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At the global level, the impact of the financial crisis of 2008, growth slow-downs in all major
industrialized countries of the world, the economic rise of China and India, and the
challenges of regulating international flows of people, goods, funds, and technology, have
fuelled an increasing interest in international political economy. The consequences and
challenges posed by the subsequent restructuring will have to be researched and studied
for years to come. The Political Economy degree program offers students these
opportunities by introducing you to this fascinating field.
Classical liberalism is a political philosophy which holds that the most important value is individual
liberty. Classical liberals believe that the utmost priority would be to maximise individual liberty,
while restricting the use of force and coercion (ie government) in order to achieve this. Classical
liberalism encompasses the social/economic/political)aspects, defining the basis and the role of
government (the legitimacy of a government is with the people, and governments should minimise
intervention and adhere to the rule of law), economics (many classical liberals would defend some
type of free market system as to maximise individual freedom in the economic sphere) and society
(mutual toleration, open discussion, freedom to act as long as nobody else is harmed). Famous
examples of classical liberals include Adam Smith and William Gladstone.
Neoliberalism is more about laissez faire economics, so economically it is very similar to classical
liberalism. Neoliberalism is like a modern take on classical liberalism; but it focuses on the markets.
This means it is about deregulation, ending protectionism, and freeing up the markets. While
classical liberalism is more of a political philosophy, neoliberalism bases its ideas on neoclassical
economics, so it is really a set of ideas for how a free market, as advocated by classical liberalism, can
be achieved and maintained. In addition, neoliberalism is quite a modern phenomenon, being
associated with economic ideas in the 19th/20th century proposing laissez faire economics.
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Difference Between
Liberalism and Neo-
liberalism
Understanding liberalism:
You might be more (or
less) liberal than you think
Categorized under Ideology | Difference Between Liberalism and
Neo-liberalism Understanding liberalism: You might be more (or
less) liberal than you think
Liber
alism vs Neo-liberalism
However, in the late 19th and early 20th century, liberalism morphed
from an individualistic philosophy to one that is more communal in
nature. Borrowing from John Stuart Mills utilitarian concept of
providing the greatest happiness for the greatest number, liberalism
sought to defend the common good namely a political and
economic system that maximized social progress for the group as a
whole, and not benefitting a certain portion of individuals. Franklin D.
Roosevelt best embodied this value with the New Deal in the 1930s.
This body of legislation produced a large
scale government infrastructure characterized by public works
projects, social welfare safety nets, and financial institution reforms
with a purpose to mitigate the effects of the rampant individualism
that is commonly associated with the 1929 stock market crash and
subsequent Great Depression.
MERCANTILISM
MERCANTILISM is one of the great whipping boys in the history of economics. The
school, which dominated European thought between the 16th and 18th centuries, is
now considered no more than a historical artefactand no self-respecting economist
would describe themselves as mercantilist. The dispatching of mercantilist doctrine is
one of the foundation stones of modern economics. Yet its defeat has been less total
than an introductory economics course might suggest.
At the heart of mercantilism is the view that maximising net exports is the best route to
national prosperity. Boiled to its essence mercantilism is bullionism: the idea that the
only true measure of a countrys wealth and success was the amount of gold that it had.
If one country had more gold than another, it was necessarily better off. This idea had
important consequences for economic policy. The best way of ensuring a countrys
prosperity was to make few imports and many exports, thereby generating a net inflow
of foreign exchange and maximising the countrys gold stocks.
Such ideas were attractive to some governments. Accumulating gold was thought to be
necessary for a strong, powerful state. Countries such as Britain implemented policies
which were designed to protect its traders and maximise income. The Navigation Acts,
which severely restricted the ability of other nations to trade between England and its
colonies, were one such example.
And there are some amusing (and possibly apocryphal) stories of bullionism in action.
