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CPOL 510:  Power and Money: Topics in Global Political Economy

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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.

Optional: you can watch Commanding Heights episodes 1.12 and 1.13 (total 15 minutes) on stagflation.  You can watch episodes 1.14 through 1.16 on Thatcher and Reagan (19 minutes). 

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.


20 Replies to “510-PAM-sum19-May27”

  1. It is apparent that in both the Mexican and U.S. financial crises, policy makers favored a Keynesian approach toward remedy through massive bailouts, rather than allowing the markets to crash and, theoretically, correct over time. The $50 billion U.S. bailout package to Mexico in 1994 seems almost minuscule compared to the $700 billion bailout package employed 14 years later during the U.S. crisis.

    Generally speaking, I gravitate toward Keynesian principles, favoring social thinking and viewing the economy as a system to be guided along by mitigating regulatory forces; however, I believe it is crucial to understand and respect the capability of the markets to function autonomously when forming mechanisms of control. As with water, its power may be harnessed to great benefit in producing energy, however, in the waves of the ocean, we realize quickly where our limitations lie. So too, should we approach with caution our interventions.

    I was struck by how brusque the dialogue became amongst various American officials involved in addressing the Mexico crisis. In both the Commanding Heights video and the reading, former Treasury secretary Robert Rubin did not mince words as he conveyed the true motivation for American intervention, “If our government didn’t step in to help, and help quickly, the immediate and long-term consequences for Mexico could be severe. But the real reason for acting was that critical American interests were at stake” (p.1). Clinton concurs, stating, “The borders will be flooded with illegal immigrants…We’ll have an enemy on our southern border… And we will pay hugely for that” (Commanding Heights 3.7). So we see American self-interest as the primary consideration, and assisting a neighbor/ally as secondary. This is surely an appropriate approach to diplomacy; however, it seems likely that absent Mexico’s geographic proximity to the United States, the $50 billion bailout would not have happened. It was heartening to hear that the objective was successful and that Mexico paid back the loan early. While perhaps unsavory to conservatives, the ideal of neighborly assistance coupled with protecting national interests was enough to spin the story favorably enough to eventually satisfy the electorate.

    The American crisis employed a similar bailout approach, albeit on a much grander scale with the potential for disastrous domestic and global consequences. Although public optics are a constant consideration in American politics, sometimes to our peril, the sheer enormity of this crisis seemed to eclipse convention. Here we see the republican president, George W. Bush, compelled to work with Treasury and the Fed in their efforts to compile nearly a trillion dollars to bail out big banks. While liberals may argue that favoring Wall Street is well within the neocon playbook, it must be conceded that public bailouts are definitely not within traditional conservative orthodoxy. Additionally, we see in the Vice Special that then candidate Obama was thoughtful enough to take the initiative to maintain a dialogue with the republicans involved in the issue, putting politics aside in order to have some path forward post-election. Ultimately, the Keynesian approach was successful, yet incapable of satisfying negative public sentiment.

    Conversely, we see the down side of bailout risk played out in the Asian financial crisis with the real-world effects of contagion spreading from Thailand to Indonesia to Korea. Perhaps in the intricacies of their scenario, it may have been appropriate to allow the markets more of a self-correcting role, although we can’t know for sure. I simply mean to show that ultimately I believe a balance is needed between Keynesian and conservative approaches to economics and that no single methodology should be applied universally. Individual economies with their unique laws and customs should be carefully considered and a functional balance struck, containing the flexibility to accommodate changes as they arise.

