CHAPTER 2
“LAISSEZ–FAIRE”: THE ECONOMIC LIBERAL PERSPECTIVE
Overview
Liberalism, like many other terms we use in IPE, suffers from something of a personality disorder. The
same set of letters means different things in different contexts. In the United States today, for example, a political
“liberal” is generally one who believes in a strong and active role for the state in society, helping the poor and
solving collective social problems. Yet economic liberalism has come to meant almost (but not exactly) the opposite
of this. Since the mid-1980s, someone who has been thought of more narrowly as an economic liberal believes
almost but not exactly the opposite. For economic liberal (often referred to as neoliberals) the state should play a
limited if not constricted role in the economy. In the United States, England, and some European nations, many
liberals have much in common with those people and their political parties that are now referred to as
“conservatives” in the sense that they focus mainly on sustaining individual rights, resisting state oppression, and
preserving society’s traditional values and institutions.
This chapter outlines the liberal perspective on 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. Along the way we discuss some of
the words of some of the most famous political economists, Adam Smith, David Ricardo, John Maynard Keynes,
Friedrich Hayek, and Milton Friedman. Economic liberalism arose and evolved in reaction to important trends and
events in the real world. Along it path to the present day, we will pause to consider the events that shaped this point
of view such as the case of the Corn Laws, which illustrates the political economy of liberalism in the context of
nineteenth–century Britain.
Note: An appendix to the chapter “The Market Model, Market–Based Resource Allocation, Economic
Efficiency, Efficience Vs. Equity,” appears in the IPE website: www.upugetsoundintroipe.com. It lays out the
formal market model for instructors who want to explore some of the ideas, values, and methodologies of traditional
formal rational choice oriented economists.
The chapter concludes with a discussion of the changing views on liberalism and economic liberalism in
particular. It describes the difference between orthodox economic liberals (OELs) and heterodox interventionist
liberals (HILs). Globalization and the financial crisis of 2007 have both caused many officials and experts to
question and even revise their beliefs about classic liberalism. However, due to entrenched beliefs, influential
supporters, and various other reasons, economic liberalism itself continues to influence state policies.
The chapter’s four main theses are: 1) economic liberal ideas continue to evolve, reflecting changes in
society; 2) the laissez-faire ideas of economic liberalism gained popularity during the laissez-faire Reagan and
Thatcher administrations; 3) orthodox economic liberalism (OEL) has increasingly come under attack for its failure
to sufficiently deal with such things as the financial crisis and poverty; and 4) although weakened, laissez-faire ideas
and policies are likely to remain popular in many nations.
Learning Objectives:
• To identify and discuss the fundamental principles of liberalism and economic liberalism.
• To examine and discuss how these principles are illustrated in the ideas of Adam Smith and others.
• To explain why economic liberals fear concentrated power, in either the state or the market.
• To explain and discuss why economic liberals view individual action as a positive-sum game.
• To explain and discuss why economic liberalism differs from mercantilism.
• To identify and discuss the implications of economic liberalism for policy issues.
• To examine how the Corn Laws illustrate the conflict between mercantilism and the economic liberal ideas of
David Ricardo.
• To discuss how the views of J.S. Mill and J.M. Keynes caused key changes in economic liberalism.
• To define the Paradox of Thrift and explain how it illustrate the failure of the invisible hand and the role of
government in the market economy.
• To define the Keynesian compromise and how it is illustrated in the Bretton Woods system.
• To explain and discuss how the conservative views of Hayek and Friedman and the neoliberal policies of
Reagan and Thatcher represent a backlash against Keynesian liberalism.
• To discuss the impact of the 2007 financial crisis and difficulties achieving recovery on neoliberal ideas.
• To discuss the status of liberalism today and why some theorists feel the popularity of economic liberal ideas
and policies related to globalism and globalization have reached their zenith.
• To describe the emergence of heterodox interventionist liberals (HILs) and ordoliberals, and to compare their
ideas to those of classical liberals.
