16.1 The Origins of International Political Economy

Learning Outcomes

By the end of this section, you will be able to:

• Define international political economy (IPE).
• Describe mercantilism.
• Define wealth according to the mercantilist theory.

International political economy (IPE) is a vast field of study occupied with the investigation of political processes and their economic consequences, which have both domestic and international impacts. IPE describes and explains the extent to which politics and public policies define winners and losers among different groups in a society.⁹

Those components of politics and policy making in a country that result in specific public policies are referred to as political factors. These components can be domestic, such as the organization of the electoral system, how politicians interact to establish policies, and the level of economic and institutional development, among others. They can also be international, like, for example, the pressure toward globalization and trade liberalization since the 1990s. Domestic and international political factors compel politicians to establish certain public policies.

Public policies invariably promote wealth redistribution in societies. As mentioned above, these policies shift benefits and costs across different groups and thus establish winners and losers.¹⁰ The example of the “commitment vs. avoidance game” played during the COP26 summit illustrates how governments negotiate environmental issues with eyes on how the policies they establish will cater to their constituents and thus increase these politicians’ chances of remaining in power.¹¹

Yet, political factors are constantly changing, and as they change, policy makers redesign policies, redefining the winners and losers. Profound transformations occurred in Western Europe during the Enlightenment, paving the way for the current economic system in the United States—the market economy, or capitalism. Such transformations also prompted the establishment of political economy as the field dedicated to the study of the relationship between politics and the economy. Adam Smith (1723–1790), a Scottish political thinker and economist, was one of the first to examine the relationship between politics and the economy. Given the influence of his writings on the development of the field, he became known as the father of political economy.

Although political economy only emerged as a field of study in the late 19th century, politics and the economy were already interconnected in the real world. Political economy has been around for as long as politicians have been making decisions that favor some groups at the expense of others.

The changes in politics and the economy that occurred during the Enlightenment deeply altered political and economic practices domestically and internationally. The centralization of political power in the hands of the monarch in Western Europe during the 17th and 18th centuries, known as absolutism, illustrates the impact of these changes and how they laid the foundations for the market economy. During the absolutist era, the belief in divine providence—that God had chosen the monarch to govern—was widespread. Monarchs had absolute political power and made decisions with the aim of increasing that power. At the time, power and wealth were interchangeable concepts: power begot wealth and wealth begot power.

This environment provided fertile ground for mercantilism, the dominant economic system throughout the absolutist era. Mercantilism was based on capital accumulation, or the increase of wealth. Notice, however, that during the absolutist era, there were no paper currencies: no US dollars, Mexican pesos, or Euros. The currency was made of precious metals, gold and silver. The more gold and silver acquired, the wealthier—and more powerful—the monarch or the country.

Precious metals are naturally occurring elements and cannot be created (despite alchemists’ best efforts); thus, the amount of wealth in the world was considered finite. Because wealth was limited, wealth accumulation was a zero-sum game.¹² The fact that a monarch got some gold meant that others had lost it. Therefore, to preserve their wealth and power, monarchs not only took precious metals whenever they could but also fiercely protected the wealth in their possession.

As rumors about “new worlds” rich in gold and silver circulated in Western Europe in the 16th century, monarchs sponsored naval fleets to venture into unknown seas in search of riches. Several European ships ended up “discovering” land and colonizing Native peoples in the Americas as well as in Asia, Africa, and Oceania. As the “new worlds” were colonized, monarchs could extend their domain to the colonies. Taking advantage of their absolute power, they seized precious metals and increased their wealth.¹³ After all, power begot wealth.

Wealth also begot power. During the 16th, 17th, and 18th centuries, European armies were composed of mercenaries.¹⁴ In times of impending war, monarchs would hire soldiers to defend their countries. The more wealth a monarch possessed, the more soldiers they could afford, and thus the higher their chances were of winning the war and maintaining their power.¹⁵

Given that wealth was finite, monarchs sought to accumulate wealth, or capital, through protectionist policies, which safeguard the domestic economy against foreign competition through the establishment of trade barriers such as tariffs, subsidies, import quotas, and other restrictions on imports. The rationale behind protectionist policies is that as a country’s balance of trade, or the difference between the value of exports and imports in a given period, maintains a surplus, the country accumulates capital.

Protectionist policies limited trade across countries and thus suppressed any incentives for industrial innovation and market development. Economic activities during the absolutist era were extremely limited; agriculture, food production, and the production of consumer goods used rudimentary inputs and technology. Production output was basically for subsistence, and common people had very few possessions. Only the royal family and the aristocracy had access to the few goods available for consumption, while the majority of the population did not consume much.

Yet, the capital the monarchy and aristocracy accumulated during mercantilism made the Industrial Revolution possible. The Industrial Revolution promoted many significant changes at the end of the 18th century. These changes pressured monarchs to let go of protectionist policies in favor of trade liberalization, helped markets to flourish, and welcomed the participation of the individual in the economy.