    1. Hi Jeff. I really enjoyed reading your post. You raise some interesting points about how we were really acting in our own self-interest in rescuing Mexico. This resonated with me as well. In Prof Quirk’s Intro to IA class, I discovered that I view the world through the Realist lens, so the description of the Mexican bail out (I use the term even though Rubin claims it wasn’t a bail out!) as an act of U.S. self interest fit neatly into my view. When I saw the clip of President Clinton talking about how the bail out more in terms of it being the right thing to do for our southern neighbor, my first thought was, “wow, Liberalism (as an IR construct) might actually exist.” But then I watched the rest of the videos and read Rubin, both of which were individually enough to confirm my view of the world. At the same time, it can be hard to reconcile that with the fact that it was so very difficult to convince Congress and the American people that bailing out Mexico was in their own best interest. I was left with the impression that Rubin and the rest of the Mexico team worked incredibly hard to come up a solution that ultimately protected the American economy from the potentially devastating effects of a Mexican collapse; however, no one seemed to appreciate it! Congress (at least publicly) and the American people did not look favorably on sending tax dollars to Mexico and Mexico resented the U.S. and the IMF from dictating terms. I think it raises interesting questions about how to balance policy and politics and how difficult that can be when time is of the essence.

      1. Yes Genevieve, the negative public sentiment you mentioned appears to be a present in both the U.S. and the Mexico crises, and perhaps partially a byproduct of both PR obsessed politicians and hyper-critical corporate media. In the case of Clinton, he encountered the added difficulty of negotiating bailout terms with a congress which had that very month ceded control of both houses to the republicans for the first time in 41 years. President Obama at least had the convenience of democratic control of both the house and senate, though his immediate predecessor, under whom the crisis unfolded, did not. It seems to me that the U.S. is capable of excelling during times of crisis, but I can’t help but wonder why we must come so close to the brink before taking action. It would be better to see legislators take proactive measures to honestly asses the system, seek bipartisan/bicameral compromise, and formulate laws to the benefit of America as a whole, rather than continually spiral through the gauntlet of campaign, media, and party antics.

      2. Right, Genevieve – how can policymakers manage incredibly complex sets of questions in ways that the non-expert masses can care and understand…

    2. Jeff, I do appreciate your post and like you, I too tend to gravitate toward a more Keynesian principled approach and value that economic ideology a bit more than Hayek though I would say there are of course some positives to Hayek’s views as well (of course).
      I think that when you talk about the “brusque” nature of the Mexican crisis and America’s approach I also was slightly disturbed by this and did not see it as good will or integrity but more self-interest as well but do believe that this is inevitable and not necessarily a bad thing. I think that, while it may seem kind of harsh and cruel, there is a value in seeing a country who makes the hard call of knowing when to step in and when to not since they have to weigh the benefits to their people and nation as well. Now, I am in no way saying not to step in and help/aid a humanitarian crisis or to economically or financially help developing nations when a wealthier nation has the ability and resources to do so, but I do think there was a lot to balance out and having some self-interested reasoning is important to make sure that the United States is not sacrificing all of its wealth and power and might in a developing country who is failing at the expense of their own stability. I do think that sometimes nations must make these hard calls but that there is room, in this global economy and the globalized relations including non-state actors for NGOs and other non-state actors to take the lead on making sure humanitarian aid and issues are met and treated and for governments to only worry about the pros and cons and benefits to itself and the other state in need is not necessarily a bad thing.
      We have seen throughout history that the United States has tended to come in to conflicts or economies or crises and does have a record of arguably ruining or pushing the state into further chaos with its intervention so I believe the weighing out of the risks, pros, cons, benefits, interests and priorities is a tell-tale sign that Clinton did not want to have the US go down for it. I think that these are impossible or severely challenging calls to make and it’s a good sign of leadership (not just Clinton, but his advisors and others in his administration) who helped with the decision making over this controversial decision that had present impact and long-term effects beyond just stimulation of the economy but having effect over relations at a global level, reputation, future implications and outcomes. I think that the debates we learned this week (Asia, Mexico and 2007-2008 US) all showed what happens when a Keynesian or Hayek type approach is instituted and due to other factors: world relations, the timing, the era, politics, evolving values, media influence, prioritization can all have different effects and shows that what once should be a more Hayek approach due to the era or timing, can in a few years require a more Keynes approach and vice versa.
      Like you, though, I was overall taken aback at first though seeing that the interests of the US are the only main factor that allowed them to decide to aid its neighbor, but thinking of the bigger picture and the job of leadership in crises, it makes some sense.

    3. Jeff,

      You’ve id’d one of the key questions – not “market” or “state” but what’s the right balance and timing of market and state – you can see how differently 1970s China v 1990s China, or 1930s US v 1990s US, etc.

