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Embedded liberalism

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The newInternational Monetary Systemwhich would embody the values of embedded liberalism was largely designed at the Bretton Woods Conference, hosted at theMount Washington Hotelin 1944

Embedded liberalismis a term ininternational political economyfor the global economic system and the associated international political orientation as they existed from the end ofWorld War IIto the 1970s. The system was set up to support a combination offree tradewith the freedom for states to enhance their provision ofwelfareand to regulate their economies to reduce unemployment. The term was first used by the American political scientistJohn Ruggiein 1982.[1]

Mainstream scholars generally describe embedded liberalism as involving a compromise between two desirable but partially conflicting objectives. The first objective was to revive free trade. BeforeWorld War I,international trade formed a large portion of global GDP, but the classical liberal order which supported it had been damaged by war and by theGreat Depressionof the 1930s. The second objective was to allow national governments the freedom to provide generous welfare programmes and to intervene in their economies to maintain full employment.[2]This second objective was considered to be incompatible with a full return to the free market system as it had existed in the late 19th century—mainly because with a free market in international capital, investors could easily withdraw money from nations that tried to implement interventionist andredistributivepolicies.[3]

The resulting compromise was embodied in theBretton Woods system,which was launched at the end of World War II. The system was liberal[4]in that it aimed to set up an open system of international trade in goods and services, facilitated by semi-fixed exchange rates. Yet it also aimed to embed market forces into a framework where they could be regulated by national governments, with states able to control international capital flows by means ofcapital controls,as well as engage in state-led development strategies, short-term IMF borrowing, and exchange rate adjustments.[5]New global multilateral institutions were created to support the new framework, such as theWorld Bankand theInternational Monetary Fund.

When Ruggie coined the phrase embedded liberalism, he was building on earlier work byKarl Polanyi,who had introduced the concept of markets becoming disembedded from society during the 19th century. Polanyi went on to propose that the reembedding of markets would be a central task for the architects of the post war world order and this was largely enacted as a result of theBretton Woods Conference.[6]In the 1950s and 1960s, the global economy prospered under embedded liberalism, with growth more rapid than before or since, yet the system was tobreak down in the 1970s.Ruggie's work on embedded liberalism rebuttedhegemonic stability theory(the notion that a hegemon is necessary to sustain multilateral cooperation) by arguing that the international order was not just maintained through material power, but "with legitimate social purpose."[7]

Previous systems[edit]

Embedded markets: all periods up to 1834[edit]

Karl Polanyiargues that until the rise of 19th-century liberalismmarkets,where they had existed at all, were always and everywhere embedded in society, subject to various social, religious and political controls. The forms of these controls varied widely, for example in India occupations were for centuries determined bycaste,rather than market forces. During theMiddle Ages,physical markets in Europe were generally heavily regulated, with many towns only permitting larger markets (then known asfayres) to open once or twice a year.[8]

Polanyi explicitly refutesAdam Smith's statement that natural man has a "propensity to barter, truck and exchange",[9]arguing that anthropology and economic history shows that until the 19th century markets had only a marginal role in the economy, with by far the most important methods governing the distribution of resources beingreciprocal gift giving,centralised redistributionandautarky(self-sufficient households). While Polanyi concedes that European society was beginning to develop towards modern capitalism from as early as the 14th century, especially after theGlorious Revolutionand the commencement of theIndustrial Revolution,he contends that it was not until 1834 that the establishment of truly free markets became possible. Polanyi calls this disembedding of markets from society a "singular departure"[10]from anything that had happened before in human history.[11]Prior to the 19th century, international trade was very low in proportion to global GDP.[12]

Classical liberalism: disembedded markets, 1834–1930s[edit]

Main article:Classical liberalism
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According to Polanyi, a key event of 1834 which allowed the formation of free markets to take place in Great Britain (the worlds foremost economy at the time) was theabolition of outdoor reliefwhich followed theseizure of political power by the middle classes in 1832.[13]With the unemployed poor unable to get any form of financial help except by enteringworkhouses[14]and with workhouses made much more oppressive than they had been before, the unemployed would tend to go to any lengths to obtain work, which established a free market in labour. Polanyi concedes that during the 19th century the free market helped deliver unprecedented material progress. He also contends it caused enormous hardship to wide sections of the population as seemingly paradoxically a rapid general increase in prosperity was accompanied by a rapid increase in the number ofpaupers.To some extent, this phenomenon had been under way in both Europe and Great Britain from the dawn of theAgricultural Revolution,accelerating with the Industrial Revolution in mid-18th century, but it became more acute after 1834.[15]

