16.1 The Origins of International Political Economy

The Origins of International Political Economy

International political economy (IPE) examines how economics and politics interact on a global scale. Understanding these interactions is central to political science because economic decisions rarely happen in a vacuum; they're shaped by political power, and they reshape it in return. This section covers the core concept of IPE, the mercantilist ideas that dominated early modern Europe, and the broader international economic order.

Concept of International Political Economy

IPE as a field asks a straightforward question: how do politics and economics influence each other across borders? Trade agreements, foreign investments, tariffs, and sanctions are all places where political goals and economic interests collide.

• Economic factors shape political decisions. A country dependent on oil imports, for example, will craft foreign policy partly around securing that supply.
• Political factors shape economic outcomes. Governments impose tariffs, negotiate trade deals, and levy sanctions to achieve political objectives.
• IPE helps explain the distribution of power and wealth among nations, particularly the gap between developed and developing countries.
• The field also examines international institutions like the World Trade Organization (WTO) and the International Monetary Fund (IMF), which set rules for how countries trade, borrow, and invest.
• It explores the causes and consequences of economic globalization, including increased interconnectedness and the cultural exchange that comes with it.
• It assesses how economic issues like resource scarcity and trade disputes can fuel international conflict.
• Comparative political economy is a related approach that compares different economic systems (market economies, command economies, mixed systems) and their political implications.

Key Principles of Mercantilism

Mercantilism was the dominant economic theory in Europe from roughly the 16th to the 18th century. Its core belief was simple: a nation's wealth and power are measured by how much precious metal (gold and silver) it holds. Everything else followed from that idea.

• Positive balance of trade. Mercantilists wanted exports to exceed imports so that gold and silver would flow into the country. To achieve this, governments adopted protectionist policies like tariffs and quotas to restrict imports while supporting domestic industries.
• Colonialism. The drive for precious metals and raw materials (spices, sugar, timber) pushed European powers to establish colonies and exploit their resources.
• Trade wars and rivalries. Because mercantilists saw wealth as a zero-sum game, competition among powers like England, Spain, and France was intense and often violent.
• State-controlled monopolies. Governments granted exclusive trading rights to chartered companies like the East India Company, which operated with state backing and sometimes their own military forces.
• Promotion of domestic industry. Subsidies and tariffs protected industries like textiles and shipbuilding, which were seen as vital to national power.

Mercantilism is best understood as a form of economic nationalism: the state actively manages the economy to maximize national power relative to rival states.

Mercantilist Theory of National Wealth

The mercantilist view of wealth rested on a few key assumptions that later economists would challenge:

• Wealth = precious metals. Gold and silver were considered the ultimate measure of prosperity. A nation's success was judged by the size of its national treasury.
• Wealth is finite. Mercantilists assumed there was a fixed amount of wealth in the world. One nation's gain necessarily meant another nation's loss. This zero-sum perspective drove economic competition and frequently led to trade wars.
• The balance of trade is the key metric. Governments tracked trade statistics and customs records to ensure they maintained a trade surplus:
  1. Exports (which bring in gold and silver) should exceed imports (which send gold and silver out).
  2. Policies were designed around maximizing this surplus.
• What mercantilists overlooked. This framework neglected other sources of national wealth like productivity, technological innovation, and human capital. Later thinkers, especially Adam Smith in The Wealth of Nations (1776), argued that free trade and specialization could make all trading partners wealthier, not just the one with the trade surplus.

International Economic Order

The international economic order refers to the system of rules, institutions, and practices that govern global economic relations. It's not a natural or neutral arrangement; it reflects the interests and power of the states that built it.

• Hegemonic stability theory suggests that a dominant economic power (a hegemon) tends to shape and enforce the rules of the international economic order. Britain played this role in the 19th century; the United States has played it since World War II.
• The order evolves over time as economic and political conditions change. The shift from mercantilism to free trade in the 19th century, and the creation of institutions like the IMF and World Bank after 1945, are major examples.
• The structure of the international economic order influences the distribution of wealth and power among nations and shapes patterns of trade, investment, and monetary policy worldwide.