Chapter Outline
ROOTS OF THE ECONOMIC LIBERAL PERSPECTIVE
a) Liberals, in the classical sense used here, are not as sanguine as are mercantilists about the outcome of an
active role of the state in the economy.
b) They fear the heavy hand of government and seek to liberate the individual from state oppression.
c) The broad term “liberalism” means “liberty under law.” Thus, all liberals believe in freedom, individual
rights, and free markets. It is no accident that liberal and liberty have the same Latin root. Human nature is
competitive in a constructive way and guided by reason, not emotions.
d) Liberals believe that people are fundamentally self-interested but do not see this as a disadvantage because
competing interests in society can be constructive.
e) Classical economic liberalism is rooted in reactions to many trends in seventeenth and eighteenth century
Europe. Classic liberals respect the market and the individual, often distrusting the state, concerned over its
potential to abuse power.
f) Francis Quesnay (1694-1774) led a group of French philosophers—the Physiocrats—who condemned
government interference in the market. They adopted the motto laissez-faire e laissez passer—or telling the
state “hands off” the economy.
g) In his famous book The Wealth of Nations, Smith opposed mercantilism in favor of the state focusing on
creating wealth, which produces more power and thus national security—another mercantilist objective!
h) For Smith, the state is manifested in the Parliament, which until the 1830s was dominated by landed gentry’
interests that favored mercantilism. When power was redistributed to entrepreneurs and industrialists,
economic liberal ideas finally took root. (See the Corn Laws box).
i) Adam Smith believed in the cooperative, constructive side of human nature. He believed that the best
interest of all of society is served by (rational) individual choices, which when observed from afar, appear
as an “invisible hand,” that guides the economy and promotes the common good.
The Dominant Features of Capitalism
An overview of some of the ideas and tenets of capitalism based on Smith’s work.
• Markets help coordinate society’s economic activity by allocating resources given the tastes and
preferences of individual consumers.
• Extensive markets exist for the exchange of land, labor, commodities, and money.
• Competition regulates economic activity; consumer self-interests motivate economic activity (individual
self-interest serves society’s interest).
• Freedom consists of free enterprise; individuals are free to start up new businesses without state
permission.
• Private property gives the owner of a resource a legal entitlement to the income that flows from the
resource.
Comments on these features include:
a) The first three features deal with the nature and behavior of markets: products and services are
commodified when producers set prices for them.
b) Charles Lindblom explains how markets organize and coordinate society; markets determine our jobs and
shape choices about travel, entertainment, and food.
c) Karl Polanyi classic book The Great Transformation explains how and why markets require land, labor,
and capital. Modern capitalism was born in the seventeenth-century when land in Great Britain was
privatized and people moved from the countryside into industrial areas where they worked in small
enterprises like woolen mills. This provided a financial foundation and labor for the industrial revolution.
d) When economists say that competition regulates economic activity they are explaining how Smith believed
that the pursuit of individual self–interest serves society’s interest.
e) In a capitalist economy individuals make rational-choices based on their needs and desires. But competition
constrains and disciplines self-interest and prevents it from becoming destructive to the interests of others.
f) Capitalism assumes that price competition results in the efficient allocation of resources among competing
uses. Economic liberals believe that no one should be in charge of allocating resources, especially the state,
should be in charge of that process. Resource allocation should reflect the tastes and preferences of
consumers.
g) Government intervention in the market distorts resource allocation.
h) Competition compels corporations to be efficient, i.e., to adopt many cost-saving measures in order to
compete with other producers.
i) Competition requires many companies to adopt new technologies that decrease production costs or are
attractive to customers in some way.
j) The last two features deal with the role of the state in establishing freedom of enterprise and private
property. Enterprises should be able to channel their goods and services to those who are demanding
(willing to spend) for them.
k) Individuals should be free to make their own career choice and take advantage of new opportunities when
they arrive.
l) Capitalists are usually adamant that the income of those who own capital is usually in the form of profits.