In both Britain and Europe,labour movementsand other forms of resistance arose almost immediately, though they had little sustained effect on mainstream politics until the 1880s. In Britain, although tens of thousands starved to death or were forced into workhouses and prostitution, social unrest was relatively low as on the whole even the working class were quick to benefit from the increasing prosperity. In part, this was due to Britain's early adoption of the free market and her lead in the Industrial Revolution. On continental Europe, unrest erupted in theProtests of 1848,after whichKarl MarxandFriedrich Engelslaunched theirCommunist Manifesto,although this did not have any great immediate effect. For the most part, from 1834 until the 1870s free market ideology enjoyed almost unchallenged ascendancy in Great Britain and was expanding its influence abroad. In 1848,Lord Macaulaypublished hisThe History of England.Though Macaulay was mainly looking back at the 17th century, he also anticipated the enduring triumph of free market liberalism.[16]

By the 1880s, various labour market protections had been enacted, causingHerbert Spencer,at the time perhaps the world's most prominent advocate of economic liberalism, to raise the alarm at the rising power of socialism. Polanyi explained this in terms of adouble movementfor thedialecticalprocess ofmarketizationalong with an opposing push forsocial protectionagainst that marketization.[17][18][19]During the late 19th and early 20th century, in the field of politics, labour relations and trade free market supporters suffered further set backs with intellectual and the moral attacks from an informal networks of progressive reformers. This included groups like theFabians;individuals such asKeir HardieandPope Leo XIIIwith his social encyclicalRerum novarum;and national leaders likeOtto von BismarckandDavid Lloyd George,who both introduced early precursors of thewelfare state.In the United States, this period has been labelled theProgressive Era.[20]Other developments not necessarily associated with the progressive movement yet still opposed to the free market, included various countries such as the United States significantly increasing their trade tariffs. In contrast, within mainstream academia and the practice of international finance free market thinking remained largely ascendant until the 1930s. Although thegold standardhad been suspended by World War I, international financiers were largely successful in re-establishing it in the 1920s. It was not until thecrisis of 1931that Britain decided to leave the gold standard, with the United States following in 1933. By the mid-1930s, the global liberal economic order had collapsed, with the old, highly integrated trading system replaced by a number of closed economic blocks. Similarly, in mainstream economics free market thinking was undermined in the 1930s by the success of theNew Dealand by theKeynesian Revolution.After a transition period and World War II, embedded liberalism emerged as the dominant economic system.[12][21][22]

Embedded liberalism: 1945–1970s[edit]

John Maynard Keynes(right) andHarry Dexter Whiteat the Bretton Woods conference, where the key institutions that would support embedded liberalism were created

Mainstream scholars such asJohn Ruggietend to see embedded liberalism as a compromise between the desire to retain as many as possible of the advantages from the previous era's free market system while also allowing states to have the autonomy to pursue interventionist and welfare based domestic policies.[23][24][25]Anticipating thetrilemmathat would later be formulated as theimpossible trinity,John Maynard KeynesandHarry Dexter Whiteargued that freedom of movement for capital conflicted both with nation state's freedom to pursue economic policies based on their domestic circumstances and also with the semi-fixed exchange rate system that was widely agreed to be important to maximise international trade in goods and services. As such, it was widely agreed that states would be free to enactcapital controls,which would help them simultaneously maintain both fixed exchange rates and, if desired, expansionary domestic policies.[26]During the 1950s and 1960s, embedded liberalism and Keynesian economics were so popular that conservative politicians found they had to largely adopt them if they were to have a chance of getting elected. This was especially the case in Britain and was called thepost-war consensus,with a similar though somewhat less Keynesian consensus existing elsewhere, including in the United States.[27]

Marxist scholars tend to broadly agree with the mainstream view, though they emphasise embedded liberalism as a compromise between class interests, rather than between different desirable yet partially incompatible objectives.David Harveyargues that at the end ofWorld War IIthe primary objective was to develop an economic plan that would not lead to a repeat of theGreat Depressionduring the 1930s.[28]Harvey states:

