University of Delhi

Gargi College

International Political Economy

DISCIPLINE SPECIFIC ELECTIVE
Under
Prof. Ragini Singh Ma'am
Submitted by - Rashi Thakur
Roll No. - 222895
Semester - V
Course - Political Science (Hons)
Date of Submission - 20th October, 2024
 Home Assignment - 1

Question - Elaborate the Liberal economy. What is the

difference between a National or Liberal economy.
Answer -
"The government has no money of its own.
It’s all your money."
— Margaret Thatcher, Former British Prime Minister
and key proponent of liberal economic principles.

In today's globalized world, liberal economies emphasize the power of free

markets, reduced government intervention, and individual entrepreneurship as
drivers of growth. The focus is on the privatization of industries, the promotion of
trade, and minimal regulation, allowing supply and demand to dictate the flow of
resources. At its core, a liberal economy celebrates competition and innovation,
viewing them as essential ingredients for national prosperity.

On the other hand, a national economy leans towards protectionism and state
involvement. While it prioritizes self-sufficiency and national interests, often
shielding local industries through tariffs and subsidies, it stands in contrast to
the liberal approach of open borders and deregulation. This fundamental
difference shapes the path each economy takes, with liberal economies seeking
global integration and national economies focusing on internal stability and
control.

This assignment delves into the principles of a liberal economy, contrasting it

with a national economy to explore the merits and challenges each framework
presents in a rapidly changing world
 1. Introduction
The concept of a "liberal economy" originates from classical liberalism,
philosophy that emphasizes personal freedom, limited government involvement, free
markets, and the protection of private property. In such an economy, resources are
allocated efficiently through market forces, with the government's role being minimal but
essential for enforcing laws, maintaining public order, and providing certain public goods
that markets may fail to deliver. Often associated with capitalism, the liberal economic
system believes that the most beneficial outcomes for society arise from the voluntary
and unrestricted exchange of goods, services, and ideas among individuals. This essay
offers a comprehensive exploration of the liberal economy, delving into its historical
background, key principles, benefits, criticisms, and current relevance.
"Laissez-faire" is an economic theory that advocates for minimal government
intervention in markets, allowing supply and demand to regulate the economy. Derived
from classical liberalism, it suggests that economies perform best when individuals are
free to pursue their own interests, resulting in efficient resource allocation and economic
growth. The French term "laissez-faire," meaning "let do" or "let go," implies that
markets are self-regulating and government interference disrupts natural economic
processes. The origins of laissez-faire can be traced back to Enlightenment thinkers of
the 18th century, particularly the Scottish economist Adam Smith. In his influential work
The Wealth of Nations (1776), Smith argued that individuals acting in their self-interest,
as if guided by an "invisible hand," would create wealth and drive innovation, ultimately
benefiting society. While Smith recognized some government responsibilities, such as
maintaining law and order and providing public goods, he advocated for minimal
government intervention in markets.

The philosophy of "economic liberalism," which gave rise to laissez-faire, was also
influenced by thinkers like John Locke and David Hume, who promoted individual liberty
and property rights. In the 19th century, classical economists such as David Ricardo
and John Stuart Mill expanded upon these ideas, emphasizing the importance of free
trade, competition, and limiting government intervention. They argued that the
government's role should be restricted to addressing market failures and protecting
individual rights, rather than regulating economic activity. This philosophy shaped
19th-century policies in Britain and other industrializing countries, where laissez-faire
economics influenced the reduction of trade barriers, privatization, and limited state
involvement in commerce. However, by the early 20th century, issues like economic
inequality, monopoly power, and financial instability led to critiques of laissez-faire,
resulting in the rise of Keynesian economics and a more active government role in
regulating economies. While laissez-faire and economic liberalism assert that free
markets yield the most efficient and beneficial outcomes for society, historical
experiences have demonstrated that unchecked markets can lead to inequality and
instability without some level of government oversight.
Orthodox Economic Liberals (OELs) are a faction within economic liberalism that firmly
adheres to the classical view of free markets and minimal government intervention.
Grounded in the principles of laissez-faire, OELs argue that markets, when left
unrestricted, optimize resource distribution, innovation, and growth. Their ideas are
based on the works of classical economists such as Adam Smith, David Ricardo, and
John Stuart Mill, who highlighted the efficiency of free markets, competition, and
individual enterprise.