    4. Hi Jeff ..
      The financial crisis that faced the US in 2008 and other countries such as Mexico in the 1990s attracted Keynesian principles from the government. The US government saw it safe to bail out the banks instead of relying on a self-correcting system that had no assurances of succeeding. I personally support Hayek’s argument that the economy should be left alone to determine the equilibrium price of goods and services. However, in times of crisis, it is mandatory for the Keynes principles to be applied since the economy has failed to autocorrect itself. Regarding the Mexico crisis, the government was right to bail them out to protect its domestic affairs. Since Mexico closely neighbors the US, a deep crisis may translate to more immigrants coming into the country. A high number of immigrants may put the security of the country at stake and make most Americans lose their jobs. Therefore, the US government was justified to help the Mexicans to protect the interests of the two nations.
      Banks play a critical role in the economy where they coordinate the flow of money from the Federal banks to the market. A crisis in the banks may curtail the economic prosperity of a country since businesses cannot thrive as expected. Therefore, bailing out the banks was a sound approach to protecting the US economy from more crisis. The funds from the Federal Reserve helped the banks to continue with their operations of giving out loans to stimulate the economy. However, the Federal Reserve must strictly regulate the banks to avoid mismanagement of funds from the Bank managers who may be relying on government bailouts.

    5. Jeff,
      I believe that Mexico proximity to the US, was an important factor, but I think that factor is exaggerated. The US has supported in a total of tens of billions of dollars to Egypt’s military and Israel. That shows that proximity to the US is not that strong factor. As the preservation of US foreign policy is- by far- greater factor. Moreover, when it comes to the best economic approach there is defiantly no universal solution as you wrote. Although, I believe that countries such as the US, the member states of the EU are more likely to benefit and recover economically with a Keynesian approach. That is due to many reasons mainly the capability of their economies and the human and institutional resources that counties like the US and member states of the EU have.

  2. “There are no atheists in foxholes”

    In the Rubin chapter on the Asian crisis, he summed up my impressions well by saying that just as there are no atheists in foxholes, there are no ideologues in financial crises. Ideology does not matter when you are facing financial Armageddon. You do what you have to do, whether it be Hayek or Keynes, if it means rescuing the global financial system. My interpretation of the U.S. response to the Mexican and Asian crises was that it was a hybrid Hayek-Keynes approach. According to Rubin, two of the most important things to do when trying to stop cash outflows during a financial crisis are to 1) re-establish confidence through policy changes and 2) infuse enough cash to give the new policies enough time to work. In the case of Mexico and the Asian countries, the new policies were distinctly Hayekian. For example, the U.S. and the IMF bargained hard for market-based reforms such as allowing currencies to float (Mexico and the Asian countries) and lending on market driven terms versus government mandated terms (South Korea). On the other hand, the massive in-flow of IMF and bilateral international funds bears the mark of Keynesian government intervention, albeit on a global scale.

    While followers of Hayek might smugly note that it was government intervention (pegging currency to the dollar) that got Mexico and the Asian countries into trouble in the first place, we cannot ignore the fact that these countries did not have adequate regulation, enforcement, or oversight over banks and lending. Those conditions ultimately led to the unreasonable accumulation of risk that ultimately triggered the crises. Moreover, the 2008 banking crisis happened in the U.S. without the type of currency manipulation that was happening in Mexico and the Asian countries, but with a “hands off” regulatory approach. In the years leading up to the crisis, the United States’ banking and finance industries were operating in a deregulated environment with somewhat lax oversight. It was the accumulation of unreasonable risk in this environment that triggered the crisis.