Profit is what is left over after workers and providers of raw materials and services are paid. Whatever is
left over is considered to be profit.
m) When property is private, producers are motivated to make investments in improving their property and
providing them with the collateral to do so.
n) Freedom of enterprise allows owners to test new ideas and products in the market.
Smith, the Cynic and Moralist
a) Although many view Adam Smith as an economist who believed in the rule of the invisible hand of the
market above all else, his economic philosophy was in fact more complex.
b) In a less famous book The Theory of Moral Sentiments, Smith appears to contradict some of his most
famous orthodox economic liberal ideas.
c) In the case of his views of the state, Smith is clear that the state is necessary and has some legitimate
functions in society such as defending the country, enforcing contracts, keeping the market functioning, etc.
d) Smith did not trust businesspeople and capitalists.
e) He expected producers to pursue their self-interest in monopolizing the market.
f) He also distrusted bankers and employers who sought to keep wages low.
g) For Smith, rich merchants had a disproportionate influence over parliament in contrast to other groups they
used to persuade the state to allow them to disregard competitive pressures and that the interests of the
merchants was identical to society’s interest.
h) The exceptions merchants gained from parliament included exclusive use of licenses, tariffs, quotas and
other protectionist measures.
i) Even though Smith favored laissez-faire, he also favored the state enforcing competition to help the market
function properly. He feared what today is known as rent-seeking, which occurs when the state rigs the
market in ways that favor or rewards certain (powerful) businesses.
j) For these reasons the state was also visible in that state power was necessary to make the market work
properly in the face of capitalists who would destroy the market.
k) In The Theory of Moral Sentiments, the market must be proactively structured in such a way as to produce
righteous and prudent people. Sounding like Marx, Smith said “the welfare of servants, laborers, and
workmen of different kinds” should be the prime concern of economic policy.
l) Serving one’s own interests in a competitive society means competing to best serve the interests of others,
to behave honestly, and to gain a reputation for fairness.
THE TRANSFORMATION OF LIBERAL IDEAS AND POLICIES
a) Smith’s writings were part of a broader intellectual movement that engendered intense economic and
political change in society. Other writers in this rubric included John Locke and Thomas Jefferson.
b) Liberal political philosophy holds that in order for markets to work, people need to have negative rights
(freedom from state interference and freedom from unlawful imprisonment), along with positive rights
(freedom to do certain basic things such as freedom of speech), and a participatory democratic form of
government to guarantee the positive and negative rights.
c) Economic liberals focus on the domain in which nation–states show their cooperative, peaceful,
constructive natures through harmonious competition.
d) International trade is a positive-sum game that benefits all parties, and not a cutthroat zero-sum competition
as mercantilists assume.
e) Smith condemned tariffs (taxes) and most state restrictions on trade, but did support the mercantilist
Navigation Acts that protected British industries
f) David Ricardo was one of the first economists to explore the scientific principles of free trade, arguing that
using talents and resources appropriately and trading for other goods and services created maximum
economic benefit to the trading parties.
g) These positive-sum payoffs bind states together by common interests in economic intercourse.
h) Economic liberal supporters of globalization argue that strong ties of mutual advantage weaken the need for
national security and war while helping generate a “universal society.”
i) Ricardo vehemently opposed the Corn Laws (see Corn Laws box on p. 33)
Box: Britain’s Corn Laws
a) The Corn Laws were restrictions on food imports enacted by Britain in 1815 to protect the agricultural
interests that then dominated Parliament.
b) Industrial interests and liberals, including Ricardo, opposed the Corn Laws, as they increased production
costs, reduced profit, and limited the amount that other nations imported from Britain.
c) After the Corn Laws were repealed in 1846, industrial production and exports increased, allowing for short-
term expansion of the British economy and building national wealth and power.