To ensure domestic peace and tranquility, some sort of class compromise between capital and labor had to be constructed. The thinking at the time is perhaps best represented by an influential text by two eminent social scientists,Robert DahlandCharles Lindblom,published in 1953. Both capitalism and communism in their raw forms had failed, they argued. The only way ahead was to construct the right blend of state, market, and democratic institutions to guarantee peace, inclusion, well-being, and stability.[29]

Harvey notes that under thisnew systemfree trade was regulated "under a system of fixed exchange rates anchored by the US dollar's convertibility into gold at a fixed price. Fixed exchange rates were incompatible with free flows of capital".[29]In addition, there was a worldwide acceptance that "the state should focus onfull employment,economic growth, and the welfare of its citizens and that state power should be freely deployed, alongside of or, if necessary, intervening in or even substituting for market processes to achieve these ends ".[29]He also states that this new system came to be referred to as embedded liberalism in order to "signal how market processes and entrepreneurial and corporate activities were surrounded by a web of social and political constraints and a regulatory environment that sometimes restrained but in other instances led the way in economic and industrial strategy".[30]

In 1960,Daniel BellpublishedThe End of Ideology,where he celebrated what he anticipated to be an enduring change, with extreme free market thinking permanently relegated to the fringe.[16]However, Harvey argues that while embedded liberalism led to the surge of economic prosperity which came to define the 1950s and 1960s, the system began to crack beginning in the late 1960s.[31]The 1970s were defined by an increased accumulation of capital, unemployment, inflation (orstagflationas it was dubbed) and a variety of fiscal crises.[31]He notes that "the embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and no longer working".[31]A number of theories concerning new systems began to develop, which led to extensive debate between those who advocated "social democracy and central planning on the one hand" and those "concerned with liberating corporate and business power and re-establishing market freedoms on the other".[32]Harvey notes that by 1980 the latter group had emerged as the leader, advocating and creating a global economic system that would become known asneoliberalism.[32]

Subsequent systems[edit]

Neoliberalism: redisembedded markets, 1981–2009[edit]

Main article:Neoliberalism

After the transition period of the 1970s, the neoliberal era is commonly said to have begun at about 1980. Also referred to by economic historians as theWashington Consensusera, its emergence was marked by the rise to power ofMargaret Thatcherin Great Britain andRonald Reaganin the United States. While there was no attempt to revive the previous system of fixed exchange rates on a global scale, neoliberalism upheld a similar commitment to free trade as had the previous era. Similar to the era of classical economic liberalism, neoliberalism involved the disembedding of markets. At a policy level, some of the main changes involved pressure for governments to abolish their capital controls and to refrain from economic interventions. However, many of the institutions established in the previous era remained in place and free market ideology never became as influential as it had been during the peak years of classical liberalism. In a 1997 paper, Ruggie himself discussed how some of the protection gained for workers with the embedded liberal compromise still lived on, though he warned it was being eroded by the advance of market forces.[33]

In Britain and the United States, domestic free market reforms were pursued most aggressively from about 1980–1985. Yet from a global perspective, the peak years of neoliberal influence were the 1990s.[34]After the 1991dissolution of the Soviet Union,there was an acceleration of the pace at which countries throughout the world chose or were coerced into implementing free market reforms. In 1992, political scientistFrancis Fukuyamasuggested that free-market capitalism coupled with liberal democracy may be a stable end point in human social evolution in theEnd of History and the Last Man.[16]Yet by 1999, various adverse economic events, most especially the1997 Asian financial crisisand the harsh response by theInternational Monetary Fundhad already caused free-market policies to be at least partially discredited in the eyes of developing world policy makers, especially in Asia and South America.[35][36][12]

Post-Washington Consensus: mixed liberalisms, 2009–present[edit]

In the wake of thefinancial crisis of 2007–2008,several journalists, politicians and senior officials from global institutions such as the World Bank began saying that the Washington Consensus was over.[37][38][39][40]As part of the2008–2009 Keynesian resurgence,it briefly appeared that there might be a prospect of a return to embedded liberalism—there had been an upsurge in global collaboration by the world's policy makers, with several heads of statecalling for a "New Bretton Woods".Yet by 2010, the short lived consensus for a return to Keynesian policy had fractured.[41]Economic historianRobert Skidelskysuggested it was too soon to identify the characteristics of the new global economic order and it may be that no single order will emerge. For instance, with the rise of theBRICsand other emerging economies, there is less scope for a single power to effectively set the rules for the rest of the world.[42]

