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Lecture

POL208Y1 Lecture Notes - John Maynard Keynes, Absolute Advantage, Corn Laws


Department
Political Science
Course Code
POL208Y1
Professor
Lilach Gilady

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- Economic Theory: free trade (absolute advantage) benefits all (Smith); comparative advantage
(Ricardo)
Winners and Losers: domestically (Stolper/Samuelson
under some economic assumptions (constant returns, perfect competition, equality of the
number of factors to the number of products)a rise in the relative price of a good will lead to a
rise in the return to that factor which is used most intensively in the production of the good, and
conversely, to a fall in the return to the other factor), International (Terms of trade), political
dynamics on who will support free trade and those who will want protectionism
- HistoryL framatic increase in international trade, Industrial Revolution, repeal of English Corn Law
- presence of a hegemon brings upon an increase in free trade because hegemon has interest in
maintaining free trade; pax Brittanica, and restored under pax Americana
- how power is distributed is very important; a very parsimonious theory
hegemon -> free trade, stability
no hegemony -> protectionism, lack of stability
structural variable (power) -> economic/political outcomes; a neorealist type of theory,
world system level of analysis (1st image of war)
Why hegemon and free trade? Hegemons are too big to fail, are not vulnerable to changes in
other areas or to make themselves vulnerable to free trade; are insulated from the negative
consequences associated with free trade
- are successful, have comparative advantage and would benefit from free trade
- hegemony suggests peace and stability, secure institutions and systems etc: beneficial for
trade
- will create rules and institutions to promote free trade because it benefits most from free
trade, would use coercive power to force people to open up and free trade; enforce a CC,
institutionalizing cooperation and enforcing it to make sure all countries don’t make prisoners
dilemma calculations, prevent defection
- in time of crisis they can mediate, can prevent beggar thy neighbour policies, maintains harmony
by enforcing rules and provide assistance to maintain the system
- benefits from stability of the system, will be willing to pay to maintain the system -> provides a
public good by being the policeman of the economic system, benefits everyone though it pays to
benefit itself
- small countries have to be globalized; exposed to outside influence, and their markets are too
small that trade is done internationally though in absolute terms the US is the biggest trader (in
relative terms it has a huge market, so can engage in globalization but its not very integrated,
insulated vs. Ireland which was exposed to international shocks)
- Hegemonic Stability Theory: Evidence
- but a very static theory, doesn’t talk about dynamics, how it works in practice, role of institutions
-> weaknesses and limitations of theory
- worked from 1914-1945, 1945 onwards; period of decline and then growth
LESSONS FROM WW2:
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Great Depression: devastating, laissez faire and deflation does not work [governments trying to
balance budgets and did not invest in growth, more unemployment, social and political turmoil]
also imposed protectionism to protect own markets, decline in international trade because its
less jobs and more unemployment, less consumption
rise of extremist political movements; many disaffected people, led to another World War -> have
to make sure that these kinds of economic crisis never occur again! Hw to minimize that kind of
situation because there is a link between economics and politics, war ; must reconstruct system to
mitigate problem, stop Depressions from getting so bad
The Kindleberger Spiral: measure the volume of world trade as the GD evolved; goes lower and
lower as time went by, countries responded to crisis by closing own markets but this was not
helping anyone, leads to a deepening recession
Following WW2, the new engineering of system is to prevent such a spiral:
- meet together at Bretton Woods in the US to try and rebuild the structure of the
economic system to avoid Spiral and Depressions,
- want economy to provide a good foundation for peaceful relations
- main intellectuals are Harry White and John Maynard Keynes
- Keynes believed government had an active role to play in crisis, needs to pour money
into the market, believed institutions matter because
markets don’t run themselves and institutions need to run them (heart of the in. pol
economic system) ; 3 institutions to target a certain problem
and stabilize the system
IMF: stabilize the exchange rate between countries, must get permission and
governments cant just manipulate to impose cost on neighbours
every country must fund money into the Fund to bail out economies that are
experiencing crisis and people don’t want to lend it money;
lender of last resort, don’t think economically
IRBD: Reconstruction and Development ; World Bank - Europe is completely
decimated and needed world economy back, need to reconstruct the main engines of int. economy
globally (projects, development, reconstruction)
GATT - WORLD TRADE ORGANIZATION: tariffs and trade, about trade -> ITO failed and
so created this agreement, WTO in 1995
- together creates a stable system, a safety net when some kind of crisis reoccurs;
mainly tries to support trade because it is the most important
dynamic I post-conflict situation -> support international trade, growing markets
through investment and aid, low tariffs and stable e.r
- IMF last resort, US Marshall Plan, capital controls to alleviate trade-related
vulnerability and volatility: comes from am international effort, so governments don’t have
complete control, must accept some sort of vulnerability; allow countries to maintain capital
control, countries control financial markets and money is able to flow
Bretton Woords preotitizes trade, build in capital controls to keep us from total control; has a
political ability to maintain market; but capital controls alleviates trade related vulnerability and
volatility
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