JOHN STUART MILL AND THE EVOLUTION OF THE LIBERAL PERSPECTIVE
a) Mill doubted the extent to which the competitive process and economic freedom of capitalism would turn
the pursuit of self-interest into the service of society’s welfare.
b) Selective state intervention in the market, including educating children and assisting the poor, would help
correct the market’s inherent inequalities.
c) As liberalism evolved, laissez-faire was still the guiding principle; however, liberals had to accept some
governmental interference in the market to achieve a number of social objectives.
JOHN MAYNARD KEYNES AND THE GREAT DEPRESSION
a) Keynesianism refers to the ideas and policy recommendations of John Maynard Keynes during the Great
Depression. Like Mill, Keynes believes that there are situations where the state must play a larger but still
limited role in the economy in order act to protect society from the negative effects of infallible markets.
b) The state should try to mediate the ups and downs of the market so as to limit the uncertain effects of the
market on society. In the 1930s the United States used a combination of monetary and fiscal policy to
sustain wages for labor, instead of worrying about inflation. One effects was spending deficits along-side
many public works projects and other measures to restore growth and faith in the economy.
c) The 1929 Great Depression, the 1997 Asian financial crisis, and current financial crisis demonstrate
investor pursuit of rational-individual self-interests who were spooked and stampeded out of the market do
not always coincide with enlightened social-collective interests.
d) The paradox of thrift accounts for both investors and consumers to not want to spend during a recession
or depression, increasing unemployment and worsening the chances of recovery.
e) International speculation also needs regulation because it makes financial market prone to economic
disaster.
f) Like Smith, Keynes argued that the economy should serve society and that accumulating wealth was a
“somewhat disgusting morbidity.”
The Keynesian Compromise: Reconciling State and International Interests
a) Keynes played a major role in the reconstruction of Western Europe after World War II.
b) A major problem was how to reconcile the objectives of restoring stability and economic growth which
required limiting protectionist policies and opening up the international economy, all the while helping
states recover which required positive state action.
c) The Keynesian Compromise is the idea that management of the international economy would reflect
peaceful cooperation of states to work through the three Bretton Woods institutions (the IMF, World Bank,
and GATT) while states agreed to gradually reduce state protectionist policies.
d) The idea of embedded liberalism accounts for situation between the 1930s and 1970s where international
markets were subject to social and political restraints and regulations that reflected chiefly domestic
priorities.
e) Hegemonic stability theory is the idea that international markets work best when a hegemon (a single
dominant state like the United States after World War II) accepts the costs associated with keeping markets
open for the benefit of both itself and its allies by providing the allies with certain international public
goods such as defense and foreign aid at its own expense.
THE RESURGENCE OF CLASSICAL LIBERALISM
a) As Keynesian liberalism evolved to justify a good deal of state intervention in the market, a backlash
movement developed in the 1970s when some of Keynes’ ideas about the relationship of recessions to
inflation became suspect.
b) In the late 1970s and 1980s the classical economic ideas of Friedrich Hayek and Milton Friedman, became
the basis of what became known as neoliberalism, which replaced those of Keynes as the dominant
outlook about the international political economy.
c) Hayek wrote about the importance of freedom and the slippery slope we face when we begin to empower
the state to provide things individuals could better provide for themselves. Milton Friedman wrote of the
dangers of concentration of power in the state and the importance of political and economic freedom (to
choose).
d) Many neoliberal ideas form the basis of the recent policies of U.S. vice-presidential candidate Paul Ryan
who argues that “paternalistic government will stand in the way of the pursuit of happiness and the good
life.”
REAGAN, THATCHER, AND THE NEOLIBERALS
a) President Ronald Reagan in the U.S. and Prime Minister Margaret Thatcher in Great Britain were
influential in the advance of neoliberal policies as well as public support for these policies.
b) Neoliberal policies (often referred to as Reaganomics) often involved privatization of state-run enterprises,
deregulation or a decrease of the state’s role in the market, and tax cuts. These policies were later credited
with helping the U.S. and to some extent Western Europe’s economies recover from an economic recession
in the late 1980s and early 1990s.
c) Thatcher’s motto about economic liberal policies was TINA—‘There Is No Alternative.’
d) In the 1980s the United States promoted globalization—policies that extend economic liberal ideas and
policies the world over.
e) One assumption was that expanding economic growth would also help realize democracy the world over.