During the Napoleonic Wars, the warring governments made few attempts to prevent
their foes from importing food (and thereby starving them). But they did try to make it
difficult for their opponent to export goods. Fewer exports would supposedly result in
economic chaos as gold supplies dwindled. Ensuring an absence of gold, rather than an
absence of grub, was perceived to be the most devastating way to grind down the
enemy.
But Mr Grampp argues that, on the whole, we should stop confusing mercantilism and
bullionism. Few mercantilists were slaves to the balance of payments. In fact, they were
alarmed by the idea of hoarding gold and silver. This is because many mercantilist
thinkers were most concerned with maximising employment. Nicholas Barbonwho
pioneered the fire insurance industry after the Great Fire of London in 1666wanted
money to be invested, not hoarded. As William Pettyarguably the first proper
economistargued, investment would help to improve labour productivity and increase
employment. And almost all mercantilists considered ways of bringing more people into
the labour force.
Mercantilism is thought to have begun its intellectual eclipse with the publication of
Adam Smiths "Wealth of Nations" in 1776. A simple interpretation of the economic
history suggests that Smiths ruthless advocacy for free markets was squarely opposed
to regulation-heavy mercantilist doctrine. But according to research by Lars Magnusson
of Uppsala University, Smiths contribution did not represent such a sharp break. The
father of economics was certainly concerned with the effects of some mercantilist
policies. He saw the damage that overweening government intervention could do. Smith
argued that the East India Company, a quasi-governmental organisation that managed
parts of India at the time, was responsible for creating the huge famine in Bengal in
1770. And he hated monopolies, arguing that greedy barons could earn wages or profit,
greatly above their natural rate. Smith also grumbled that legislators could use
mercantilist logic to justify stifling regulation.
Nicholas Phillipson, who recently wrote a biography of Smith, argues that the notion of
free markets was alien to the father of economics. Smith made it clear that
governments would always play a part in making marketsand could not conceive of a
market where the government did not play a crucial role. And in this sense, his
contribution does not represent such a sharp break from mercantilist thought. The
question was not whether, but how much, of a role the state would play.
Though most of the world's rich countries remain committed to free trade today,
mercantilist themes are often found in economic policy debates. China and Germany
are often envied for their trade surpluses or seen as economic models, and China
especially has very deliberately subsidised exports. President Barack Obama has made
a doubling of American exports a major policy goal, as part of his plan to help America
"win the future". This zero-sum way of looking at the global economy is less rooted in
the national greatness side of mercantilism than in the focus on full employment, at a
time when many rich economies are suffering from insufficient demand and high rates of
joblessness; it is thoroughly Keynesian, in other words. Early in the recovery some
economists gave a veneer of intellectual credibility to this perspective. Paul Krugman,
for instance, wrote of America's 2010 trade agreement with South Korea:
There is a case for freer trade it may make the world economy more efficient. But it does nothing
to increase demand.
And theres even an argument to the effect that increased trade reduces US employment in the
current context; if the jobs we gain are higher value-added per worker, while those we lose are lower
value-added, and spending stays the same, that means the same GDP but fewer jobs.
If you want a trade policy that helps employment, it has to be a policy that induces other countries to
run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-
creating; a deal with South Korea, not.
But importantly, the case for bullionism as a demand stimulus evaporated with a role for
bullion in monetary policy. The introduction of fiat money meant that balance-of-payment
goals were unnecessary to maintaining a particular monetary policy stance, since
central banks no longer needed an adequate hoard of gold to pump money into the
economy. The mercantilist temptation is a strong one, however, especially when growth
in the economic pie slows or stops altogether. More than two centuries after Smith's
landmark work, economics's foundational debate continues to resonate.
Mercantilism stands in contrast to the theory of free trade which argues countries
economic well-being can be best improved through reduction of tariffs and fair free
trade.
Mercantilism involves
Restrictions on imports tariff barriers, quotas or non-tariff barriers.
