Comparing Liberalism and Mercantilism in International Political Economy

International political economy is a vital subdiscipline of international relations, exploring the complex interplay of economic and political forces on the global stage. Within this field, three major ideologies—Liberalism, Mercantilism, and Marxism—have emerged as influential frameworks for understanding international economic relations. In this essay, we will delve into the foundational principles of Liberalism and Mercantilism, offering an in-depth comparison between these two ideologies. Our aim is to shed light on their distinct perspectives and implications within the realm of international political economy.

Liberalism: Embracing Economic Freedom and Individualism

The liberal perspective on political economy has deep roots in Western economic thought, with key figures such as Adam Smith, David Ricardo, Friedrich August von Hayek, and Milton Friedman contributing to its evolution over time. At its core, Liberalism places a strong emphasis on individual interests, economic freedom, and the maximization of economic benefits.

Adam Smith's concept of the "invisible hand" laid the foundation for economic Liberalism in the seventeenth century.

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It posits that when individuals pursue their self-interest in a free market, they unintentionally contribute to the overall welfare of society. This notion was revitalized by Friedrich August von Hayek in the 1940s and further expanded upon by Milton Friedman in the 1970s.

One of the fundamental tenets of economic Liberalism is the belief that people are rational economic actors, and markets spontaneously emerge to satisfy human needs. In this view, the market operates according to its internal logic, guided by supply and demand dynamics, rather than the dictates of individuals or governments.

Since every individual is both a consumer and a producer, their actions within the market are deemed rational choices, contributing to a delicate balance among various market forces.

Given the inherent scarcity of resources, every economic decision involves an opportunity cost, necessitating trade-offs among alternative resource uses. This rational decision-making by individuals collectively leads to a stable market equilibrium, as the balance of power shifts dynamically. Therefore, economic Liberalism staunchly opposes government intervention in the market, contending that such interventions disrupt the market's inherent stability and efficiency.

Economic liberals argue that while economic activity can enhance national power, its core purpose is to benefit each consumer. This dual role of individuals as both consumers and producers reinforces the idea that every action should be a rational choice within the market. According to Samuelson (1980), resource scarcity inherently implies that acquiring something comes at the cost of forgoing something else, making rational decision-making paramount.

Any form of government intervention, especially in economic affairs, is viewed as detrimental to market development and a threat to the market's intrinsic stability. Consequently, economic Liberalism asserts that politics tends to divide people, whereas the economy fosters solidarity. A liberal international economy is seen as having a moderating influence on international politics, promoting mutual interests and a commitment to the status quo, as suggested by Gilpin (1987).

Mercantilism: State-Centric Economic Regulation

Mercantilism, in contrast, is a theory that places the state at the center of economic regulation, prioritizing the state's interests and the goal of state-building (Gilpin, 1975). This ideology encompasses three key theoretical components, as elucidated by Magnusson (1993).

Firstly, Mercantilism places significant emphasis on currency and commerce development, regarding the accumulation of currency, primarily in the form of gold and silver, as a crucial indicator of a state's wealth. Second, Mercantilism is preoccupied with foreign trade and actively seeks trade surpluses. It lacks faith in market mechanisms for state-building and believes that state intervention, including policies like tariffs and exchange rate manipulation, is essential to safeguarding domestic industries. Thirdly, Mercantilism champions the development of domestic industries while nurturing and safeguarding infant industries.

Mercantilism also attributes spillover effects to industrial development, associating the possession of industry with economic self-sufficiency and political autonomy (Sen, 1984). Importantly, it recognizes industry as the bedrock of military power and a linchpin of national security in the modern world.

Mercantilism can be categorized into two main branches: "benign" Mercantilism and "malevolent" Mercantilism. The former regards the protection of national economic interests as the minimum essential requirement for state security and survival. It aims to develop and safeguard domestic industries through state interventions, such as tariffs and monetary policies, to shield them from foreign competition. On the other hand, "malevolent" Mercantilism advocates for state empowerment and the unimpeded expansion of foreign trade through aggressive state actions. It perceives the international economy as an arena for imperialist expansion, emphasizing state power and dominance (Hirschman, 1969).

While there are differences between these two variants of Mercantilism, their shared goal is clear and unified: to enhance the wealth and power of the state (Magnusson, 1987).

Comparing Liberalism and Mercantilism: Key Differences

The ongoing debate between Liberalism and Mercantilism has historical roots and revolves around three primary distinctions, as outlined by Goddard (2003).

Firstly, Liberalism underscores the supremacy of market mechanisms and advocates for limited government intervention in economic affairs. Conversely, Mercantilism places a strong emphasis on the role of the state and contends that political decisions are pivotal in shaping economic activities.

Secondly, Mercantilism perceives the world economy as a zero-sum game, where one nation's gain necessitates another's loss. It anticipates conflicts between nations as inevitable, with each country relying on its own resources for self-preservation. In contrast, Liberalism rejects the zero-sum paradigm and emphasizes mutual benefit, striving for win-win situations that promote international cooperation and interdependence. Liberalism posits that fostering economic growth creates a bigger metaphorical cake, rather than merely dividing an existing one, thereby reducing the likelihood of conflict.

Finally, Mercantilism places significant importance on military power and views the accumulation of political and economic power as a means of ensuring state security. In contrast, Liberalism contends that the accumulation of military and other forms of power reduces economic efficiency, advocating for peace as a more effective approach than war in achieving national interests.

The distinctions between Liberalism and Mercantilism are not only theoretical but also have profound real-world implications in shaping international relations and economic policies. These ideologies provide contrasting frameworks for governments and policymakers to approach global economic issues and challenges.

Conclusion

In conclusion, Liberalism and Mercantilism represent two prominent and historically significant ideologies within the field of international political economy. These ideologies offer distinct perspectives on the role of the state, market mechanisms, and the dynamics of international relations. While they differ in their fundamental assumptions and policy prescriptions, both have their merits and drawbacks.

Liberalism champions economic freedom, individualism, and minimal government intervention. It emphasizes the rationality of individuals in the market, the spontaneous emergence of markets to meet human needs, and the intrinsic stability of markets when left to their own devices. According to Liberalism, international cooperation, interdependence, and the pursuit of mutual interests can lead to a more peaceful and prosperous world.

On the other hand, Mercantilism places the state at the forefront of economic regulation and seeks to maximize the state's wealth and power. It prioritizes the accumulation of currency, trade surpluses, and the development of domestic industries. Mercantilism believes in the zero-sum nature of international economic relations, anticipating conflicts and advocating for state empowerment as a means of ensuring security and prosperity.

While Liberalism and Mercantilism have their merits, it is essential to approach these ideologies with a critical perspective. Each has its strengths and weaknesses, and their applicability may vary depending on specific circumstances and objectives. Policymakers and scholars must carefully evaluate the nuances of these ideologies when formulating international economic policies.