2. Roots of the liberal Economy

The roots of the economic liberal perspective are deeply embedded in the intellectual and
political shifts that occurred in Europe during the 17th and 18th centuries. Liberalism, in its most basic
form, revolves around the concept of "liberty under the law." It places a strong emphasis on the
competitive yet constructive aspects of human nature, guided by reason rather than emotion. Unlike
mercantilism, which views human nature as inherently combative and distrustful, liberalism sees
individual self-interest as a driving force for societal progress.
One of the earliest advocates of this perspective was François Quesnay (1694-1774), who led the
Physiocrats, a group of French thinkers who developed early economic liberal ideas. The Physiocrats
believed that government interference in economic activities was harmful and that markets function best
when left alone. Their motto, laissez-faire, laissez-passer (let do, let pass), became a cornerstone of
classical economic liberalism. They argued that natural economic laws, like those governing supply and
demand, should be allowed to operate freely without government intervention. This philosophy had a
profound influence on Adam Smith (1723-1790), the Scottish economist whose work The Wealth of
Nations (1776) is considered foundational to modern economic thought. Smith shared the Physiocrats'
belief in the importance of limiting government intervention in the economy. He famously critiqued
mercantilism, which at the time was the dominant economic policy in Europe. Mercantilists believed that
national prosperity could only be achieved through the aggressive accumulation of wealth and resources
by the state, often through tariffs, monopolies, and strict regulations.
Smith, however, argued that true wealth came from productive activities like manufacturing and trade,
which were best managed by individuals acting in their own self-interest. His famous concept of the
"invisible hand" suggested that when individuals pursue their personal economic goals, they inadvertently
contribute to the overall good of society. He believed that individuals, by seeking their own security and
profit, would direct resources in the most efficient manner, benefiting the public without even intending to
Smith was writing at a time when Europe was transitioning from feudalism to capitalism, a new system of
economic organization that focused on private ownership and the free market. He offered the first
comprehensive analysis of capitalism, which prioritized individual entrepreneurship over state control. For
Smith, economic freedom—particularly the freedom to make rational choices in the marketplace—was
crucial for societal progress. He saw capitalism as a system that could harmonize individual self-interest
with collective welfare, provided that it operated within a framework of justice and the rule of law.
Smith's work laid the foundation for what would become known as classical economic liberalism, a school
of thought that further developed through the contributions of thinkers like David Ricardo, Friedrich Hayek,
and Milton Friedman. These economists all shared Smith's respect for the market as a mechanism for
efficiently allocating resources. They were also critical of excessive government intervention, fearing that
state control could stifle innovation and lead to inefficiencies.
For economic liberals, the state plays a limited but essential role in ensuring that markets function freely
and fairly. They believe that when individuals are allowed to compete in an open market, the competition
fosters innovation, efficiency, and overall societal improvement. This contrasts sharply with the
mercantilist belief that the state must actively shape economic outcomes to ensure national strength and
security.
And therefore, the roots of the economic liberal perspective lie in the rejection of mercantilist policies and
the embrace of individual liberty within the market. By advocating for minimal government intervention
and promoting the idea that rational self-interest leads to collective good, classical economic liberalism
laid the groundwork for modern capitalism. It remains a dominant influence on political economy today,
offering insights into the ways in which free markets can lead to prosperity and societal well-being.

3. Liberal Ideas And Policies and it's later

Transformation
The liberal ideas and policies that emerged during the 18th and 19th centuries marked a significant
transformation in political and economic thought, deeply influencing modern governance and global trade.
This intellectual movement was spearheaded by thinkers like Adam Smith, John Locke, and Thomas
Jefferson, whose ideas laid the foundation for classical liberalism, promoting both individual rights and
free markets.
At its core, liberalism emphasized the importance of human liberty, not only in the economic domain but
also in political life. Thinkers like Locke and Jefferson championed the concept of negative
rights—freedoms from state interference, such as protection from unlawful arrest—as well as positive
rights, including unalienable rights like freedom of speech and democratic participation. These ideas were
central to the formation of democratic institutions and were firmly embedded in foundational documents
like the U.S. Declaration of Independence and the Bill of Rights. The liberal idea that individuals should be
free to make choices in the marketplace was closely aligned with the belief that they should also enjoy
political freedoms. In this context, economic and political freedoms were seen as intertwined, with the
former reinforcing the latter.
Adam Smith, whose work represented the economic side of this transformation, was a strong advocate
for consumer freedom and the benefits of free markets. His writings in The Wealth of Nations (1776)
criticized the mercantilist policies that dominated the 18th century. Smith believed that government
restrictions—such as tariffs and monopolies—hindered economic progress. Instead, he argued that free
trade and open markets allowed for more efficient use of resources, enabling individuals and nations to
benefit mutually through competition and cooperation. Smith viewed international trade as inherently
beneficial, asserting that nations, like individuals, should engage in exchanges that provide the most
economic advantage. His famous statement, "What is prudence in the conduct of every family can scarce
be folly in that of a great kingdom," underscored his belief that the same principles governing personal
economic choices should apply to national economies.
One of the key transformations in liberal thought was its shift from purely domestic concerns to
international economic relations. Smith's support for free trade was expanded by economists like David
Ricardo, who made significant contributions to the theory of comparative advantage. Ricardo argued that
under a system of free trade, each nation should focus on producing goods in which it had a relative
advantage, thus maximizing global efficiency. For Ricardo, the pursuit of individual or national economic
interests naturally aligned with the global good. He saw free trade as a "positive-sum game," where all
participants could benefit, in contrast to mercantilism's "zero-sum game," where one nation’s gain came at
the expense of others.
Ricardo's opposition to Britain’s Corn Laws, which restricted agricultural imports, was a reflection of his
commitment to free trade. He believed these protectionist measures hindered economic growth and
impoverished consumers. His argument that free commerce stimulates industry, rewards innovation, and
increases production highlighted the efficiency that liberals prized, viewing it as essential to liberty and
prosperity.
This focus on free markets also had profound implications for international relations. Economic liberals
like Ricardo believed that open trade could foster peace among nations by creating interdependence. In
this vision, the mutual benefits derived from trade and commerce would weaken the need for conflict, as
nations became bound by economic ties rather than competition for resources. Ricardo suggested that
through free markets, the nations of the world could form a "universal society" of peaceful cooperation.
The liberal transformation in economic thought, therefore, shifted from a national focus to a global
perspective. It rejected the mercantilist notion that wealth was finite and must be hoarded by the state,
instead promoting the idea that wealth could be expanded through free competition and exchange. This
laid the groundwork for the modern capitalist system, which is built on principles of individual liberty, free
trade, and limited government interference.
Thus, liberal ideas and policies transformed the way people viewed economics and politics. The
emphasis on personal freedoms, both in the political sphere and in market exchanges, became central to
the liberal worldview. Moreover, the shift from mercantilist competition to the liberal vision of mutually
beneficial trade represented a significant change in how nations approached international relations. This
transformation continues to influence contemporary economic policies, particularly those that advocate for
globalization and open markets as pathways to peace and prosperity.