    The initial emergency action to save the U.S. financial system was pure Keynes. Even the Hayekian free-marketeers were unwilling to stand on ideology and let the system collapse. But after the initial intervention, the debate resumed: should the United States spend its way out or let the market figure it out. I believe that Congress’s failure to authorize more spending earlier in the crisis prolonged the recovery. While the wealthiest members of society came out of the crisis OK and landed on their feet, the least wealthy are still struggling to recover, even as the economy benefits those at the top. The effect of this disparity on the national discourse and resulting policies cannot be understated. In essence, Hayek is not working to help those who need it most and Keynes was not given an adequate opportunity to really have an effect. I believe that the result is, as Sorkin observed in the HBO video, the rise in populism. I could easily go on for another 500 words about how, as Rubin observed, that our political system might not be well suited to the global economy and works against the best economic interests of those who need it the most. But I will save that for another day.

  3. The debate of bailout of investment banks is interesting as it showcases the discrepancies of the Keynes and Hayek principles. Besides, banks are crucial institutions in the economy where they act as the link between the Federal Reserve and the public. Firstly, banks work under the regulation of the government through the Federal Reserve that sets policies relating to interests and the amount of loans to lend to the public. Therefore, the financial crisis that occurred in the US in 2008 meant that the government policies had failed to streamline the operations of the banks. Goldman Sachs, the Lehman Brothers, AIG, and Morgan Stanley were all crumbling down despite the government being the major regulator (Sorkin, 2009). Secondly, Hayek principles of a free market failed to apply in 2008 as the market forces could not restore stability in the financial firms. Therefore, it is interesting to note that there are times when either Keynes or Hayek principles cannot independently restore equilibrium in the economy.
    Banks and other financial institutions have been finding themselves in a rough road due to mismanagement and instability in the global economy. Those who are in charge have been misusing the shareholders’ funds leading to losses. Besides, the increased competition between banks has lowered their profit levels hence implicating some to tremendous losses. This is what happened during the 2008 financial crisis where banks such as Goldman Sachs were going through hard times. The debate remains whether it is prudent for the government to bail them out from the financial turmoil. Keynes ideas can support this kind of action from the government as it will spur employment and economic stability. On the contrary, Hayek can argue that the economy should be left alone to attain stability.
    Moreover, bailing out investment banks can exacerbate corruption and mismanagement of funds in the financial institutions. Managers can misuse the shareholders’ funds and engage in money laundering like the Lehman brothers (Foley, 2009). They can hide the money in foreign accounts as they know that the government will bail them out in times of crisis. Nevertheless, bailing out the banks can restore the macroeconomic stability in the economy where the interest rates can drop hence spurring economic growth. However, the government must be keen on the kind of banks they bail out. There should be strict regulations on the operations of the banks by the Federal Reserve. In addition, the Federal Reserve should come up with a general framework of how the banks will be operating to avoid financial difficulties. This can ensure that most banks adhere to the set policies hence avoid the trap of being in financial crisis.
    Today, there is a debate in the US regarding the increased regulation of the government. President Donald Trump has vowed to put the interest of the Americans first. Therefore, the government is adopting Hamilton principles of having a strong government that has direct control of all the economic aspects of the country (Quirk, 2013). For instance, the government is regulating international trade by restricting the number of imports to the US. Recently, the US banned Huawei from using android features. The increased regulations of President Trump will also touch the banks hence making it hard for them to fall into financial crisis. The critics of the President claims that he is an entrepreneur who has no interest for the citizens. However, I think that the US is in the right course of realizing the benefits of regulations. If the financial institutions are well regulated, there will be no room for mismanagement and money laundering. Therefore, these institutions will thrive well without any hiccups hence leading to economic stability in the country.
    Foley, S. (2009). Too Big To Fail, By Andrew Ross Sorkin. https://www.independent.co.uk/arts-entertainment/books/reviews/too-big-to-fail-by-andrew-ross-sorkin-1833641.html
    Quirk, J. M. (2013). Economics and the Dynamics of Political Change. https://govt396.files.wordpress.com/2019/05/keynes-hayek-sorkin-more-from-dpc-sum13-sorkin-too-big-to-fail-keynes-hayek-hamilton-list.pdf
    Sorkin, A.R. (2009). Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – and Themselves. https://www.economist.com/node/14743362/print