THE 1990s AND 2000s: NEOLIBERALISM AND GLOBALIZATION UNDER ATTACK
a) Initially, neoliberalism was initially credited with helping the international economy recover in the early
1990s. The Clinton administration supported many economic liberal trade agreements and a new World
Trade Organization (WTO) to replace the GATT.
b) By the turn of the century neoliberalism was under attack by anti-globalization protestors for supposedly
causing violations of human rights, damaging the environment, depriving poorer countries of effective
representation in international economic organizations, and fostering sweatshops in developing countries.
c) Globalization was not creating a more peaceful world.
d) Former employees of the World Bank and the IMF criticized these institutions for imposing neoliberal
policies on nations that did not have the proper institutions to allow the market to work properly, and for
making it difficult for developing nations to get out of debt.
e) As they viewed the disparities between the rich and poor, most experts began to acknowledge that relying
solely on neoliberal economic policies would likely undermine the prosperity of even the richest nations.
Instead, markets needed to be embedded in social and political institutions in order to have legitimacy and
to resolve fundamental human problems.
f) An ardent supporter of globalization Thomas Friedman, acknowledged many of the problems globalization
contributed to.
g) Despite these critics and problems with globalization, many experts such as Jaghdish Bhagwati and Paul
Collier continue to defend many neoliberal ideas.
h) By the mid-2000s a number of critics and supporters of globalization had converged around the argument
that some better regulations and global governance are needed to deal with a variety of issues that cannot
be solved by unfettered markets and globalization alone.
The Financial Crisis: A Stake in the Heart or Just a Scratch?
a) No single event in recent history has seemingly undermined economic liberalism as much as has the recent
financial crisis, which produced the most severe economic collapse since the Great Depression.
b) U.S. Fed Chairman Greenspan admitted that his faith in self-regulating financial markets had been
misplaced and that there were flaws in economic models of how the world works that led to excessive
speculation and investor risk taking in large parts of the world.
c) Presidents Bush and Obama and later many European officials felt that there was no alternative but for the
bank to bail out the many banks that had failed. (Chapters 8 and 12 contain more details about the current
crisis.)
d) In the absence of state regulation, many banks and investment firms took on excessive economic risk.
However, most of the risk was assumed by new investors, allowing original investors to profit handsomely.
An Outdated Economic Theory and Ideology
a) Many experts criticized state regulation, arguing that markets were self-correcting mechanisms. Some
argue that free market theorists have underestimated distortions in markets, overestimated markets’ ability
to self-adjust, and failed to account for the long-term problems resulting from markets’ short-term
incentives that led to excessive speculation.
b) The financial crisis reinforced the idea that economics was still a “dismal science” that had become
obsessed with mathematical models and an emphasis on fighting inflation, while allowing for recurring
asset bubbles.
c) Professor Robert Schiller argued that “group think” played a major role in shaping the views of both
experts and officials.
d) The promises of wealth and faster growth took priority over social stability and relative income
distribution.
e) Laissez-faire policies were heavily promoted by the wealthy and the “financial oligarchy” in Washington,
D.C. and many European capitals.
f) Christina Freeland labels the group a “plutocracy” that moves freely about the world benefitting from tax
breaks and government subsidies.
g) Matt Taibbi and Charles Ferguson argue that together with high paid lobbyists, they operate at the expense
of the public.