4. The resurgence of classical liberalism

In the late 1960s and 1970s was driven by a response to the perceived failures of Keynesianism,
particularly during the economic crises of the 1970s. President Nixon, along with other critics, opposed
the high costs of President Johnson's Great Society programs, emphasizing economic growth over
stability. The U.S. shift to a flexible exchange rate system in 1973 and the OPEC oil price hikes triggered
an economic recession, while Keynesian policies failed to resolve stagflation—a combination of low
economic growth and high inflation.
This environment allowed the ideas of Friedrich Hayek and Milton Friedman to gain traction. Hayek’s The
Road to Serfdom warned that government overreach in economic matters could lead to a loss of
individual freedom and a slippery slope towards socialism or authoritarianism. He believed that state
intervention, even in the name of economic security, would ultimately erode personal liberties. Hayek
argued that limiting government and relying on the free market were essential to preserving both
economic efficiency and personal freedom.
Milton Friedman expanded on these ideas in his book Capitalism and Freedom, where he stressed that
government’s role should be minimal, limited to actions that protect essential freedoms. He saw any
further expansion of government powers as a threat to individual liberty, equating it to authoritarian
regimes that suppress freedom for security. Friedman, like Hayek, returned to Adam Smith's classical
liberalism, advocating for a free, competitive market as the best way to preserve both liberty and
economic prosperity.
These ideas formed the basis of neoliberalism, a modern form of classical liberalism that emphasized
deregulation, privatization, and minimal government intervention in the economy. This shift influenced
political leaders like Margaret Thatcher in the UK and Ronald Reagan in the U.S. during the 1980s, who
adopted neoliberal policies to counteract the perceived failures of Keynesianism and restore economic
growth. This marked a significant return to the core principles of classical liberalism, emphasizing
individual freedom, limited government, and free-market capitalism.
 5. Reagan, Thatcher, And The Neoliberals
In the early 1980s, the classical economic liberal view of International Political Economy (IPE) reasserted
itself through a transformative movement known as neoliberalism, prominently championed by U.S.
President Ronald Reagan and British Prime Minister Margaret Thatcher. Their policies drew heavily on
the foundational ideas of classical economists like Adam Smith, Friedrich Hayek, and Milton Friedman,
marking a departure from the mixed economy models influenced by John Stuart Mill and John Maynard
Keynes. Thatcher's motto, "TINA"—"There Is No Alternative"—reflected the unwavering belief in
economic liberalism as the only viable path forward.
Neoliberalism prioritizes economic growth over stability, with Reagan advocating for "supply-side
economics." This approach posits that reducing taxes would stimulate economic activity by increasing the
money supply and generating demand. Under Reaganomics, the top income tax rate in the United States
was significantly reduced from 70% in 1980 to 33% by 1986. This period also saw extensive deregulation
across various sectors, including banking, energy, investment, and trade markets, promoting free trade as
a core principle.
Both leaders pushed for privatization, with industries such as telecommunications, airlines, and trucking
being sold to private entities, thereby fostering competition and allowing for market-driven pricing. In
Britain, Thatcher privatized public housing, while both she and Reagan rolled back welfare programs,
arguing that the state had grown too large and was untrustworthy. Neoliberals contended that government
interests often aligned with powerful special interests, while the market was viewed as a neutral
mechanism capable of redistributing income to the most efficient, innovative, and hardworking individuals.
This "trickle-down" approach suggested that even if income inequality increased, the benefits of economic
growth would eventually reach the broader population.
A fundamental tenet of Reagan and Thatcher's governance was the minimization of state intervention
across public policy domains, with the notable exception of maintaining a robust anticommunist security
stance. By the mid-1980s, the U.S. began promoting globalization, advocating for the global spread of
economic liberal principles as a means to enhance economic growth and promote democracy in nations
that integrated into this capitalist framework. The emphasis on unfettered markets promised to improve
production efficiency, facilitate technological advancement, and generate employment in response to
increased demand, with an expectation that such integration would also alleviate poverty in developing
countries.
The late 1980s witnessed the emergence of the "Washington Consensus," which endorsed economic
liberal policies and their links to democratic governance, championed by institutions like the General
Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF), and the World Bank. The
perceived success of laissez-faire policies in the U.S. and U.K., coupled with the collapse of communism
in Eastern Europe in 1990, inspired many leaders in rapidly growing developing economies in Southeast
Asia and Latin America to adopt more market-oriented strategies. This shift resulted in a widespread
move away from centralized state planning toward economic models that embraced liberalization and
free-market principles, further solidifying neoliberalism’s impact on the global economic landscape.