Accumulation of foreign currency reserves and gold and silver reserves. (known also as
bullionism) It was believed in the sixteenth / seventeenth century that the accumulation of gold
reserves (at expense of other countries) was the best way to increase the prosperity of a
country.
Granting of state monopolies to particular firms especially those associated with trade
and shipping.
Control of colonies, e.g. making colonies buy from Empire country and taking control of
colonies wealth.
Examples of mercantilism
England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
All colonial exports to Europe had to pass through English first and be re-exported to
Europe.
Under British Empire, India restricted in buying from domestic industries and were forced
to import salt from the UK. Protests against this salt tax, led to Salt tax revolt led by Gandhi.
In seventeenth Century France, the state promoted a controlled economy, with strict
regulations about the economy and labour markets
Rise of protectionist policies following the great depression. With countries seeking to
reduce imports and also reduce value of currency by leaving gold standard.
Some have accused China of mercantilism due to industrial policies which have led to
increase in investment and capacity, rise in FDI in China combined with policy of
undervaluation of currency. However, the extent of mercantilist policies are disputed See Is
China Mercantilist? NBER
Modern Mercantilism
In the modern world, mercantilism is sometimes associated with policies, such as.
Undervaluation of currency. e.g. government buying foreign currency assets to keep the
exchange rate undervalued and make exports more competitive. A criticism often levelled at
China.
Government subsidy of industry for unfair advantage. Again China has been accused of
offering too much subsidised investment for industry, leading to over supply of industries such
as steel meaning other countries struggle to compete.
Criticisms of Mercantilism
Adam Smith The Wealth of Nations (1776) argued for benefits of free trade and
criticised the inefficiency of monopoly.
Mercantilism is a philosophy of a zero sum game where people benefit at the expense
of others. It is not a philosophy for increasing global growth and reducing global problems. Also,
increasing other peoples wealth can lead to selfish benefits, e.g. growth of other countries,
increases markets for our exports. Trying to impoverish other countries will harm our own growth
and prosperity.
Mercantilism justified Empire building and the poverty of colonies to enrich the Empire
country.
Mercantilism leads to tit for tat policies high tariffs on imports leads to retaliation.
Growth of Globalisation and free trade during post-war period show possibilities from
opening markets and respecting other countries as equal players.
Tariffs in response to domestic subsidies. Supporters argue that since Chinas steel
is effectively subsidised leading to a glut in supply, it is necessary and fair to impose tariffs on
imports of Chinese steel to protect domestic producers from unfair competition. US tariffs on
imports of steel from China 266%. In Europe, tariffs are 13%.
Protection against dumping. If some countries have excess supply of goods, they can
sell at a very low price to get rid of the surplus. But, this can make domestic firms unprofitable.
Protectionism can be justified to protect against this dumping. Examples, include EEC dumping
excess agricultural production on world agricultural markets and Chinas dumping of steel.
Infant industry argument. For countries seeking to diversify their economy, tariffs may
be justified to try and develop new industries. When the industries have developed and benefit
from economies of scale, then the tariffs and protectionism can be dropped.
MARXISM
Marxism is an economic and social system based upon the political and economic theories of Karl
Marx and Friedrich Engels. While it would take veritably volumes to explain the full implications and
ramifications of the Marxist social and economic ideology, Marxism is summed up in the Encarta
Reference Library as a theory in which class struggle is a central element in the analysis of social
change in Western societies. Marxism is the antithesis of capitalism which is defined by Encarta
as an economic system based on the private ownership of the means of production and distribution
of goods, characterized by a free competitive market and motivation by profit. Marxism is the
system of socialism of which the dominant feature is public ownership of the means of production,
distribution, and exchange.
Under capitalism, the proletariat, the working class or the people, own only their capacity to work;
they have the ability only to sell their own labor. According to Marx a class is defined by the relations
of its members to the means of production. He proclaimed that history is the chronology of class
struggles, wars, and uprisings. Under capitalism, Marx continues, the workers, in order to support
their families are paid a bare minimum wage or salary. The worker is alienated because he has no
control over the labor or product which he produces. The capitalists sell the products produced by
the workers at a proportional value as related to the labor involved. Surplus value is the difference
between what the worker is paid and the price for which the product is sold.
