Liberalism and Economic Nationalism understand the interaction of states and markets

Critically compare how Liberalism and Economic Nationalism understand the interaction of states and markets.

 “Globalization certainly poses new problems for states, but it also strengthens the world cultural principle that nation-states are the primary actors charged with identifying and managing those problems on behalf of their societies”. This analysis according to Meyer et al (1997: 157) highlights the ever-present debate on the relationship between states and the market as well as the role that states play in the functioning of their markets at the international level. In the aftermath of the Second World War, it has been argued that creating new international organizations to orchestrate and regulate inter-state relations would allow countries to recover while avoiding a crisis as destructive as the one in 1930. In this way, new international institutions have been established. Another main objective was to encourage the liberalization of trade by creating a relatively stable system that would allow avoiding protectionism and would foster relations between countries, societies and the market. (Ruggie 1982) The study of international political economy and world-systems allow understanding, thanks to the exploration of different theories, how politics and economics evolve through history. In other words, this means how states and markets construct the international economic order and how they interact within the latter. Indeed as professor O’Rian (2000) claims, ‘states play a critical role in constructing markets by guaranteeing their rules of operation but also by creating new market actors and shaping their strategies.’  Thus, to understand how states and markets interact, we will focus on the Liberalism and Economic Nationalism theories. We will first of all study the theory of liberalism, based on its foundations and the work of the theorists, we will try to understand the relationship between the state and the market. Then we will study economic nationalism and we will compare the similarities and differences between these two theories in terms of the role they give to the state in the functioning of the market.

First of all, one of the theories much used to understand how the state manages its economic interests is that of liberalism. In the liberal view, the state is not acting alone, and the real key economic actor is rather the individual. The state is indeed influenced by a wide range of factors. Liberals see the global system as a system of interdependence, for example between the state and the individual or between the state and firms. States and peoples can succeed in cooperating for mutual benefit and in the general interest. (O'Brien and Williams, 2016) International Political Economy is considered by the liberals as constituted by a search for wealth. Today, globalization, technical and communication advances allow nations to be increasingly interconnected. We are witnessing the growing influence of powerful transnational corporations. World trade is facilitated by open borders, so-called rather lax restrictions, international agreements, and institutions. In his work named  ‘The Wealth of Nations’ (1776) , the philosopher and economist Adam Smith undertook one of the first works to describe capitalism. He believes that countries must specialise in industries where they have an absolute advantage. That is to say, when their companies produce at a lower output than a foreign company. For him, specialisation makes it possible to increase the global production of goods and services for a constant consumption of factors of production and thus makes it possible to satisfy a greater number of needs. This optimal allocation of resources benefits all nations participating in the exchange. (Singh, V. B.1959) Adam Smith's theory was pursued by One of the major theorists who has been defending free trade was David Ricardo (1772-1823). Indeed, he has been one of the major theorists of his century defending the cause of free trade. Just as Adam Smith, he rejects the balance of trade' system of the supporters of the mercantile system' and want the gradual introduction of free trade. (Potier, 2007)  He is often described as having been strongly driven by the goal of maximizing worlwide Economic efficiency. He developed the theory of comparative advantage. According to him, all states can benefit from free trade even if they are not as competitive as the others. In this, countries need to specialize in producing where they have a relative advantage over others.  ‘Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each’ ([2004 (1817/1821)]: 133). Thanks to free trade, this specialization will result in increased wealth that will benefit each country. Moreover, he wrote how free trade would ensure that the ‘pursuit of individual advantage is admirably connected with the universal good of the whole.. The universal society of nations throughout the civilized world.’ (Ricardo, 1817: 132-134)  This theory therefore represents one of the characteristics of liberalism, the importance of free trade, but also the division of labour with a specific goal, that of generating wealth. The crucial role of the state, according to the liberal vision, is to guarantee the construction of a reliable market through rules that give it a framework. It must ensure the conditions for the reproduction of this market, particularly the laissez-faire approach, which is in fact planned. (Block, 1996) However, this functioning of the market must be supported by the society that the state represents. That is to say, it must be able, through the market, to meet its expectations and needs. The power that the state holds in the market enables it to be at the centre of tensions between the market and society and therefore to be able to manage them. The corporation uses the state to protect itself from the market, but at the same time the state uses the market to maintain growth and a high standard of living. (Polanyi, 1944)  The state must also closely monitor the relationship to savings and consumption that citizens have. Indeed, the state must put in place means to encourage citizens to consume and not to save in order to prevent the export system from being slowed down. (Watson, 2016)

The origin of the theory of nationalist economics comes in particular from mercantilism. Mercantilist theorists believed that each state had to secure its interests by blocking the economic interests of other states. This theory corresponds to the 'zero-sum game'. That is to say, states must protect their national economies from international competition before they can truly compete on a level playing field. (O'Brien and Williams, 2016)  For example, Friedrich List ([1885] 1991) studied the case of Germany. He argued that at that time Germany had an interest in industrializing while protecting itself behind trade barriers to catch up economically with Great Britain. In his view, free trade is only interesting for countries that are already industrialized and powerful. Developing countries would lose out if subjected to competition. List [1841/2005c: 46] thus accused Britain of having ‘kick[ed] away the ladder by which [it] has climbed up, in order to deprive others of the means of climbing up after [it]’ To this, Professor Stephen Krasner (1976) later added that the world economy actually reflected the interests of the most powerful states. He suggests that a dominant power is needed to provide leadership and absorb the short-term costs of maintaining a free trade regime. Following the crumbling of European empires, the newly decolonized countries were formally sovereign but still dominated by foreign economic power. This is how we have seen the emergence of classical economic nationalists like List establishing theories to enable these decolonized countries to keep pace with European and American development. The Economist nationalists view the state as the main actor in the global political economy. One of the major principles supporting the key role of the state is the primacy of the political over other aspects of social life. Since the state is the tool used by the people to achieve their goals, it thus becomes one of the main actors capable of taking action at the national and international levels. Thus, the major assumption is that market relations are shaped by political power. (O'Brien, and Williams,2016) According to Robert Gilpin (1987:31), the central idea of economic nationalism ‘is that economic activités are and must be subordinated to the goal of state-building and the interests of the state.’ List's work on the theory of economic nationalism led to an examination of how politics could enable a nation to assert itself and thus obtain 'prosperity, civilization, and power.' (Helleiner, 2002) List (1789-1846) set up the theory of infant industries (Levi-Faur, 1997), he aimed to put in light the crucial economic role of the state. Free trade is harmful to countries that are not yet as industrialized as the United States or Europe. It would undermine national wealth and that is why he believed in the importance of protectionism in order to protect the interests of the nation. Other theorists, such as Attwood (1826), were considering the problem of the gold standard as a more significant threat. In his view, it would have a negative effect on national loyalty in times of war and would make it more difficult for the state to serve the domestic economic needs of the nation.

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