6. Neoliberalism and Globalization critique

The 1990s and 2000s marked a significant period in the history of neoliberalism and globalization, as the
optimism that had characterized the early adoption of these ideologies began to wane. Many attributed
the global economic recovery following the recession of the early 1990s to widespread policies of
deregulation and privatization, which had become the norm in various parts of the world. This era was
often seen as the triumph of neoliberalism, especially as the Clinton administration in the United States
continued to embrace these principles, negotiating significant free-trade agreements such as the North
American Free Trade Agreement (NAFTA) and aiding in the creation of the World Trade Organization
(WTO). Neoliberal capitalism and open markets were increasingly seen as integral to U.S. economic and
military interests, with countries in Central and Eastern Europe joining the European Union's single
market and nations like Mexico, India, and China implementing pro-market reforms.

However, by the mid-1990s, the tide began to turn against neoliberalism, with increasing criticism
emerging, particularly from anti-globalization activists. These groups accused neoliberal policies of
causing human rights violations, harming the environment, depriving poorer nations of effective
representation in international economic organizations, and facilitating exploitative labor practices in
developing countries. The "Battle of Seattle" in 1999 epitomized the growing discontent, with mass
protests reflecting widespread skepticism toward laissez-faire capitalism. Additionally, economic crises in
Mexico (1994), Russia (1996), and Southeast Asia (1997-1998) prompted many officials in developing
countries to reconsider the wisdom of deregulation and unrestricted capital flows.

Despite these criticisms and the apparent failures of neoliberalism to deliver a more peaceful
world—evidenced by conflicts in the former Soviet Union and unrest in "failed states" like Somalia and the
Democratic Republic of the Congo—support for globalization remained robust among Western
policymakers and business elites. By the mid-2000s, however, a growing number of public officials and
intellectuals began acknowledging the shortcomings of rapid, unregulated globalization. Many of these
critics did not oppose economic liberalism per se but advocated for better management of international
political economy.

Economist Joseph Stiglitz, a former chief economist of the World Bank and Nobel laureate, criticized the
policies of the International Monetary Fund (IMF) for making it challenging for developing nations to
escape debt and benefit from globalization. Similarly, economist Dani Rodrik argued that excessive
economic integration and unfettered capital flows posed a threat to democratic governance, asserting that
markets must be "embedded" within national contexts to function effectively and maintain legitimacy.
Even proponents of globalization began to voice concerns. In his influential book The World Is Flat
(2005), Thomas Friedman acknowledged the opportunities presented by open markets but also
highlighted issues such as environmental degradation. He argued for government intervention to promote
renewable energy and improve environmental standards, suggesting that a temporary authoritarian
approach might be necessary to implement effective policies before reverting to democratic governance.

Critics of neoliberal globalization also emerged from within the development economics community.
William Easterly, a former World Bank economist, condemned Western institutions for imposing
ineffective market-based policies on impoverished countries lacking the requisite social and political
frameworks. He argued that these nations should be allowed to develop their own institutions to facilitate
market function, even advocating for protective measures and innovative non-governmental organizations
(NGOs). Paul Collier, another economist, recognized globalization's potential to create opportunities for
billions but also criticized it for leaving a significant population trapped in poverty due to various obstacles,
including civil conflicts and governance issues. He suggested that state intervention, including military
support in failed states and temporary trade protections, might be necessary to help these nations
overcome their challenges.

By the mid-2000s, a coalition of economic liberal scholars and anti-globalization activists began to
converge around the notion that the global economy required improved regulation and governance. This
emerging consensus recognized that markets must be embedded in social and political institutions to
maintain legitimacy and address fundamental human issues. The failure of unfettered global markets to
assist the world's poorest populations and the environmental degradation they caused raised alarms
about the long-term sustainability of neoliberal policies. The escalating issues would ultimately culminate
in the global financial crisis of 2007, leading policymakers to realize that mere globalization or piecemeal
reforms would not suffice to rectify the contradictions inherent in neoliberalism.

