Section 1. International political economy
International political economy
Guns vs butter is a metaphor used to describe a trade off between military
spending and spending on civilian welfare. Opportunity costs are the utility of
options used as the result of making a decisions. War economy are the patterns
of production for the purposes of war making. Economic welfare is the inane
disturbance of an adversary's economy to diminish its power.
The concept of guns vs. butter is a common metaphor for the national production
possibility frontier. As societies, we can choose between two types of goods:
guns (defense) and butter (civilian). For any amount of butter produced, we
sacrifice a certain amount of guns, and vice versa. In IR we assume that both are
necessary, so the real choice for societies is what the balance will be between
the two. The metaphor becomes very important in wartime, because that is when
the trade-off becomes most noticeable. For example, in WWII Britain, families’
water and food were rationed so that resources could be directed toward the war.
Guns vs. butter is also useful in differentiating between economic liberalism,
economic nationalism and Marxism. For liberals, there is always a trade-off.
Butter should be chosen over guns because cooperation between countries is
boosted by increased trade and undermined by increased defense. For
nationalists, there is no dilemma between guns and butter. As sources of power,
both trade and defense should be employed strategically to ensure a nation’s
relative advantage. For Marxists, guns serve the needs of butter: the military-
industrial complex (the guns) represents the interests of the capitalists, who have
all the butter.
International political economy in IR
Important because it is our view of the role of the economy. Economic
liberalism is an approach to international political economy premised on the
belief efficiency creates growth and welfare. It is committed to the standard case
for international trade (Adam smith) and concerned with absolute rather than
relative gains. This approach also limits the role of the government (laissez-faire).
Economic nationalism is associated with realism. It is the view that wealth is a
source of power that international politics amounts to a competition for primacy
and that the economy's primary purpose is to contribute to state power. This
approach is more concerned with relative gains. This interdependent approach
will lead to vulnerability. Marxism sees the world economy as dominated by
capitalists who seek the maximum profit. Profit-seeking leads to overproduction ,
ultimately resulting in instability and systematic crisis. Lenin modified the original
Marxist theory to allow for imperialism as a means of delaying the ultimate crisis
In sum: Liberalism- minimal intervention
Nationalism- economy's purpose is to contribute to state power. One
compliments the other
Marxism- complete control
• Organizing and managing a market economy to receive the most economic
growth and individual welfare
• An individual will seek to acquire an bike give unit until a market equilibrium is
• Governments should not intervene, opportunity costs: to get something one
must give something up
1.Wealth is an absolute means to power
2.Power is essential as a means to retain wealth
3.Wealth and power Re each proper ultimate ends of national policy's
4.There is long run harmony between these ends
• The role of the market is to strengthen the state, and increase power
• They are not used together to create pace, infant the economy is the number
one source of conflict
• Political conflict arises from class struggle over wealth
• Economic growth will eventually lead t the highest state of capitalism, until it
1.Law of disproportionality: denial that supply and demand will always be in
balance, capitalists tend to go toward overproduction, crisis of
overproduction will become more and more severe
2.The law of concentration of capital: increased concentration of wealth in the
hands of few and growing impoverishment of many, this leads to the idea
of a revolution
3.The law of falling rate of profit: uneven development causes countries to go to
war with each other if a country has no incentive to invest in another
Trade and globalization 1
Adam smith- advantages of free trade, countries can enjoy absolute advantage
Ricardo- comparative advantage of free trade- when costs are lower and more
effective to pay instead of trade due to transaction costs, opportunity costs,
relative prices. Terms of trade are important for Ricardo because it looks at the
ratio of an export commodity to an import commodity and analyses the fairness.
(Raw materials vs. processed goods)
• Heckscher-ohlin theorem: a country has comparative advantage in producing
goods that make relatively intend use of countries realistically abundant
factor • Stolper-Samuelson theorem: owners of a relatively abundant facts of
production benefit from free trade, owners of scare production benefit from
protectionism (tariffs, subsidies, etc. subsidies: measured through free
trade, a sum of money that the government gives a company to keep the
prices low, dumping: a country sells products abroad in princes that are
artificially low; drive other competition companies out f business and then
raise their prices again)
The logic of PROTECTIONISM: becomes an outcome of an international
prisoner's dilemma because you do not know which countries are join got screw
you over so you put up barriers in order to avoid it.
