CPOL 510: Power and Money: Topics in Global Political Economy
May 28 – Keynes and Hayek, Part 2
This week we take a step back so we can take a few more forward.
Just a reminder – we’re doing a lot of work each week because this semester is not only online, it is also compressed – we need to accomplish two weeks’ worth of a regular semester’s work each week during this summer session.
Last week we did a very thorough introduction to Keynes and Hayek. This week we see how the fundamentals of their debate – What is the proper role of government in the economy? – continue into today’s U.S. and global challenges.
But we start with by reviewing a framework that I know some of you are already familiar with. Below is an outline of four models of International Relations (IR) theory – our “four columns” we called it in CPOL 500. We remember that each of our “four columns” has a set of corresponding economic ideas. Then we look at two examples of Keynes and Hayek’s debate at work in the White House. First, in 1994, we ask whether the U.S. should help Mexico with it’s financial crisis. Then we take the same questions to the U.S. banks in 2008 – should the government bail out the banks, and to what extent is this a global question, not just a domestic question.
One word on nomenclature. “International Relations” itself is a dated term for what the relevant material really is – some “relations among states”, but also the impact of global manufacturing and finance, climate change, refugees, al Qaeda, etc, including non-states.
So too IR Theory’s term “international political economy,” often IPE. IPE has at least two meanings. Sometimes, including for us this week, IPE is the general term for the study of the impact of politics on economics and the impact of economics on politics (with “international” scattered in there). Previously, the term IPE was also used more narrowly, implying particular attention to that column of ours dealing with Marxist politics and economics (again, with “international” in there somewhere). One example was IPE’s focus on the structural relationship between the United States (capital) and Latin America (labor).
Some movement has been made to more accurately reflecting the field as “global political economy” (GPE) – recognizing that Exxon, Bitcoin, Google, and refugee crises are not sufficiently described as “political economy between states.” Maybe you’ve already made the leap: “international relations” itself is hardly an accurate title for this field of study that includes so many essential elements that are not “nation-states”. “International Relations” is a long-outdated name for the field, but it is nevertheless still the dominant term; so too IPE.
Four Models of IR. We start this week by looking at four models of International Relations theory. You might find these familiar.
Look over our columns carefully, and then try to summarize each column.
Realism. If we were to use a single bumper sticker: “States in conflict.” Imagine a one-room schoolhouse where the teacher says, “Realism?” and in unison the class responds, “States in Conflict!” This is how we usually talk about the world today: Russia did something, China and Mexico talked, Iran and Iraq went to war.
Liberalism. (The bumper stickers get smaller print from here on.) “States and non-state actors, sometimes in conflict, sometimes in cooperation.” (Told ya.) Oil companies and Facebook and FIFA and Amnesty International matter.
Marxism. “Capital exploits labor; north exploits south.” Remember, these are short-cuts, not dissertation-length analyses. Similar approaches include exploitation of women, people of color, the poor, and the environment.
Constructivism. “Ideas, interests, and identities; flexible norms.” My own short-cut for this one is, “When things other than power and money matter most,” but I can’t find this quote in the scholarly literature yet. If you think each country should have a voice in a debate, no matter how rich or poor or small or large or well-behaving they are; if you believe a government’s commitment to human rights matters; if you believe that your god is better than everyone else’s god; if you think that states matter but they choose whether to see the world as Realist or something else; if you think the rules of global politics are “socially constructed” (agreements among people, and flexible/changeable) instead of natural (determined by nature) and immutable; if you don’t mind borrowing from Realism and Liberalism and adding your own stuff….then you might be a Constructivist. That’s a big bumper sticker.
Keynes and Hayek Today
Last week we talked about Keynes and Hayek during their original debates. Keynes argued that governments can and therefore must intervene in the economy for political ends. Inventing macroeconomics, he determined that a government could spend more money to lower unemployment, but that this risked increasing inflation. He also said a government can cut inflation, but this risks raising unemployment. Government should do these things to prevent wild economic swings which could create social chaos and an opening for the rise of dictatorship.
Hayek saw things from a different perspective. Everything thing the government does takes away some liberty; the more the government does, the more liberty it takes away, until there is no more liberty. Wild economic swings are possible, but in the long run the market will correct itself. Keynes’s famous, reply, “In the long run, we’re all dead.”