An increasing immiseration of the proletariat occurs as the result of economic recessions; these
recessions result because the working class is unable to buy the full product of their labors and the
ruling capitalists do not consume all of the surplus value. A proletariat or socialist revolution must
occur, according to Marx, where the state (the means by which the ruling class forcibly maintains
rule over the other classes) is a dictatorship of the proletariat. Communism evolves from socialism
out of this progression: the socialist slogan is From each according to his ability, to each according
to his work. The communist slogan varies thusly: From each according to his ability, to each
according to his needs.
What were the Marxist views of religion? Because the worker under the capitalist regimes was
miserable and alienated, religious beliefs were sustained. Religion, according to Marx was the
response to the pain of being alive, the response to earthly suffering. In Towards a Critique of
Hegels Philosophy of Right (1844), Marx wrote, Religion is the sigh of the oppressed creature, the
feeling of a heartless world, and the soul of soulless circumstances. Marx indicated in this writing
that the working class, the proletariat was a true revolutionary class, universal in character and
acquainted with universal suffering. This provided the need for religion.
2 MARXIST PHILOSOPHY
Marx's study of capitalism was grounded in a philosophy that is both dialectical and
materialist. With dialectics, changes and interaction are brought into focus and
emphasized by being viewed as essential parts of whatever institutions and processes
are undergoing change and interaction. In this way, the system of capitalism, the wider
context, is never lost sight of when studying any event within it, an election or an
economic crisis for example; nor are its real past and future possibilities, the historical
context, ever neglected when dealing with how something appears in the present.
Whatever Marx's subject of the moment, his dialectical approach to it insures that his
fuller subject is always capitalist society as it developed and is still developing. The
actual changes that occur in history are seen here as the outcome of opposing
tendencies, or "contradictions", which evolve in the ordinary functioning of society.
3 ALIENATION
Marx's specific theories are best understood as answers to his pointed questions
about the nature and development of capitalism. How do the ways in which people
earn their living affect their bodies, minds and daily lives? In the theory of
alienation, Marx gives us his answer to this question. Workers in capitalist society do
not own the meansmachines, raw materials, factorieswhich they use in their work.
These are owned by the capitalists to whom the workers must sell their "labor power",
or ability to do work, in return for a wage.
This system of labor displays four relations that lie at the core of Marx's theory of
alienation: 1) The worker is alienated (or cut off) from his or her productive activity,
playing no part in deciding what to do or how to do it. Someone else, the capitalist, also
sets the conditions and speed of work and even decides if the worker is to be allowed to
work or not, i.e. hires and fires him. 2)The worker is alienated from the product of that
activity, having no control over what is made or what happens to it, often not even
knowing what happens to it once it has left his hands. 3)The worker is alienated from
other human beings, with competition and mutual indifference replacing most forms of
cooperation. This applies not only to relations with the capitalists, who use their control
over the worker's activity and product to further their own profit maximizing interests, but
also to relations between individuals inside each class as everyone tries to survive as
best he can. 4)Finally, the worker is alienated from the distinctive potential for creativity
and community we all share just because we are human beings. Through labor which
alienates them from their activity, product and other people, workers gradually lose their
ability to develop the finer qualities which belong to them as members of the human
species.
The cutting of these relationships in half leaves on one side a seriously diminished
individual physically weakened, mentally confused and mystified, isolated and virtually
powerless. On the other side of this separation are the products and ties with other
people, outside the control and lost to the understanding of the worker. Submitted to the
mystification of the marketplace, the worker's products pass from one hand to another,
changing form and names along the way"value", "commodity", "capital", "interest ,
rent "wage"depending chiefly on who has them and how they are used. Eventually,
these same productsthough no longer seen as suchreenter the worker's daily life as
the landlord's house, the grocer's food, the banker's loan, the boss's factory, and the
various laws and customs that prescribe his relations with other people.
