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CHAPTER 2
“LAISSEZ-FAIRE”: THE ECONOMIC LIBERAL PERSPECTIVE
Overview
This chapter outlines the liberal perspective in International Political Economy (IPE), linking the
recent rise of the economic liberal view to its historical roots. We trace the broader idea of
liberalism from eighteenth century France, through nineteenth century England, to the twenty–
first century. We also consider some events that shaped this point of view such as the case of the
nineteenth-century Corn Laws and the Great Depression.
We discuss some of the words and arguments of famous political economists such as Adam
Smith, David Ricardo, John Maynard Keynes, Friedrich Hayek, and Milton Friedman. We stress
that liberalism (like all the IPE perspectives) has evolved, and it contains many strands of
Key Terms
•
economic liberalism
•
rent-seeking
•
Corn Laws
•
positive-sum game
•
embedded liberalism
•
hegemonic stability theory
•
public goods
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Teaching Tips
• This chapter contains many quotations that can be used effectively in class to bring out the
power and complexity of liberal ideas. Instructors may also want to bring into class other pithy
• This chapter traces the evolution of liberal ideas and discusses their consequences for state–
market relations and different policies. Some students will be confused by the fact that
• It is good to ask the question “What makes Mill and Keynes liberals?” This is a controversial
question with respect to Keynes, but the quotations provided (and especially the suggested
reading by Skidelsky) make the answer clear.
• One element of economic liberal thought that merits discussion is the importance of
competition in truly free markets. Box 2.2 on ordoliberalism provides a good basis to
1. Adam Smith and John Maynard Keynes are both liberals, in the broad sense in which this
term is used in IPE. Explain what views Smith and Keynes share regarding the market, the
state, human nature, and power. How do they differ?
2. Explain the key assumptions and assertions of classical liberalism.
3. How do liberals such as David Ricardo view international trade? Why do they hold this
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5. Explain several key arguments of John Maynard Keynes.
Sample Multiple-Choice Questions
1) Adam Smith favored “laissez–faire” policies, where individuals, guided by the “invisible
hand,” would produce social benefits. The invisible hand stands for
a) government regulation.
2) Which of the following best states Smith’s ideas related to moral sentiments?
d) Serving one’s own interests in a competitive society means competing to best serve the
interests of industrial society.
3) David Ricardo favored free international markets. Which of the following ideas about free,
open markets is not associated with Ricardo?
a) Open markets promote efficiency.
4) John Stuart Mill is most noted for changing liberalism to reflect
5) Which of the following is not one of the main elements of capitalism listed by the authors?
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e) markets coordinate society’s economic activities
6) Embedded liberalism can be summed up in which of the following statements?
a) International markets should be subject to political regulations in order to protect
7) In the liberal view today, a hegemon is
a) a rich and powerful state that supplies the international public goods necessary for a
8) Which of the following statements about the views of President Reagan and Prime Minister
Thatcher is incorrect?
a) They both favored market deregulation.
9) This supporter of globalization argues that if a country wants to benefit from globalization, it
must put on a “golden straightjacket,” i.e., the country must adopt economic liberal policies
and accept some limits on state sovereignty.
10) Heterodox economic liberals recommend all of these policies except
11) Who admitted before a U.S. congressional committee in 2008 that his assumptions about
financial markets and banks were flawed?
a) Ben Bernanke
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12) Ordoliberals would agree with each of the following statement except which one?
d) The market requires an appropriate set of legal and political institutions.
13) Compared to neoliberals, heterodox economical liberals are less likely to believe in
a) the efficient market hypothesis.
Suggested Readings and Links
Bhagwati, Jagdish. In Defense of Globalization. Oxford: Oxford University Press, 2005.
Birch, Kean. A Research Agenda for Neoliberalism. Northampton, MA: Edward Elgar, 2017.
Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962.
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New
York: Farrar, Straus & Giroux, 2005.
Fukuyama, Francis. The End of History and the Last Man. New York: The Free Press, 1992.
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Polanyi, Karl. The Great Transformation: The Political and Economic Origins of Our Time.
Boston: Beacon Press, 1944.
Ricardo, David. The Principles of Political Economy and Taxation. London: Dent, 1973.
Audiovisual Resources
Capitalism. Part 1, Adam Smith: The Birth of the Free Market. Ilan Ziv, dir. Brooklyn, NY:
Icarus Films, 2015.
Commanding Heights: The Battle for the World Economy. William Cran, dir. Invision
Productions Limited in association with Heights Productions and WGBH Boston. Boston:
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Supplementary Materials
These supplementary discussions for Chapter 2 were written by Professor Ross Singleton
and originally appeared in the 4th edition of this textbook. They are:
• “The Market Model”
• “Market-Based Resource Allocation”
• “Economic Efficiency”
• “Efficiency vs. Equity”
The Market Model
At the heart of the liberal perspective lies the market as the means of allocating scarce resources
among competing uses. An appreciation of the market mechanism in this regard requires a basic
understanding of the market as captured in the following market model. The market model
demand curve, from P1, Q1 to P2, Q2 in Figure 3–1. As the price of a commodity falls,
consumers will substitute more of that commodity for other goods, which now cost relatively
more. The inverse relationship between price and quantity demanded reflects the law of demand.
So, the effect of a change in price is depicted by a movement along the demand curve. How
about the effect of a change in any other determinant of demand? A change in any determinant of
demand other than the price of the commodity itself will cause a shift of the entire demand curve.