• Realist theory: the dimension of power effects the behaviour of things; the
hegemon has a lot of power and effects the behaviour of our actors
• States prefer to avoid vulnerability n
• Protectionism is costly and small states cannot afford the costs of
protectionism therefore have to open up.
• Large states can choose to opt out of protectionism for the benefits of free
• Large states have the ability to enjoy free trade without compromising stability
• A hegemon enjoys comparative advantage
• Use its powers to force other countries away from protectionism and open up
• Hegemon will always say that they want free trade because it serves their own
Trade and globalization 2
Hegemons are top big to fail, they enjoy comparative advantage and therefore
benefit from free trade; they have the ability to set trade rules that benefit its
interests. They can use their powers to convince other countries to open up.
Kindleberger spiral: trying to measure e volume of world trade as the economic
crisis evolves. As time goes on, the level of trade goes down. Countries respond
by closing markers and imposing protectionism. This is ineffective because as
trade goes down so does manufacturing and so down implement therefore
Bretton woods: 44 nations met in 1944 to discuss how to rebuilt the structure of
the economic system after the war. IMF: stabilize the exchange rate between
countries. Solutions: world bank, general agreement on tariffs and trade (GATT)
Globalization: process by which nationality and geographic location became
increasingly irrelevant for economic activities.
• Serves state interests
• Institutional dimension
• Systematic factors: hegemonic interests, technology
Race to the bottom: in a globalized society, capital can exist and move to a more profitable location. Therefore, taxation, labour laws. Environment
regulations etc. can induce capital to move elsewhere. This is a socio-
economic concept that is argued to occur between countries, states, provinces or
territories as an outcome of globalization, free trade,neoliberalism or
economic deregulation. When competition becomes fierce between geographic
areas over a particular sector of trade and production, governments are given
increased incentive to cut business regulations, labor standards, environmental
laws and business taxes.
How far will integration go ?
Political trilemma: countries cannot simultaneously maintain all three (economic
integration, mass politics and a nation state)
• Economic integration+nation state= a Race to the bottom, Choose to liberalize
everything to maintain the national government, movement ofmcapitalmis
a treat toward government, we lose the option of mass politics
• Economic integration + mass politics= global federalism, loss of the nation
state will lead to a global government
• Nation state+mass politics= Bretton woods. We won't have as much economic
gain, limited economic integration, control on monetary movement.
When currencies collapse
We currently rely to much on the dollar and the euro and both are giving doubts
about their stability of the future. Look at the examples of 30s and 70s to avoid a
collapse however we do not have another currency to fall back on.
1930s: depression. Good played a significant role as countri used it as an
international monetary reserve. Interest rates rose, Roth slowed and us stock
markets collapsed. Led to English banks removing the gold standard and capital
was going out of countries rather than liquidation. Countries relied to heavily on
the two currencies without backup
1970s: Bretton wood was created, which was a new international monetary
system where currency values were fixed but it was against the dollar.
Institutions (GATT,IMF) were successful as they increased stability while
increasing growth in trade. There began to be doubts against the dollar, currents
floated against the dollar, however global trade actuAlly rose after the collapse
because institutions provided stability but us was not dependent on Bretton
Hegemonic stability theory: a hegemon naturally has an incentive to implement
free trade because they enjoy comparative advantage from trade. "Too big to
fail"-> stability and security are ensured for trade. The solution is to maintain
stability and secure confidence while helping those countries that are struggling
to increase the over all economic growth. North and South
Modernization Theory: there is a growing gap between developed and less
Industrialization> urbanization > rise of the middle class > democracy> growth.
This theory assumes that European model is universal, with minimal government
intervention and free trade. The idea that all states develop in the same way.
Assumes that the only idea of development is contemporary "modern" societies
and that all other nations will take the same party at some point from
industrialization to modernity. Walt Whitman Rostow.
The J-Curve of economic reform: the economy will get worse before it gets
better. Likely to lead to political measures in order to help settle the struggle.
Only those institutions strong enough are able to enjoy the benefits of reform.