  4. This week’s discussion, a sequel to last week’s topic, continued with a view of the contrasting views of John Maynard Keynes and Friedrich Hayek when it comes to the argument on the proper role of government in the economy. In line with what was touched on last week, it is evident that Keynes supports government intervening in the economy to ensure stability, while Hayek is of a different view which stresses the peril of losing liberty as government continues to expand in its presence and power over the economy. This week’s material provides insights into crucial past and current debates about whether governments should involve themselves in their domestic economies or international (or international) economies. It serves as a further avenue to assess the positions of both Keynes and Hayek.
    ​In this week’s discussion, the description of International Relations (IR) and International Political Economy (IPE) was discussed in detail, with both relating to impacts governments have on global economies. The materials provided insight into the four models of IR which include Realism, Liberalism, Constructivism, and Marxism. While Realism, Liberalism and Constructivism had participation by states, it is only both Liberalism and Constructivism that see the states having to share power with nonstate actors. Marxism on the other hand has economic classes being the main actors in the economy. In terms of processes used to interact, competition is used in Realism, this competition is complemented by cooperation in Liberalism, and exploitation is used in Marxism. In Constructivism, the process of interaction used depends on the social context and historical period.
    ​Three debates were provided from which I will be choosing one that resonates most with you as well as one I feel is most interesting today. The first debate focused on whether the U.S should get involved to save Mexico in 1994 from financial collapse. The second debate focused on whether the U.S should intervene in the currency collapses in Southeast Asia between 1997 and 1998. The third debate was more domestic as it focused on whether the U.S government should intervene and bailout large American investment banks in 2007-2008 during the financial crisis.
    Of these debates, the one that resonates most with me was the debate about whether the U.S government should have intervened in the economy to bailout the American investment banks after the 2007-2008 financial crisis. Not only does this debate seem closer in time than the other two and is still in contention today, it showed firsthand how badly a lack of regulation could result in tremendous fraudulent activities and greed on the part of the private sector. I was amazed after watching the video to see just how far the mortgage institutions and banks went in limiting the necessary criteria to provide cheap access to very risky loans just so that they could make money. An example was that of Merrill Lynch which was engaged in repackaging very risky mortgages and making them look attractive to unknowing borrowers (Financial Crisis Inquiry Commission, 2011, p. 202). Rating agencies also played a part in this fraudulent scheme with many like Moody’s Investor Service engaged in inadequate rating of mortgage loans just to increase their own revenues and bottom line (Financial Crisis Inquiry Commission, 2011, p. 206). All these played a huge role in the collapse of the financial system. In this regard, the bailout of the investment banks was very necessary because as mentioned in the video, the acts by the banks led to a collapse of the whole financial system which impacted many Americans negatively. I strongly support the government stepping in to not only bailout but to put in place stiff regulations that will stop something like this from happening again. Reading excerpts from the book titled “Too Big to Fail” by Aaron Ross Sorkin from the various links provided was very enlightening. I was particularly shocked to find out that some of the main culprits that led to the financial crisis in 2008 are still around in the industry and even doing better than ever (Sunderland, 2009). It is no wonder that Sorkin believes that they are starting to feel invulnerable (Sunderland, 2009). It is fair to say that the government should not have bailed them out but not doing so could have completely crumbled the system and destroyed the lives of millions of people permanently in the U.S and around the world.
    I liken this debate to what is happening in the realm of social media companies like Facebook and Twitter. Part of the debate today is about whether they have enough oversight and regulations from the government because the way they were used to distort the 2016 elections in the United States and are playing a huge role in misinformation around the world shows a need for government to step in take some control. This is a very interesting debate today because when these social media platforms were formed, they were only seen as a form of socializing but now they command billions of users around the world. This dynamic makes information sharing and privacy concerns more distorted and at risk than ever before. It is clear that what happened during the 2007-2008 financial crisis is a result of what Hayek supports and what Keynes dreaded. When Hayek claimed government intervention limited liberties, I am sure he did not envisage the players in the economy being greedy and running the financial system into the ground. This is something that Keynes feared, and it is what led to his position that government needed to be involved in the economy.