7. Keynesian vs. Liberal Economic Models

The economic theories of John Maynard Keynes and classical liberal economists present contrasting
perspectives on how to manage economies, particularly during times of crisis. Keynes is best known for
his pivotal role in reconstructing Western Europe after World War II and for shaping the postwar
international economic order, primarily through the establishment of the International Monetary Fund
(IMF) and the World Bank at the Bretton Woods Conference in 1944, along with the General Agreement
on Tariffs and Trade (GATT) in 1947.

Aspect Keynesian Economics Model Liberal Economic Model

Role of Emphasizes the active Government Advocate the minimal government

Government intervention during economic downturns intervention in the economy

Market Argues that invisible hand cannot Posits that the market, driven by the
functioning resolve all the economic issues individual self interest, is the best
particularly in recession. mechanism for resource allocation.

Government Believes that government spending can Contends that government

Spending stimulate demand and lead to recovery. intervention leads to distortions and
inefficiencies.

Economic Supports a proactive role for the state to Suggests that the state should focus
Management smooth out business cycles and ensure on maintaining law and order and
full employment. protecting property rights.

InternationaI Advocates for a liberal international Emphasizes free trade with minimal
Economic system but acknowledges the need for state involvement , promoting the
System state intervention to stabilize self-regulating nature of markets.
economies.

Embedded Proposes a model where internationa I Rejects the need for such protective
Liberalism markets are competitive , but states can measures, believing that market
implement protective policies. competition should prevail.

Historical Associated with the postwar "golden Rooted in classical liberalism, with
Context age" of economic growth, particularly in foundations laid by thinkers like Adam
industrialized nations. Smith, Hayek, and Friedman.

Philosophical Views the economy as a tool to improve Emphasizes individual liberty and
Foundation societal welfare and prevent ideologies economic freedom, cautioning against
like fascism. excessive government power.

Perception of Sees the state as a necessary actor in Warns that too much government
State Power promoting economic stability and control can lead to totalitariani sm and
addressing social inequalities. undermine individual freedoms.
In summary, Keynesian and liberal economic models represent fundamentally different approaches to
economic management. Keynesianism advocates for active government intervention to stabilize
economies and promote growth, particularly during crises, while classical liberalism emphasizes minimal
state involvement and the power of free markets. Both frameworks have shaped the development of
international economic policy, particularly in the aftermath of World War II, leading to ongoing debates
about the appropriate balance between state intervention and market freedom in addressing economic
challenges. Keynes's vision of a moral economy that prioritizes social welfare contrasts sharply with the
more individualistic and market-centric view of classical liberalism, highlighting the broader ideological
tensions that continue to influence economic thought today.

8. Financial Crises and State Intervention

In retrospect, it is clear that in the lead-up to major financial crises, particularly in countries with capital
deficits such as the United States and parts of the European Union, banks and investment firms were
willing to take on excessive risks. This behavior was fueled by an environment of deregulation and
free-market capitalism, often referred to as "wildcat" capitalism. High-yield investments allowed initial
investors to reap large profits, while the risks were passed on to new investors and mortgage holders.
These practices encouraged and institutionalized risky behavior, leading to an unsustainable financial
bubble.

Before the financial crisis, many U.S. and British officials supported a laissez-faire approach to economic
regulation, believing that the markets would regulate themselves. This hands-off attitude allowed financial
institutions to operate with little oversight, which, while profitable in the short term, ultimately led to
instability. When the crisis hit, governments had no choice but to intervene. State officials around the
world, including U.S. Presidents Bush and Obama,recognized the gravity of the situation and took drastic
action to bail out banks and financial institutions. These interventions were not aimed at saving the
executives responsible for reckless practices, but rather to stabilize the financial system and prevent
further economic collapse.

The debate over state intervention in financial crises continues to revolve around who should take
responsibility for bailing out failing institutions and how much money should be allocated. Many questions
remain: How did financial institutions accumulate so much risk? Why did neoliberal policies, which had
been widely accepted and considered scientifically sound, fail to prevent such crises? While neoliberal
ideas had promoted free-market principles, the financial crisis highlighted the need for state intervention
to correct market failures and restore stability.

This period underscored the complex relationship between globalization, neoliberalism, and financial
crises, suggesting that markets, left unchecked, can create systemic risks that require government
intervention to resolve

9. Mercantilist : History and Philosophy

Mercantilism was a dominant economic theory and practice in Europe from the 16th to the 18th centuries,
coinciding with the age of exploration and colonization. It developed as powerful nation-states such as
Spain, Portugal, England, France, and the Netherlands sought to strengthen their economies and political
influence by controlling trade and accumulating wealth. The central aim of mercantilism was to achieve a
positive balance of trade, where exports exceeded imports, generating surpluses in the form of precious
metals like gold and silver. Colonization played a critical role in this process, as colonies were vital
sources of raw materials and markets for European goods.

In the 17th century, mercantilism reached its height, marked by colonial empires and strict trade
regulations like England’s Navigation Acts, which ensured that wealth from the colonies flowed back to
the mother country. State-chartered monopolies, such as the British East India Company, were also key
players, controlling trade and securing resources. However, by the 18th century, mercantilism began to
face criticism from economic thinkers like Adam Smith, whose ideas of free markets and competition laid
the groundwork for the decline of mercantilism and the rise of capitalism.