We Are All Keynesians Now (Again! At Least for a While?)
a) The financial crisis brought about the re-emergence of Keynesian thought among heterodox
interventionist liberals (HILs), who believe the economy should serve the broader interests of society
rather than just the wealthy.
b) In contrast to orthodox economic liberals (OELs), most HILs believe the financial system requires a
sophisticated and effective regulatory and legal framework that only the state can provide—a state strong
enough to enforce those laws but without stifling the profit motive, economic freedom, and individual
liberty.
c) While HILs are not opposed to globalization per se, many such as Joseph Stiglitz, Simon Johnson, and
Martin Wolf of the Financial Times believe that it should be managed in such a way that allows for greater
wealth distribution to the masses, for instance, by state provided regulatory and legal frameworks to
enforce laws without stifling profit, freedom and liberty.
d) Developing countries, for example, should be allowed more protection while industrialized nations reduce
their barriers to trade.
e) Economic-oriented international finance institutions such as the IMF, World Bank, and WTO should get
away from a “one-size-fits-all mentality of how economies should be run.
f) Many HILs are open to creating different kinds of economies and social systems. (See the Ordoliberalism
box below.)
g) Laissez-faire ideas remain popular for several reasons: they are deeply entrenched in values and ideals of
many societies; they are relatively easy to understand; they invoke the promise of greater wealth; they are
supported by the wealthy; and they continue to be promoted by politically powerful individuals.
Box: Ordoliberalism and the Social Market Economy
a) Ordoliberals believe that the failings of liberalism resulted from the failure of nineteenth and twentieth
century “laissez faire” policy makers to appreciate Adam Smith’s insight that the market is embedded in
legal and political systems. They strongly believe that the protection of human dignity and personal
freedom is important.
b) Alfred Müller-Armack, who is credited with developing the basis of the social market economy that
characterizes many European states, accepted key ordoliberal principles but argued that supplemental
“social” policies were necessary to ensure that market outcomes would indeed be consistent with the good
society.
CONCLUSION
a) Liberalism has changed to reflect a variety of different theories and changes to society in different
historical periods.
b) In the recent past OEL ideas have become very popular, especially as they have served as the theoretical
foundation of “free market” policies that emphasize wealth and free enterprise but also globalization and
the spread of relatively unregulated capitalism the world over.
c) The negative effects of globalization and the recent financial crisis have called into question many of the
precepts of these ideas and the policies that are associated with them.
Key Terms:
• economic liberalism
• heterodox interventionist liberals (HILs)
• orthodox Economic Liberals (OELs)
• rent-seeking
• Corn Laws
• positive-sum game
• zero-sum game
• Keynesianism
• paradox of thrift
• Keynesian compromise
• embedded liberalism
• hegemonic stability theory
• hegemon
• public goods
• neoliberalism
• Reaganomics
Teaching Tips:
• This chapter contains many quotations that can be used effectively in class to bring out the power and
complexity of liberal ideas. Smith and Keynes provide especially good material for understanding the
complexity of these thinker’s views and student reaction to them.
• One of the themes of this chapter is the evolution of liberal ideas and values as part of liberal theory and policy
(liberalism) and its consequences for state–market relations and different policies. Some students will be
confused by the fact that liberalism and conservatism are nearly synonymous, in the sense that these terms are
sometimes used in IPE. It is a good idea to simply confront this problem right at the start to avoid confusion
later. Try to draw out this dynamic element as you go through this chapter. Ask students to carefully distinguish
between classical liberalism and economic liberalism as we understand it today. Ask them why they think there
is now so much tension between political liberals and economic liberals—or OELs and HILs.
• 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.
• Try to work through this material on several levels. Try to push students to see the differences in shading and
color that distinguish, for example, a Keynesian economic liberal and an OEL. Also press your students to
understand why economic liberals do not accept mercantilist arguments. On the other hand, for many reasons
(discussed in different chapters of the book), this distinction has been breaking down. And as noted in the
chapter, the lines between political and economic liberalism have been blurring. Encourage students to look for
this mixing and the tensions that it causes when it comes to explanations of the financial crisis in other chapters
of the text.