As of late 2011, there had been some trends consistent with a move away from economic liberalism, including a growing acceptance for a return to the use ofcapital controls,macroprudential regulationandstate capitalism.[43]On the other hand, China has been progressively liberating its capital account well into 2012 while in the United States theTea Party movementemerged as a powerful political force, with members who appear to be committed to a purer vision of the free market than has existed since the peak of classical liberalism in the 1840s.[44]In 2011, professor Kevin Gallagher suggested that rather than being largely governed by a single ideology as had been the case for the previous eras, the newly emerging global order is influenced by "varieties of liberalism".[45]However,George Monbiotsaid in 2013 that neoliberalism remained an influential ideology.[46]

According to Edward Mansfield and Nita Rudra, the digital revolution has undermined embedded liberalism by facilitating a spread in global supply chains, facilitating automation, connecting capital in the developed world with labor in the developing world, and strengthening multinational corporations.[7]

See also[edit]

Notes and citations[edit]

  1. ^Ruggie, John Gerard (1982)."International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order".International Organization.36(2): 379–415.doi:10.1017/S0020818300018993.ISSN0020-8183.JSTOR2706527.S2CID36120313.
  2. ^As World War II was drawing to a close, there was more political support for redistributive policies than ever before. The working classes had increased influence due to the recent expansion of theelectoral franchiseand the wealthier classes were generally more sympathetic due to the shared experience of participating in the war and as moderate Keynesian policies were seen as the best measure to stabilise liberal democracy by reducing poverty and unemployment, thus forestalling the rise of extremists such as fascists.
  3. ^This had recently happened to France after thePopular Frontcame to power in 1936. As Keynes said at the Bretton Woods Conference: "Surely in the post-war years there is hardly a country in which we ought not to expect keen political discussions affecting the position of the wealthier classes and the treatment of private property. If so, there will be a number of people constantly taking fright because they think that the degree of leftism in one country looks for the time being likely to be greater than somewhere else". Quoted in Helleiner (1995) at p. 35.
  4. ^The word liberal has a special meaning here and should not be confused with the modern United States sense of the word which can be associated with left-leaning politics. As is common in mostinternational political economytopics, the word in this article generally means supportive of free trade.
  5. ^Helleiner, Eric (2019)."The life and times of embedded liberalism: legacies and innovations since Bretton Woods".Review of International Political Economy.26(6): 1112–1135.doi:10.1080/09692290.2019.1607767.ISSN0969-2290.S2CID198646716.
  6. ^Though not as a result of Polanyi's direct influence, many others, most notably Keynes, had independently reached parallel conclusions.
  7. ^abMansfield, Edward D.; Rudra, Nita (2021)."Embedded Liberalism in the Digital Era".International Organization.75(2): 558–585.doi:10.1017/S0020818320000569.ISSN0020-8183.SSRN3719975.
  8. ^In addition to chapter 3–6 of Polanyi (1944), for a wide-ranging and easily digestible discussion of these restrictions see chapter 1 ofThe Worldly PhilosophersbyRobert Heilbroner.
  9. ^Polanyi 1944,p. 45.
  10. ^Quoted by Ruggie in the1982 paperwhere the term embedded liberalism was coined.
  11. ^Polanyi 1944,passim,especially chapters 7–12.
  12. ^abcRavenhill 2005,pp. 12, 156–163.
  13. ^Full abolition of outdoor relief was only completed by the early 1840s, but it was largely accomplished with the 1834 Act.
  14. ^Though Polyani notes that a few were still able to receive charity from Lords, Ladies or clergy who offered it in defiance of the Law.
  15. ^Polanyi 1944,chapters 3–4.
  16. ^abcCockett 1995,pp. 321–333.
  17. ^Eichengreen, Barry (2019).Globalizing Capital: A History of the International Monetary System(3rd ed.). Princeton University Press. pp. 2–3.doi:10.2307/j.ctvd58rxg.ISBN978-0-691-19390-8.JSTORj.ctvd58rxg.S2CID240840930.