Charles Tilly's analysis of mercantilism highlighted its role in state formation and the consolidation of
power in early modern Europe. Tilly’s ideas of capital and coercion align closely with mercantilist
practices, where states used regulated trade and tariffs to accumulate wealth, financing military
campaigns and maintaining stability. For Tilly, mercantilism was not solely about economic gain but also a
strategic tool for enhancing political power. His famous assertion that "war made the state, and the state
made war" emphasizes how states used mercantilist wealth to bolster military strength and control.

Kenneth Pomeranz offered a global perspective on mercantilism, noting its role in creating economic
divergence between Europe and regions like China. Europe’s access to New World resources, facilitated
by mercantilist policies, allowed for economic growth that surpassed the continent's ecological limits. The
influx of silver from the Americas provided liquidity for trade and military expansion, enabling Europe to
outpace other regions in development. Additionally, mercantilist strategies focused on extracting
agricultural resources from colonies to support European industry, contributing to global economic
inequalities.

Steven Topik highlighted mercantilism as an early form of globalization, fostering global trade networks
and control over valuable commodities like sugar and cotton. While mercantilism prioritized national
interests and monopolies, it laid the foundation for interconnected markets, eventually transitioning to free
trade ideologies in the 19th century as nations saw the benefits of competition.

● Philosophy of Mercantilism - At the heart of mercantilism is the belief that the economy is
a zero-sum game, where one nation’s gain is another’s loss. Mercantilists believed that
states should control economic activity to maximize national wealth, primarily through a
favorable balance of trade. They viewed wealth in the form of precious metals, especially
gold and silver, as finite, and therefore, states should hoard as much of it as possible.
This often led to protectionist policies aimed at shielding domestic industries from foreign
competition and maximizing exports.
● Mercantilism also emphasized the role of the government in regulating the economy.
States imposed heavy trade restrictions, tariffs, and subsidies to direct economic activity
and ensure national wealth. Governments would often establish monopolies over certain
industries to control production and profits. In international trade, mercantilism promoted
the idea that one nation could only prosper at the expense of others, leading to intense
competition between states.
● Influence on Modern Policies - Though mercantilism has been largely replaced by
economic liberalism and capitalism, elements of its philosophy still persist in modern
economic policies. Protectionist or nationalist trade policies, such as tariffs, import
restrictions, and subsidies to domestic industries, are rooted in mercantilist thinking.
These practices are seen in modern trade wars, where nations prioritize domestic
production over global cooperation.In contrast, economic liberalism, which emerged as a
 response to mercantilism, emphasizes free trade, individual freedom, and the idea that
wealth is expandable through productive labor and innovation. While economic liberalism
advocates for global cooperation and mutual benefit, mercantilism remains focused on
state control, protectionism, and the accumulation of finite wealth, viewing international
trade as a competitive struggle where only one nation can come out ahead.

10. Neomercantilism and the Global Economy

Neomercantilism is a modern adaptation of traditional mercantilist economic policies, which emphasize
state control over economic activity, protectionism, and the pursuit of trade surpluses to ensure national
economic strength. In the context of today’s global economy, neomercantilist policies have emerged in
response to globalization, economic competition, and the challenges posed by free trade.
Neomercantilism reflects a strategic approach where governments intervene in markets to enhance their
nation’s competitiveness and protect key industries from foreign competition, drawing from principles that
shaped early modern mercantilism.

- Characteristics of Neomercantilism
Unlike classical mercantilism, which focused on accumulating gold and silver, neomercantilism
emphasizes building up national wealth through trade surpluses, controlling key industries, and
safeguarding domestic markets. A hallmark of neomercantilist strategy is the implementation of
protectionist policies, such as tariffs, import quotas, and subsidies for domestic industries, to
prevent foreign goods from overwhelming local markets. Governments may also impose
restrictions on foreign investment or encourage national champions—large firms or industries
considered vital to the economy.In this modern form, the state plays an active role in the economy
by supporting domestic industries through favorable regulations and policies, while discouraging
imports and promoting exports. Currency manipulation, where countries deliberately devalue their
currency to make exports cheaper and imports more expensive, is another feature of
neomercantilism seen in some economies today.

- Neomercantilism in the Global Economy

In the global economy, neomercantilism has become more prominent in response to the rise of
emerging economies, growing inequality, and the volatility of global trade networks. For example,
China is often cited as an example of a neomercantilist state due to its heavy reliance on
state-directed industrial policy, export-driven growth, and the protection of key industries through
government subsidies and trade barriers. China's Belt and Road Initiative, which seeks to expand
its economic influence through infrastructure investments in other countries, also reflects a
neomercantilist approach to expanding global market dominance.
Similarly, the United States, under various administrations, has also adopted neomercantilist
policies, particularly during trade disputes with countries like China, Mexico, and Canada. Tariffs,
trade restrictions, and policies aimed at reshoring manufacturing jobs reflect a shift away from
liberal trade ideals toward a more protectionist, neomercantilist stance. These measures often
focus on defending domestic industries and reducing dependence on foreign goods, signaling the
reemergence of state-controlled trade in an interconnected global economy.