    1. EA, I enjoyed your perspective. You discussed Hayek’s concern that government intervention in the financial system would lead to dictatorship, fairly stating that he surely didn’t envision the level of greed and corruption which led to the U.S. crisis. The “Commanding Heights” profile indicates that the impact of hyperinflation in Austria following WWI, in which Hayek’s wages rose from 500 kronen per month to one million kronen per month in a nine month period, had a drastic impact on his perspective. Unfortunately, I believe he takes too hard of a stance by barring all forms of government intervention. Consider that greed and corruption is condition of human nature which must be tamed and mastered with empathy and self control. These factors are no less present in those who influence the market than in those who run government. We see in the 2008 U.S. crisis how unchecked greed endangered the globe. I contend, therefore, that unchecked markets could lead to oligarchy, be it on paper or in practical application. Sadly, it seems that perhaps even with the bailout, the elite top bankers still received their bonuses and proverbial golden parachutes. According to the New York Times, only one top U.S. banker went to prison for crimes related to the financial crisis, and he copped a plea, ensuring him a sentence of 30 months (https://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-financial-crisis.html). A check-and-balance approach which mimics that of our federal system could prove useful in the financial system with regulations designed to ensure the markets’ personal liberty is respected and protected so that it may flourish to its potential. The flip side is that our government leaves much to be desired in living up to what it puts on paper, so in reality, even a check-and-balance system has its significant challenges and manipulations. Kudos on your comparison at the end to social media. Perhaps the beginning of the bubble burst there was the 2016 U.S. presidential election!

    2. EA,

      I like your connection to social media giants today. Hayek would have known about the industrial giants and trust-busting, but these were more economic questions, separate from the level of an individual’s right to speech and from an individual’s susceptibility to political influence… nice

    3. EA,
      I found your perspective very interesting. In particular, your eloquent emphasis on the part of the finical crisis of 2008 it was not a matter of right and wrong to bail out banks in principle it was a matter of practicality to save the US economy. Moreover, the Keynesian approach is as you stated in many cases like the 2008 financial is a necessity. Moreover, as you mentioned efficient regulation is needed and the lack of it is likely to lead to economic catastrophes fueled by greed. Another important factor in this context is the lack of what can be called popular awareness. Many people- epically prior to the 20057 crisis- lacked finical awareness. That lack of financial awareness on a micro level was a leading cause to a catastrophe on a macro level in the US in 2008.

  5. I think the debate over whether or not the US should have bailed out Mexico, in 1994, or not is an interesting one that brings in different viewpoints and conflicting ideas from different lenses, approaches, philosophies and values. Firstly, there was a moral obligation on behalf of the US to engage in aiding their neighbor whom they had just entered into the NAFTA agreement with. The North American Free Trade Agreement was entered into by the US, Canada and Mexico as parties to an agreement literally right before the Mexico economy plummeted and the financial and economic crisis imploded right from under them. This then had a humanitarian impact in causing a country, Mexico, to face imminent poverty, danger, instability and struggle which, as President Clinton stated, would “certainly cause…5-9 million illegal immigrants to rush to the border due to hunger, poverty and looking for work.” This would have had serious effects on the US economy in-turn by causing them to have to balance and weigh out how to deal with the influx of human beings which would consist of families and weigh out how to determine who can stay and who’d be turned back while balancing the needs of the American citizens as well. Desperation and humanitarian crises paired together made for the imminence of danger and possible war even higher of a likelihood too.

    Besides this, coming from an international perspective, the actions of the United States is always looked at by its friends, its foes and everyone in between. This means that the decision on how to deal with this controversial situation was being watched by the entire world and how the United States handled it would determine how the world saw it and could affect their standing and power, reputation and future trade deals or future alliances or lack thereof depending on what they decided to do. From Clinton’s standpoint, having foreign nations view them as a country who tapped into its resources as a wealthier nation to help nations in need to benefit both parties was the best way to go no matter the controversy of putting up a ton of money on the outset. Having a reputation at the international level is necessary to maintain ones status as a powerhouse in the globalized economy and to create potential lasting power as a respected nation by friends and seemingly more of a threat unable to be toppled by foes. Overall reputation matters.