Unknowingly, the worker has constructed the necessary conditions for reproducing
his own alienation. The world that the worker has made and lost in alienated labor
reappears as someone else's private property which he only has access to by selling his
labor power and engaging in more alienated labor. Though Marx's main examples of
alienation are drawn from the life of workers, other classes are also alienated to the
degree that they share or are directly effected by these relations, and that includes the
capitalists.
4 THEORY OF VALUE
What is the effect of the worker's alienated labor on its products, both on
what they can do and what can be done with them? Smith and Ricardo used the
labor theory of value to explain the Cost of commodities. For them, the value of any
commodity is the result of the amount of labor time that went into its production. Marx
took this explanation more or less for granted. His labor theory of value, however, is
primarily concerned with the more basic problem of why goods have prices of any kind.
Only in capitalism does the distribution of what is produced take place through the
medium of markets and prices. In slave society, the slave owner takes by force what his
slaves produce, returning to them only what he wishes. While in feudalism, the lord
claims as a feudal right some part of what is produced by his serfs, with the serfs
consuming the rest of their output directly. In both societies, most of what is produced
cannot be bought or sold, and therefore, does not have any price.
In accounting for the extraordinary fact that everything produced in capitalist society
has a price, Marx emphasizes the separation of the worker from the means of
production (whereas slaves and serfs are tied to their means of production) and the sale
of his or her labor power that this separation makes necessary. To survive, the workers,
who lack all means to produce, must sell their labor power. In selling their labor power,
they give up all claims to the products of their labor. Hence, these products become
available for exchange in the market, indeed are produced with this exchange in mind,
while workers are able to consume only that portion of their products which they can
buy back in the market with the wages they are paid for their labor power.
"Value", then, is the most general effect of the worker's alienated labor on all its
products; exchangewhich is embodied in the fact that they all have a priceis what
these products do and what can be done with them. Rather than a particular price,
value stands for the whole set of conditions which are necessary for a commodity to
have any price at all. It is in this sense that Marx calls value a product of capitalism. The
ideal price ("exchange value") of a commodity and the ways in which it is meant to he
used ("use value") likewise exhibit in their different ways the distinctive relationships
Marx uncovered between workers and their activities, products and other people in
capitalist society.
"Exchange value" reflects a situation where the distinct human quality and variety of
work has ceased to count. Through alienation, the relations between workers has been
reduced to the quantity of labor that goes into their respective products. Only then can
these products exchange for each other at a ratio which reflects these quantities. It is
this which explains Smith's and Ricardo's finding that the value of a commodity is equal
to the amount of labor time which has gone into its production. While in use value, the
physical characteristics of commoditiesplanned obsolescence, the attention given to
style over durability, the manufacture of individual and family as opposed to larger group
units, etc.give unmistakable evidence of the isolating and degraded quality of human
relations found throughout capitalist society.
Surplus-value, the third aspect of value, is the difference between the amount of
exchange and use value created by workers and the amount returned to them as
wages. The capitalist buys the worker's labor power, as any other commodity, and puts
it to work for eight or more hours a day. However, workers can make in, say, five hours
products which are the equivalent of their wages. In the remaining three or more hours
an amount of wealth is produced which remains in the hands of the capitalist. The
capitalists' control over this surplus is the basis of their power over the workers and the
rest of society. Marx's labor theory of value also provides a detailed account of the
struggle between capitalists and workers over the size of the surplus value, with the
capitalists trying to extend the length of the working day, speed up the pace of work,
etc., while the workers organize to protect themselves. Because of the competition
among capitalists, workers are constantly being replaced by machinery, enabling and
requiring capitalists to extract ever greater amounts of surplus value from the workers
who remain.