- Impact of Neomercantilism
Neomercantilism has profound implications for the global economy. While it can stimulate
domestic production and shield key industries from foreign competition, it also introduces trade
tensions and protectionist rivalries that can disrupt global supply chains. The U.S.-China trade
war, for example, saw both countries imposing tariffs on each other’s goods, affecting global
 markets and slowing economic growth. The rise of neomercantilism also challenges the
foundations of free trade and global economic cooperation, as countries prioritize national
interests over multilateral agreements.
Additionally, neomercantilist policies can contribute to global economic imbalances. By focusing
on export-driven growth and limiting imports, countries like China and Germany have developed
large trade surpluses, while countries with trade deficits, such as the U.S., face economic
pressures. This imbalance can fuel resentment and lead to further protectionist policies,
potentially destabilizing global markets.

- Neomercantilism vs. Economic Liberalism-

Neomercantilism contrasts sharply with economic liberalism, which promotes free trade, open
markets, and minimal government intervention. Economic liberalism holds that countries benefit
from specialization and comparative advantage, with trade generating mutual gains. In contrast,
neomercantilism views international trade as a zero-sum game, where one nation’s gain is
another’s loss, and therefore prioritizes national economic security over global cooperation.
While neomercantilism seeks to control and direct the economy to ensure national
competitiveness, economic liberalism argues that markets should regulate themselves, allowing
for efficient allocation of resources and innovation driven by competition.

In today’s global economy, neomercantilism reflects a strategic retreat from liberal trade policies toward
state intervention and protectionism. Countries adopting neomercantilist policies aim to safeguard their
industries, secure trade surpluses, and strengthen their national economies amid rising global
competition. While these policies can provide short-term economic advantages, they also risk creating
trade conflicts and undermining the principles of open markets and international cooperation, which have
shaped global economic growth for decades.

11. Liberal vs. National Economy

The liberal and nationalist economic models represent two distinct approaches to economic theory and
policy, each driven by different views on trade, government intervention, and the role of the state in
economic affairs. Both models have shaped global economic thought, but they diverge significantly in
their approach to international trade, market regulation, and national interests.

1. Liberal Economy - A liberal economy, rooted in the principles of classical liberalism, promotes
minimal government intervention in markets and the free exchange of goods, services, and
capital across borders. The primary goal of a liberal economy is to foster individual freedom,
economic efficiency, and wealth creation through open competition and free trade. Central to this
model is the idea that markets, when left to function freely, are the most efficient mechanisms for
allocating resources and generating wealth. Key aspects of a liberal economy include:
- Free Trade and Globalization: Liberal economies advocate for open markets, free from
protectionist barriers like tariffs and quotas. The belief is that free trade allows countries
to specialize in industries where they have a comparative advantage, resulting in mutual
benefits through trade and greater global economic cooperation.
- Limited Government Intervention: In a liberal economy, the government's role is limited
to enforcing property rights, ensuring market fairness, and providing public goods like
infrastructure, education, and defense. Regulation is minimal, as it is believed that
excessive state interference distorts the natural functioning of markets.
- Private Property and Capitalism: Liberal economies prioritize private ownership of
property and capital, with an emphasis on individual entrepreneurship and innovation.
 This fosters competition, which is seen as a driving force behind economic progress and
wealth creation.
- Economic Interdependence: Liberal economies encourage international cooperation and
integration, believing that interconnected markets reduce the likelihood of conflict and
promote peace. Economic interdependence through trade and investment ties countries
together, making war less likely due to shared economic interests.

2. National Economy- In contrast, a nationalist economy focuses on prioritizing the interests of the
nation-state, often emphasizing self-sufficiency, protectionism, and state control over key
industries. Nationalist economic policies are designed to strengthen the domestic economy,
reduce reliance on foreign goods and capital, and promote national sovereignty in economic
affairs. Key characteristics of a nationalist economy include:
- Protectionism: Nationalist economies often employ protectionist measures such as tariffs,
quotas, and subsidies to shield domestic industries from foreign competition. The goal is
to protect jobs, promote local production, and reduce trade deficits by limiting imports and
encouraging exports.
- Economic Sovereignty: Nationalist economies seek to minimize dependence on foreign
markets and investments, aiming for greater self-sufficiency. This can involve state
support for strategic industries, such as energy, agriculture, and manufacturing, to ensure
national security and economic stability.
- State Intervention: In a nationalist economy, the state plays an active role in regulating
and guiding economic activity. This can include state ownership or control of key
industries, centralized planning, or subsidies for domestic businesses to compete
globally.
- Focus on Domestic Interests: Nationalist economies prioritize the well-being of the
nation’s citizens, often placing national interests above global integration. Policies are
designed to benefit domestic producers, workers, and consumers, even if it comes at the
expense of international cooperation or trade.

Nationalist Liberal economy Nationalist Economy

Trade and embraces globalization and free economy prioritizes protectionism and
Globalization trade,view global trade as a win-win economic independence, see it as a
scenario zero-sum game, where one country’s
gain can be another’s loss.