    Another conflicting viewpoint was if the United States decided not to bail Mexico out, it would hurt the stability of its southern border, it would create tensions that could result in war or the possibility of having enemy nations come into bail Mexico out and create alliances against the United States and secondly would create a humanitarian crisis like no other (at the time) due to the economic instability and implications of choosing to stay silent and not act.

    Taking into consideration the IR theories, liberalism seemed to be the best approach in this since bailing Mexico out would make for states to be in cooperation instead of choosing conflict which would in turn hurt both parties/states anyways and have a ripple effect to other sectors/non-state actors as well.

    I think that looking at Keynes and Hayek, Hayek views would be against bailing out since it would mean economic outcomes due to government intervention but Keynes would look at the stimulation of the government help as helping the economy in the long-term. I tend to agree that the bailout overall had way too many pros over cons at the time it was decided and that the Keynesian approach, a liberalism standpoint and the amount of humanitarian, reputation, global scale concerns outweighed the hefty cost upfront.

    But this decision definitely made me realize realistically how many viewpoints have validity to major policy decisions and the amount of risk and uncertainty is quite concerning and only in retrospect is it able to be determined a success or failure. I think the gut feelings of Clinton and his advisers made the right decision in the moment to choose to go forward with the bailout. We are better when we help others from a political, moral, humanitarian, reputation, economic, security and power standpoint.

    1. Hi Acatiggay. I appreciate your perspective, coming from outside the United States and your discussion of the United States’ moral obligation. When I lived abroad (6 months in South America, 1 year in Europe), it was very interesting to look back at the United States from the lenses of my host countries. My observation was exactly as you say: the world watches closely how the United States uses its political and economic influence. One aspect of this that I found interesting (and that was reflected in the video on the Asian crisis), was that regardless of whether the United States intervened or didn’t intervene, it would come under equally as heavy criticism. For example, while friends and acquaintances were quick to criticize the United States for acting as the world’s policeman in places like the former Yugoslavia and the Middle East, they were equally as quick to decry U.S. decision not to act as the world’s policeman in Syria. There are a lot of nuances to these conflicts that I acknowledge, but I was reminded of these conversations during the Asian crisis video when one of the speakers accused the United States of colonizing Thailand as a part of the bail out package. Certainly, if the United States (and international partners) had channeled Hayek and let the Thai economy collapse, the Thai people would have been resentful that we did not use our political and economic largesse to lend a helping hand and save millions from abject poverty. But we did help, and we did use our political and economic influence to get the Thai economy back on its feet. Regardless, there was a lot of resentment. Similar to the exchange Jeff and I had (above) on the difficulties of domestic politics, there are also tensions in international politics. This is a common theme present in global relations, resulting from the United States’ ubiquity, politically, economically, and culturally. I view the love-hate relationship the world has with the United States to be one of the side effects of globalism and is something that remain cognizant of and interested in, especially during my international travels.

  6. The ideas of Keynes resonate and make more sense to me. Governments in the world -is certain cases- must interfere when needed to prevent any possible economic catastrophe and to elevate its economy when a recession depression takes place. Humankind is mostly driven by self-interest and greed. Hayek’s notion that any government interference undermines personal freedom is an overstatement. Without governments limitation on the greed of cooperations and banks, it is very likely that an economic catastrophe will take place. It is an exaggeration to claim that governments are always smart and know what they are doing, but in many causes government whether elected or not are more aware and capable to maintain national economic prosperity. There is differently no economic system or approach that is a panacea for every time and place. Moreover, if we take the 2008 economic crisis in the context of the United States’ economy, we will find that Keynes ideas are very relevant. Prior to the crisis many of the people of the United States did not have adequate financial awareness, relied on banks that were driven by reckless insane greed. Furthermore, if the government of President Obama did not interfere after the finical crisis many would argue that the whole US economy would have collapsed and gone into a depression similar to the depression of the 1930s. Keynes idea in the context of the post-WWI Germany was- I argue- is very true not only in that case but almost always. When a defeated country is crushed with economic sanctions a strong, violent retaliation is very likely to happen. That obviously happened with the rise of Nazism and the eruption of WWII. Moreover, one of the main reasons that led to the rise of radical groups in the Middle East was the sanctions on Iraq (1990-2003) after the defeat of Saddam Hussain in Kuwait (1991). Bin Laden himself in an interview with Al-Jazeera spoke about the sanctions in Iraq that he and others capitalized on to strengthen the anti-west sentiment.