Can Trade Liberalization Benefit Both Rich and Poor?
Trade Liberalization: lowering barriers, greater openness to competitive
markets and less artificial restrictions to trade, this increases economic growth
and prosperity because t can increase the quality of goods and the amount of
cheaper goods available, it generates new jobs and it increases peace since
higher levels of international trade is usually associated with lower levels of
hostility among trading nations.
Disadvantages of Free Trade: growing global instability, the distribution of wealth
both within and between states has increasingly grown unequal, and unfettered
global competition creased incensed pressure to abandon domestic social
policies, environmental regulations and human rights protection.
Free trade benefits both developed and developing countries according to
Charlton. It has increased American household income by lowering costs of
goods and services, it has increased wages and it is making more effective
American companies. If done right, free trade will help developing countries get
out of poverty and allow them to bargain on equal terms with developed
countries. Objective of US commercials: 1. foster economic prosperity, 2. protect
US political alliance campaign. Opposition to free trade according to Charlton is a
short sighted and does not look at the long term benefits of it. Free trade boosts
growth and provides meaningful employment. Economic liberalization will
ultimately lead to global development (NATIONALISM?)
FAIR TRADE: Stigilz - what is often practiced as free trade is not actually free trade. There are usually additional barriers on products being traded as "free". A
lot of the FTA that are established by the US are designed on the basis of US
economic interests and effects the development of developing countries. The
FTA set out by the Bush administration is not a free-trade agreement at all but is
designed to benefit US economic interest and the US keeps it subsidies which
they do not allow developing countries to have counter subsidies.
Free trade/ trade liberalization has made many people in developed and
developing countries worse off because they are over powered by the bigger
corporations and nations. There is a growing inequality in both developed and
developing countries. Americans loose their jobs to lower waged workers in
different countries. The standard economy theory does not say everyone will be
better off, it is just the winners, therefore the rich get richer and the poor, poorer.
Many countries that have increased their levels of trade growth like China, have
grown faster but countries did not liberalize, instead used protectionism because
they become vulnerable. Foreign banks only become interested in large
corporations than small local/ medium sized businesses. Protectionism is bad but
most countries economies developed with some form of protectionism.
Strategic Significance of Global Inequality
Priority is given to national interests and their influence on economic growth over
1.Poverty Trap: countries are too poor to sustain economic growth due to failure
to fulfill basic standards that would encourage new investments
2.State Bankruptcy: States inability to fulfill its current debts. This is typically
associated with foreign creditors, similar to a poverty trap.
3.Liquidity Crisis: reverse of capital flow
4.Transition Crisis: when political and economic regimes undergo a significant
International Regimes and Organizations
It had been proven that the more developed a country is, the nicer it is to live
there. The j-curve economic reforms are politically challenging especially when
political institutions are weak and legitimacy is low (due to a lack of democracy if
Weak institutions are the product of a variety of things: 1.Colonial legacy: no institutional infrastructure... No modern self rule tradition,
many places do not hold a nation state in a colonial legacy, traditional
authority structures;culture; geography. Instability leads to weak
institutions lead to instability (continuous cycle that is difficult to break)
2.Curse of natural resources: decline in manufacturing, high levels of
unemployment, and exports, government does not rely on taxation, until
there is stability, they are corrupt.
3.Geography and poverty trap: war leads to poverty; poverty leads to war...
Natural disasters, modernization theory
New international economic order: helps diminish gap between north and south.
We need economic intervention in the market forces in order to start imaginary in
a more just way (nationalism)
Dependency theory: alternative to modernization theory..development and
underdevelopment emerged simultaneously. Some nations are deflated and
some are underdeveloped, one feeds off the other. Dependency theory argues
that all countries are modern, even developing nations. They Re not behind in
time they just exist as a result of modernity. Developing nations are the way they
are because of the way they have been inserting into the world system. The
development of some depends on the exploitation of underdevelopment of
Institutions help increase cooperation, stability, prosperity, and emergence of
The false promise of international institutions
Institutions push states away from war and promote peace.
Liberal institutionalism:addresses how to prevent war. Economic and
environmental cooperation between states is more realistic than stat