The development and spread of liberal economics (OCR A-Level Politics): Revision Notes

32.1.1 The development and spread of liberal economics

The Development and Spread of Liberal Economics

Liberal Democracy and Liberal Economics:

Liberal democracy is defined as a system of governance where there is the rule of law, a capitalist economic system, and the essential features of democracy such as free and fair elections, participation, representation, and accountability. In this system, the rule of law ensures that no person or institution is above the law, and all actions are governed by statutes and constitutions enforced by an independent judiciary.

A liberal economy or capitalist system is characterised by wealth creation driven primarily by the private sector, with minimal government intervention. Wealth and property ownership are protected by law, allowing individuals and businesses to operate in a market where supply and demand dictate the economy.

Historical Spread of Liberal Economics:

The spread of liberal economics is closely linked to the Industrial Revolution, which began in England in the late 18th century. Innovations in manufacturing, such as in iron, steel, and textiles, facilitated mass production and contributed to rapid economic growth. This industrialisation soon spread across Western Europe and the United States during the 19th century.

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Globalization and Economic Liberalism:

The latter half of the 20th century saw an acceleration of globalisation, largely driven by the promotion of free trade and liberal economic policies by international institutions like the International Monetary Fund (IMF) and the World Trade Organisation (WTO). As global trade expanded, more states began to adopt neo-liberal economic policies, integrating into the global economy and contributing to the spread of liberal economics.

The End of History?

By the end of the 20th century, liberal democracy and capitalism seemed to have triumphed as the dominant global systems. Francis Fukuyama, in his 1989 essay "The End of History and the Last Man," argued that capitalism represented the final stage of human development, contradicting Karl Marx's prediction that communism would be the ultimate end-point. Fukuyama's ideas emerged during the collapse of the Soviet Union and the democratisation of Eastern Europe, a period when even China and Russia were adopting capitalist-style economic reforms.

However, the 21st century has shown that Fukuyama's predictions were not entirely accurate. Events like the Arab Spring, which sought to democratise parts of the Arab world, faltered in countries like Libya, Egypt, Syria, and Yemen. Additionally, new ideologies, such as fundamentalist Islam promoted by groups like Al-Qaeda and Islamic State, and the rise of authoritarian populism in countries like Russia, China, and Hungary, have posed challenges to the dominance of liberal democracy.

Economic Peace Theory:

The development and spread of liberal economics are closely tied to the idea of economic peace theory. This theory posits that market-oriented economies are less likely to engage in war with one another because they are interconnected and mutually dependent. The theory suggests that economic interdependence promotes stability and peace, as the cost of conflict would be too high for economically integrated states.

Thomas L. Friedman, in his 1999 book "The Lexus and the Olive Tree," famously proposed the "Golden Arches Theory," which claimed that no two countries with McDonald's franchises had gone to war with each other after establishing those franchises. This idea was based on the notion that countries with strong middle classes and integrated economies would avoid conflict. Friedman later updated this theory in his 2005 book "The World is Flat," introducing the "Dell Theory," which argued that no two countries that are part of the same global supply chain would go to war with each other. This theory highlighted the significance of economic interdependence in maintaining global peace.

Economic Liberalism and Human Nature:

Economic peace theory is built on the assumption that states act rationally in their own interests, with an optimistic view of human nature. In a globally integrated economy, countries are deterred from engaging in conflict due to the high financial and human costs associated with war. Proponents of this theory argue that "the freer the market, the freer the people," suggesting that economic freedom leads to political and social freedoms. Furthermore, a market free from state intervention is believed to lead to the most efficient allocation of resources.