  7. Several of you,

    Several of you have id’d an important pair of ideas –

    (1) that we are looking at 1990s problems with 2010s eyes — the presumption from the mid-1980s into the 2008 crisis was a distinct preference for market solutions – from both parties – in the same (opposite) way that 1971 GOP Pres Nixon said (sort of) “We’re all Keynesians now.” 1990s Pres Clinton was as liberal-internationalism, free-trade, no-govt-on-the-new-Internet in the way any GOP policy maker was. And by 2008, GOP Treas Sec Paulson was as interventionist as Keynes ever was. We associate Keynes with New Deal Democrats and Hayek with Reaganomics, but it’s really more bipartisan at times than that

    (2) and as Genevieve, BA and others note, it’s hard to disentangle “domestic” and “foreign” policies in global economics…. Bailing out Mexico in 1994 definitely bailed out Mexico. But it also bailed out US banks and maybe prevented a refugee surge to the US border. If you watched to the end of the 1997-1998 crisis, you saw that it went from Asia to Latin America to Russia to Long Term Capital Management – a Wall Street firm. In 2008, bailing out US banks bailed out US banks who had made enormous amounts of money and then made enormously bad bets — but bailouts that by a matter of days might also have quite literally prevented nationwide food shortages – “no milk in the stores in four days”. We can see the opposite today: new US tariffs on imports from Mexico and China can hurt Mexico and China, but they also risk hurting the US (directly and indirectly).

    Great – what else?

  8. Hi Jeff
    Thank you for your detailed comment about this week’s discussion exercise. I agree with you that the Keynesian approach was favored and executed in solving the Mexican and U.S financial crises. I was particularly disappointed in the way the investment banks (in the U.S bailouts) were bailed out with taxpayers’ money just because their existence almost determined the fate of the whole financial and economic system of the U.S. Although I understand that Keynes’ view was for the government to serve as some sort of guide and regulator in the system, this episode showed how the government could be forced to step in and even bail out people who engaged in fraud just because of their perceived responsibility to the citizens of the nation. It would have been better in my own view if the government had used the Hayek approach and let these businesses go under so that more ethical and responsible businesses could spring up. I understand that this might be a very harsh approach, but it would surely help to deter similar actions by such firms in the future.
    ​I also agree with your point of view that the U.S bailouts do not align with conservative views of fiscal responsibility and limited government. This was certainly not adhered to by the Bush Administration when they decided to bail out the banks in 2008. The bill which was signed in 2008 and saw $700 billion made available for banks was named the Emergency Economic Stabilization Act (Amadeo, 2018). This was a significant sign of government taking up a huge presence in the markets when it should not be as Hayek proposed. Many might argue of the need for this to have happened, but I would have rather preferred the economic forces worked to correct the mess these banks created.

  9. Hi Genevieve
    Thank you for your post. I must say that I do not completely agree that there are no ideologues in financial crises. I think although people would be in a state of chaos when such situations as financial crises take place, some people would still stay strong to their beliefs about whether the government should intervene or not. Reading Hayek’s view over the past few weeks have made me realize that someone like him would be totally averse to the government coming in to save the day during a financial crisis. The views of Rubin are very interesting to me but one thing that I worry about with his second point of infusing so much cash into the economy to enable the policies to work is that it could lead to inflation which could compound matters even more One might correctly say that inflation should be the last thing to worry about in a financial crisis but I think that its impact might persist for a long time if not properly managed.
    ​I agree with your point that the U.S banks were operating in a laxed and deregulated environment which stimulated the crisis in the first place. This is something that should not have been allowed to go on for so long. Although I am more of a proponent of Hayek’s point of view of limited government intervention in economies, I still feel that they should be properly equipped to provide oversight and regulatory guidelines that would prevent fraudulent actions by firms in the markets.

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