Sample Essay-Discussion Questions:
1. Adam Smith and John Maynard Keynes are both liberals, in the broader sense 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. How do liberals such as David Ricardo view international trade? Why do they hold this opinion? Explain how
the Corn Laws debate in nineteenth–century Britain illustrates the conflict between mercantilist and economic
liberal views of international trade.
3. John Stuart Mill and John Maynard Keynes thought that government could and should play a positive role in
correcting problems in the market. Discuss the specific types of “market failures” that Mill and Keynes
perceived and the types of government actions they advocated. What kinds of policy recommendations do you
think Mill and Keynes would favor today? Explain.
4. The term “liberal” in IPE means something different from what it means in everyday political discussions.
Explain the difference and briefly explain how and why the term took on its current meaning. Use some of the
works or points in the chapter related to Margaret Thatcher, Ronald Reagan, Milton Friedman, Dani Rodrik,
Paul Collier, Thomas Friedman, James Galbraith, Martin Wolf, Alan Greenspan, or ordoliberals in the EU to
discuss what it means to be a liberal today. Another case would be that of presidents Bill Clinton, George W.
Bush, and Barack Obama, who some argue are very similar to one another when it comes to their views about
the role of the state in the economy. Or are they?
5. Apply the issue to the state’s role in the economy and market failure today. Depending on your own background
and interests, discuss with students where this tension exists today in different countries or in relation to
different issues such as the causes of the current global financial crisis.
6. Another issue is the popularity of economic liberal values and policies, especially in the United States. Ask
students to explain this trend and why neoliberalism appears to be in decline at the moment. Also ask them why
during the global financial crisis many experts have recommended reading Keynes over economic liberals such
as Hayek or Milton Friedman.
7. Discuss the liberal view of hegemony stability theory and contrast it with the views of mercantilists and
structuralists (when Chapter 4 is read). Ask students how the theory would apply to the issue of the causes of
the current global crisis and solutions to solve it. (Note: Chapter 8 would be very helpful here, but for now get
the conversation going.)
Sample Examination Questions:
1. Adam Smith favored “laissez–faire” policies, where individuals would achieve social benefit guided by the
“invisible hand.” The invisible hand stands for
2. When it came to moral sentiments, which of the following best states Smith’s ideas?
3. David Ricardo favored free open international markets. Which of the following ideas about free, open markets
is not associated with Ricardo?
a) open market promotes efficiency
4. John Stuart Mill is most noted for changing liberalism to reflect
a) the need for less state regulation of the economy.
5. Which of the following is NOT one of the five main tenets of capitalism listed by the authors?
a) the existence of markets for land, labor, commodities, and money
6. The Keynesian compromise can be summed up in which of the following statements?
7. In the liberal point of view, a hegemon is
d) a strong capitalist nation that uses its power to exploit less developed countries.
8. Which of the following statement about the views of President Reagan and Prime Minister Thatcher are
incorrect?
a) They both favored market deregulation.
9. The term “embedded liberalism” refers to
d) the idea that markets need to be an accepted institutions for international organizations and
nongovernmental organizations.
10. This supporter of globalization has recently been critical of its impact on the environment and supports increase
state regulation in this policy field to promote, among other things, energy efficiency?
a) Joseph Stiglitz
11. According to the authors, the financial crisis has led many HILs to assert that _____ must act to save the
financial system and even capitalism itself.
a) the U.S. Congress
12. According to HILs, when it comes to reforming the WTO, IMF, and World Bank, they would like to see
a) more state contributions to these IOs.
13. Which of the following is NOT likely to be on the list of things OELs would recommend to solve the global
financial crisis?
a) limit government support for banks, infrastructure projects, and social welfare programs
14. According to Ordoliberals _____ is the basis of their plan that makes it work.
a) high economic growth rates
15. Who admitted before a U.S. congressional committee that he had made a big mistake when it came to the
fundamental assumptions of market failure and models?
a) Ben Bernanke