Government Role limited government involvement in favor strong state intervention, with
markets, trusting that the forces of the government actively shaping and
supply and demand will regulate controlling economic outcomes to
economic activity. benefit the nation.

Global vs. National seeks economic interdependence focus on global cooperation and
Focus integration.
12. Criticism of the Liberal Economy
While the liberal economy, based on free-market principles, has driven significant
economic growth and innovation, it has faced increasing criticism, particularly in the
wake of financial crises such as the 2008 global recession. The criticisms highlight the
shortcomings of relying too heavily on the market’s self-correcting abilities and the flaws
in the assumptions underlying free-market ideology.
1. Market Failures: As noted by Keynes and later evidenced during the Great
Depression, markets are prone to failure, particularly during economic crises.
The assumption that markets will always reach equilibrium ignores the reality of
economic uncertainties and disequilibrium that are often present in real-world
markets. The 2008 financial crisis further demonstrated that deregulated financial
markets could lead to asset bubbles and severe economic downturns.
2. Over-Reliance on Mathematical Models: Economists and policymakers have
relied on abstract models, such as the Efficient Market Hypothesis, which
suggests that markets incorporate all relevant information into prices. These
models often assume a level of market rationality and equilibrium that does not
align with the complexities of real economies. As noted by The Economist, these
models failed to account for real-world uncertainties such as changing
preferences, technological advancements, and resource constraints, leading to
policies that underestimated risks.
3. Groupthink and Entrenched Ideologies: Behavioral economists like Robert
Shiller have suggested that groupthink, particularly within financial and political
elites, has contributed to the entrenchment of free-market ideologies. Despite
evidence of market failures, many policymakers and business leaders remain
committed to laissez-faire principles, partly due to shared beliefs and a
reluctance to question the established system.
4. Focus on Economic Growth at the Expense of Social Stability: Free-market
models prioritize economic growth and efficiency but often overlook issues
related to social stability, income inequality, and long-term sustainability. Policies
focused on maximizing profits and growth can lead to short-term gains for some,
but often exacerbate social inequality and environmental degradation.
Alternatives, such as higher taxes for social programs or slower growth for
sustainability, are often seen as politically unpalatable.
5. . Political and Economic Power Concentration: The liberal economy has also
been criticized for contributing to the concentration of wealth and power in the
hands of a few. Scholars like Simon Johnson and Chrystia Freeland describe the
rise of a "financial oligarchy" or "plutocracy"—a class of wealthy individuals and
institutions that wield disproportionate influence over political and economic
 policies. This elite group, through lobbying and financial influence, has promoted
policies that benefit their interests, such as deregulation, tax breaks, and
government bail
Conclusion
A Liberal economy is grounded in the principles of economic liberalism, emphasizing free markets,
minimal government intervention, individual entrepreneurship, and competition. It advocates for
deregulation, private ownership, and international trade, believing that the forces of supply and demand
should determine prices and the allocation of resources. Governments in liberal economies play a limited
role, focusing on maintaining the rule of law, enforcing contracts, and ensuring a stable environment for
businesses to thrive. Classical liberal economists like Adam Smith argued that the "invisible hand" of the
market naturally leads to efficient outcomes and societal prosperity.
In contrast, a National economy (often associated with protectionism) prioritizes the interests of the
domestic economy over global competition. It tends to focus on self-sufficiency, protecting local industries
from international competition through tariffs, subsidies, and regulation. A national economy is concerned
with preserving jobs, safeguarding industries considered vital to national interests, and ensuring economic
independence from foreign influence. Governments may take a more active role in steering economic
policy, balancing free market forces with protective measures to strengthen internal markets.
Therefore, The fundamental distinction between a Liberal economy and a National economy lies in the
level of government intervention and the openness to global markets. While liberal economies prioritize
free trade and market-driven solutions, national economies often place greater emphasis on self-reliance
and protectionism. In practice, many countries adopt a hybrid approach, balancing liberal economic
policies with national interests to foster growth while safeguarding their industries. However, as global
integration deepens, the tension between these two economic philosophies continues to shape the
landscape of international economic policy. For a balanced economic future, governments must navigate
this tension by harmonizing the benefits of open markets with the need to protect their domestic economic
interests.

References
- Balaam, David N. and Bradford Dillman (2014), "Laissez-Faire: The Economic Liberal
Perspective", "Wealth and Power: The Mercantilist Perspective", and "Economic Determinism and
Exploitation: The Structuralist Perspective", in Introduction to International Political Economy, 6th
edition, Boston: Pearson, pp. 25-52:53-77, 78-100.

- Martinussen, John (1997), "Neo-Marxist Theories of Underdevelopment and Dependency", in

Society. State and Market: A guide to competing theories of development, London: Zed Books
Ltd., pp. 85-100.

- Gilpin, Robert (1987), "Three Ideologies of Political Economy", in The Political Economy of
International Relations, Princeton: Princeton University Press, pp. 25-64.