. British international political economy is a broad church in terms of methods and in terms of schools of thoughts. It is methodologically and thematically eclectic, and it looks at all kinds of issues with our drawing limits. British international political economy does not consider itself as a branch of international relations. Thus, in many places in the United Kingdom, international political economy is stored into departments that do not teach international relations. Moreover, British international political economy has a much more ambitious agenda in the sense that it introduced the concept of globalization but also approaches such environmental culture and feminist political economy.

Old vs new international political economy

American international political economy can be split up into the old and the new international political economy. The old international political economy based itself on methodologically loose attempts and holistic understandings of the international political economy. From that, the old international political economy of the 1970s gradually moved towards a more positivist and behavioralist direction. From the mid-1980s, international political economy became mainly concerned with positivist explorations of the individual dimensions of the system or with what some authors refer to as Mertonian middle-range theory. There is also a shift from qualitative to quantitative methodologies.

The primary debate in the old international political economy was the debate about complex interdependence, hegemonic stability theory and hegemonic decline. There was a major debate about whether the United States was in hegemonic decline in the late 1970s and 1980s, and another one about international organizations and the governance of the global system. The main focus of the discipline was the international level.

The main aspects of the new international political economy focus on the domestic sources of foreign economic policy. In contrast, the new international political economy attempts to determine the relationships between key individuals, political, and economic variables in the system.

Keohane, who was the founder of the old international political economy, in 2009 in the article X sustained attention to issues of structural power and the synthetic interpretation of change. There are debates within the American international political economy itself about which direction the discipline should take.

Opening economy politics is the name given by contemporary practitioners of American international political economy to their approach. The main idea is that today international political economy tries to determine the relationships between three distinct variables, namely domestic interests, domestic and international institutions, and international bargaining between states. For contemporaries, the combination of those three variables determined the way the international political economy functions.

The key people in the old international political economy were Robert Keohane, a political scientist and neoliberal institutionalist. There is also Stephen Krasner more a neorealist. Peter Katzenstein was credited with introducing the issues of domestic variables and ideational variables into the study of international political economy in the early 1980s. There is Charles Kindleberger and also Robert Gilpin who wrote a string of books that became classic.

Americans are almost exclusively in international relations, and most come from Ivy League universities. Furthermore, it is very much a group of people who are associated with a legit university in the United States. They are very close to policymaking circles as well, whereas actors in the British international political economy come from all over the place. Two institutions are particularly important in the field of international political economy: one is the London School of Economics obviously, and the other one is the is the University of Warwick. Authors in British international economy come from different horizons. There are also the Canadians who try to bridge the gap between the Americans the British.

This illustration shows the way international relations as a discipline has developed since the Second World War. We can see how gradually since the 1970s and the emergence of international political economy, there is a decline of neoliberalism.

Since the 1970s there has been a debate between the rationalists and the constructivists. In the 1990s there is the emergence of the constructivist school of thought which in by contradictions to the rationalists posits that ideas have an independent influence on the way processes are now coming in international relations happen. The new realists, the new Marxists, the constructivists try to identify the independent influence of ideas, norms, and how it influences the way the international system works.