  18. ^Polanyi 1944,pp. 148–154.
  19. ^Polanyi citesThe Man Versus the State(1884) where Spencer provides a long list of what he saw as undesirable state interventions into economic affairs. Polyani goes on to says Spencer was wrong to blame socialism, arguing that the interventions resulted from pragmatic reactions by policy makers to the stresses caused by the free market, thus socialism was not to become a powerful political force until a few decades later.
  20. ^The link between progressive developments in the United States and Europe is covered in Polyani'sGreat Transformation(1944), but for a much more detailed account seeAtlantic Crossings: Social Politics in a Progressive Age(2000) by Daniel Rodgers.
  21. ^Polanyi 1944,passim,especially p. 1–7.
  22. ^Blyth 2002,p. 3–5.
  23. ^Johnathan Kirshner (1999). "Keynes, capital mobility and the crisis of embedded liberalism".Review of International Political Economy.6:3, Autumn: 313–337.
  24. ^McNamara 1999,pp. 54–55, 82–87.
  25. ^Blyth 2002,passim,especially p. 2–5.
  26. ^Such as Keynesian public spending to boost employment and low interest. In the absence of capital controls, investors would tend to move their money away from countries that pursued such policies, causing downward pressure on the domestic currency that would make the maintenance of fixed exchange rates difficult or impossible.
  27. ^Blyth 2002,passim.
  28. ^Harvey 2005,passim.
  29. ^abcHarvey 2005,p. 10.
  30. ^Harvey 2005,p. 11.
  31. ^abcHarvey 2005,p. 12.
  32. ^abHarvey 2005,p. 13.
  33. ^John Ruggie(1 January 1997)."Globalization and the Embedded Liberalism Compromise: The End of an Era?".Max Planck Institute for the Study of Societies.Archived fromthe originalon 10 September 2015.Retrieved4 July2012.
  34. ^Bateman 2010,chapter 1.
  35. ^Some scholars such asDavid Graebercredit theglobal justice movementwith a leading role in reducing the influence of free market ideology on Asia and South America (see for example his bookDebt: The First 5000 Years), though others point to a change of heart at the top, with politicians and senior official in multilateral organisations like the International Monetary Fund themselves losing faith in free market thinking. For more on the historical opposition to neoliberalism in Asia, see alsoBeijing ConsensusandMumbai Consensus.For more on the retreat from neoliberallism in Latin America, see thepink tide.
  36. ^ Green, Duncan (2003).Silent Revolution: The Rise and Crisis of Market Economics in Latin America.New York University Press. pp. passim.ISBN1-58367-091-2.
  37. ^ Skidelsky, Robert(2009).Keynes: The Return of the Master.Allen Lane. pp.101,102, 116–117.ISBN978-1-84614-258-1.
  38. ^Cooper, Helene; Savage, Charlie (10 October 2008)."A Bit of 'I Told You So' Outside World Bank Talks".The New York Times.Retrieved17 November2010.
  39. ^Painter, Anthony (10 April 2009)."The Washington consensus is dead".The Guardian.Retrieved17 November2010.
  40. ^"Prime Minister Gordon Brown: G20 Will Pump Trillion Dollars Into World Economy".Sky News.2 April 2009.
  41. ^Farrell, Henry;Quiggin, John(March 2012)."Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis"(PDF).The Center for the Study of Development Strategies. Archived fromthe original(PDF)on 25 August 2013.Retrieved29 May2012.
  42. ^As was largely the case for most of the previous two centuries, where Britain and the United States had performed this role.
  43. ^Several large developing states had already been practicing forms of state capitalism throughout the neoliberal era, but often it was justified as short term measures to protect infant industries and economies until they were sufficiently well developed to compete in the free market. After the crises, state capitalism became more common and several states became increasingly unapologetic about it. See Ian Bremmer's bookThe End of the Free Market: Who Wins the War Between States and Corporations.
  44. ^SeeThomas Frank's 2012 bookPity the Billionaire.
  45. ^Gallagher, Kevin (20 February 2011)."Regaining Control? - Capital Controls and the Global Financial Crisis"(PDF).University of Massachusetts Amherst.Retrieved3 July2012.
  46. ^Monbiot, George(14 January 2013)."If you think we're done with neoliberalism, think again".The Guardian.Retrieved15 December2013.

References[edit]

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