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The supply of a particular commodity (the willingness and ability of producers to supply the
commodity) depends on the price of the commodity, the prices of resources needed to produce
the commodity, production technology, the number of producers, and other factors. The quantity
of the commodity supplied increases when the price of the commodity increases, holding other
determinants of supply constant. This is depicted as a movement along the supply curve, from
P1, Q1 to P2, Q2 in Figure 3–2. The profit-maximizing response to a higher price is to expand
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The market is in equilibrium at the price at which the quantity demanded and the quantity
supplied are in balance. In Figure 3–3, P1 and Q1 are the equilibrium price and quantity,
respectively.
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Market-Based Resource Allocation
Using this simple model, we can now describe how resources are allocated and reallocated via
the market. Assume that consumer tastes and preferences turn in favor of the particular
commodity, the market for which is depicted in Figure 3–4. The demand for this commodity will
increase. The demand curve will shift to the right to Demand. At price P1, a shortage of the
commodity (Q3 – Q1) will be created as the quantity demanded exceeds the quantity supplied.
The shortage in turn will cause the price of the commodity to rise, and as the price rises,
These resources will be bid away from other lesser-valued uses. Consequently, resources will be
reallocated away from other uses and to this use in accordance with changing consumer tastes
and preferences. No central agency or authority oversees this resource reallocation process;
rather, this reallocation occurs in response to the incentives created by the higher price for the
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commodity. That is, producers increase production in an effort to increase their profitability, not
out of concern for the well-being of consumers and not because they have been directed to do so
by a central planning authority. Yet the producer’s self-interested behavior ultimately serves
If, instead, consumers’ tastes and preferences move away from a particular good, the demand for
that good will decline—the demand curve will shift left. Consequently, there will be a surplus of
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Economic Efficiency
The concept of economic efficiency is central to the study of IPE. Public policies, and even
entire economic systems, are evaluated based on their “efficiency.” But what does this term
mean? It is a slippery term, in part, because of the various meanings implied or intended by its
use. Efficiency may mean one thing to an economist, another to a sociologist, and something else
again to a political theorist.
Economists’ conceptions of economic efficiency include allocative, production, and dynamic
efficiency. Allocative efficiency concerns the allocation of scarce resources among competing
uses—a fundamental task that every society must undertake in one way or another. We will use
the market model we have developed to illustrate the concept of allocative efficiency in some
Resources are best allocated among various goods and services by the state (structural
perspective) or by the market (liberal perspective) or by some combination of the two.
Regardless of the mechanism, the goal is, presumably, to allocate scarce resources to their most
highly valued uses in order to maximize social welfare.
Social welfare from the perspective of an economist has a very particular meaning. The social
welfare that can be derived from a particular commodity (a good or service) is the total benefit
The allocation process using the market is decentralized in the extreme—no one is in charge.
Rather, the interactions of individual consumers and producers as reflected in demand and supply
result in an efficient allocation of resources (absent the many well-known causes of market
failure, including monopoly, externalities, public goods, and information problems). Recall that
the demand curve represents the prices that consumers are willing and able to pay for additional
units of a commodity. Economic theory suggests, in turn, that the price a consumer is willing and
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The significance of this outcome can best be appreciated if we consider the notion of opportunity
cost. The opportunity cost of using resources in one use is the benefit foregone of not using those
resources in their best alternative use. For example, the opportunity cost of reading this
paragraph is the benefit you otherwise would have realized from using your time (a very scarce
resource) in its best alternative use (perhaps watching a rerun of Seinfeld, or working on a cure
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units, were produced, a social welfare loss equal to the area efc would be incurred from the
underallocation of resources to this commodity. For example, the marginal benefit of the fourth
unit is $8, and its marginal cost is $3. If resources are not allocated to the production of this unit,
$5 in social welfare will be lost. If more than seven units are produced, say, ten units, a social
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Efficiency Versus Equity
The question remains: Is an efficient allocation of resources necessarily an equitable (fair)
allocation of resources? In fact, the concept of allocative efficiency is based on a very particular
(some might say peculiar) definition of social welfare. Recall that social welfare is defined as
total benefit minus total costs. Further, marginal benefit is reflected in the price that consumers
are willing and able to pay. Unless a consumer is both willing and able to pay, his or her
Those in tune with the liberal perspective tend to think in terms of market justice. Market justice
implies that the income each member of society enjoys (and therefore the votes he can cast in the
market) equals the contribution each member makes to national output. Brain surgeons are rich
(and deserve to be) because they render services that are highly valued—they contribute
substantially to national output. Star athletes or entertainers are ultrarich because they provide
Market justice also means that those of us who might be disadvantaged regarding our ability to
contribute to national output due to circumstances beyond our control (physical or mental
disability, born to a drug-addicted single mom, discriminated against in the workplace based on
race or religion, etc.) will earn very little income and therefore have little access to the goods and
While market justice can be harsh, it does undeniably create strong incentives to be productive.
By establishing a direct link between effort and reward, individuals are rewarded for their hard
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Against the liberal notion of market justice stands the ideal of distributive justice as associated
with structuralism. The essence of distributive justice is captured in Karl Marx’s dictum, “From
each according to his ability and to each according to his need.” In a society that really adheres
Or does the would-be brain surgeon choose not to undertake the arduous years of necessary
training, knowing that her efforts will not lead to commensurate monetary rewards? Does the
mill worker fail to show up on Mondays and Fridays? Does the entrepreneur bother to innovate?