Keynes’s policies were adopted by U.S. President Franklin Delano Roosevelt at the “New Deal” – a massive spending effort to put people directly to work. This was followed by another massive spending and employment effort: World War II. After World War II, Keynes’s ideas were applied to the global economy. If government elites can manage national economies, global elites can manage the international economy. The International Monetary Fund (IMF) and the World Bank were two postwar creations in this direction.
But by the 1970s, Keynesianism was proving less reliable. The U.S. and West were experiencing both high unemployment and high inflation – together called stagflation (portmanteau of stagnant economy and inflation). It was here where in the UK Margaret Thatcher called directly up Friedrich Hayek and his ideas, and in the US Ronald Reagan similar themes of Hayek and Milton Friedman. Together there was a shift in philosophy – and when Thatcher and Reagan were elected, in policy – from “big, activist government is good and necessary and the solution” to “big government is the problem, less government is the solution.” These ideas came to drive policy in the West but market-oriented policies also rose in the Soviet bloc, China, Latin America, India, parts of Africa, and elsewhere.
With this background, we can watch three decisions get made.
Let’s start with these notes (click here), that review Keynes and Hayek and get us ready for 2008.
In each, there is a real conflict: should the government get involved? You can see debates inside any nation’s economy – should the United States cut taxes or raise spending to stimulate the economy? should Greece go to an austerity budget? should the Soviet Union allow more small-scale private farming?
In the cases we look at here, the questions are more global and more about bailouts.
First, should the U.S. get involved to save 1994 Mexico from financial collapse? (Watch episode 3.7 and read Robert Rubin, In an Uncertain World, chapter 1, on Blackboard). What motivates the leaders – why are they interested in taking action? How is it that the President and the Speaker agree?
Second, should the U.S. do anything about the currency collapses in Southeast Asia, 1997-1998? (Watch episodes 3.11 and 3.12 and read Rubin, chapter 8, on Blackboard). Western policymakers see the crisis differently than some of the East Asian leaders, like Mahathir Bin Mohamad. What might explain that?
Third, should the U.S. government bailout American investment banks in 2007-2008 (or should it bailout anyone else) as a financial crisis emerges.. (Watch this short version (2 minutes) of the explanation of 2007-2008, from the HBO movie version of Aaron Ross Sorkin’s Too Big to Fail book.
I’d like you to read the 800-page book, but for now try some of these reviews of his book:
In the Economist, https://www.economist.com/node/14743362/print
The Guardian, https://www.theguardian.com/books/2009/dec/13/too-big-to-fail-sorkin
The Independent, https://www.independent.co.uk/arts-entertainment/books/reviews/too-big-to-fail-by-andrew-ross-sorkin-1833641.html
If this is what you love, you can read a pretty good excerpt of the book at https://www.vanityfair.com/news/2009/11/too-big-to-fail-excerpt-200911
So, what really happened?
The 2011 Financial Crisis Inquiry Report [don’t read this yet] offers the Democratic view of things (it’s the fault of deregulation and greedy banks) and the dissent: two shorter Republican views of things (it’s the fault of a volatile global financial market and of U.S. government efforts to make mortgages available to riskier borrowers). You might skim the ten-page summary (of the Democratic conclusions) that begins at page xv.
It’s probably better if you watch this VICE special on what happened. It interviews the many key bankers and policymakers, you hear from them in their own words. It is slow in parts, but covers a lot of the important contexts and questions. Throughout, you can hear the voices of Keynes and Hayek. And you can see that it is not an American problem, it is a global problem. Some vulgar language.
You might also enjoy watching the HBO film version of Too Big to Fail, where people don’t get to portray themselves in their best light. It is available online for free with amazon prime or for $3 on YouTube, Google Play, iTunes, etc. It’s better to read the 800-page book, sure, but you can get some of the main ideas, including contagion and moral hazard from the film. The film has frequent unnecessarily-vulgar language, if you prefer to avoid that.
Ok, Your turn…
There’s really a lot to consider here. But in short, the Keynes vs. Hayek debate continues. In 500 words or so, by Thursday or Friday night discuss which of these debates resonates most with you – which debates are most interesting today, and why? You might choose from the ones listed above but also from any of many other contexts?
By Sunday night or Monday, you should be engaged with each other. Reply to one or more of your classmates (in approximately 500 words total), building on each other’s arguments. You don’t need to agree with each other, but learn from and add to each other.
By Friday night, please also let me know by email what paper topic you might be interested in pursuing for our end-of-semester paper. I’d also like to meet with each of you on Skype or Facebook video chat for just a few minutes to check in, say hello, etc. Please email me by Tuesday night about your availability for day or evening chats this week.