Embedded liberalism is a term for the global economic system and the associated international political orientation as it existed from the end of World War II to the 1970s. The system was set up to support a combination of free trade with the freedom for states to enhance their provision of Welfare and to regulate their economies to reduce unemployment. The term was first used by the American political scientist John Ruggie in 1982.
Mainstream scholars generally describe embedded liberalism as involving a compromise between two desirable but partially conflicting objectives. The first objective was to revive free trade. Prior to World War I, international trade formed a large portion of global GDP, but the classical liberal order which supported it had been damaged by war and by the Great Depression of the 1930s. The second objective was to allow national governments the freedom to provide generous welfare programmes and to intervene in their economies to maintain full employment. This second objective was considered to be incompatible with a full return to the free market system as it had existed in the late 19th century - mainly because with a free market in international capital, investors could easily withdraw money from nations that tried to implement interventionist and redistributive policies.
The resulting compromise was embodied in the Bretton Woods system, which was launched at the end of World War II. The system was liberal in that it aimed to set up an open system of international trade in goods and services, facilitated by semi fixed exchange rates. Yet it also aimed to "embed" market forces into a framework where they could be regulated by national governments, with states able to control international capital flows by means of capital controls. New global multilateral institutions were created to support the new framework, such as the World Bank and the International Monetary Fund.
When Ruggie coined the phrase Embedded liberalism, he was building on earlier work by Karl Polanyi, a scholar who had introduced the concept of markets becoming "dis-embedded" from society during the 19th century. Polanyi went on to propose that the "re-embedding" of markets would be a central task for the architects of the post war world order, and this was largely enacted as a result of the Bretton Woods Conference. In the 1950s and 60s, the global economy prospered under Embedded liberalism, with growth more rapid than before or since. Yet the system was to break down in the 1970s.
- 1 Previous Systems
- 2 Embedded Liberalism: 1945 - 1970s
- 3 Subsequent systems
- 4 See also
- 5 Notes and citations
- 6 References
Embedded markets: all periods up to 1834
Polanyi argues that until the rise of 19th century Liberalism, markets, where they had existed at all, were always and everywhere "embedded" in society; subject to various social, religious and political controls. The forms of these controls varied widely, for example in India occupations were for centuries determined by caste, rather than market forces. During the middle ages, physical markets in Europe were generally heavily regulated, with many towns only permitting larger markets ( then known as fayres) to open once or twice a year.
Polanyi explicitly refutes Adam Smith's statement that natural man has a "propensity to barter, truck and exchange", arguing that anthropology and economic history shows that until the 19th century, markets had only a marginal role in the economy, with by far the most important methods governing the distribution of resources being reciprocal gift giving, centralised redistribution and autarky (self-sufficient households). While Polanyi concedes that European society was beginning to develop towards modern capitalism from as early as the 14th century, especially after the Glorious Revolution and the commencement of the Industrial revolution, he contends that it was not until 1834 that the establishment of truly "free" markets became possible. Polyani calls this dis-embedding of markets from society a "singular departure" from anything that had happened before in human history. Prior to the 19th century, international trade was very low in proportion to global GDP.
Classical liberalism: Dis-embedded markets, 1834 - 1930s
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According to Polanyi, a key event of 1834 which allowed the formation of free markets to take place in Great Britain (the worlds foremost economy at the time), was the abolition of outdoor relief which followed the seizure of political power by the middle classes in 1832. With the unemployed poor unable to get any form of financial help except by entering workhouses, and with workhouses made much more oppressive than they had been before, the unemployed would tend to go to any lengths to obtain work, which established a free market in Labour. Polanyi concedes that during the 19th century, the free market helped deliver unprecedented material progress. He also contends it caused enormous hardship to wide sections of the population; seemingly paradoxically, a rapid general increase in prosperity was accompanied by a rapid increase in the number of paupers (To some extent this phenomena had been under way in both Europe and Great Britain from the dawn of the Agricultural Revolution, accelerating with the Industrial Revolution in mid 18th century, but it became more acute after 1834.)
In both Britain and Europe, labour movements and other forms of resistance arose almost immediately, though they had little sustained effect on mainstream politics until the 1880s. In Britain, although tens of thousands starved to death or were forced into workhouses and prostitution, social unrest was relatively low, as on the whole even the working class were quick to benefit from the increasing prosperity - in part this was due to Britain's early adoption of the free market and her lead in the industrial revolution. On continental Europe, unrest erupted in the Protests of 1848, after which Marx and Engels launched their Communist Manifesto, although this did not have any great immediate effect. For the most part, from 1834 until the 1870s, free market ideology enjoyed almost unchallenged ascendancy in Great Britain, and was expanding its influence abroad. In 1848, Lord Macaulay published his The History of England. Though Macaulay was mainly looking back at the 17th century, he also anticipated the enduring triumph of free market liberalism. He was wrong.
By 1880s, various labour market protections had been enacted, causing Herbert Spencer, at the time perhaps the world's most prominent advocate of economic liberalism, to raise the alarm at the rising power of socialism. During the late 19th and early 20th century, in the field of politics, labour relations and trade, free market supporters suffered further set backs with intellectual and the moral attacks from an informal networks of progressive reformers: this included groups like the Fabians; individuals such as Keir Hardie and His Holy Father Pope Leo XIII with his social encyclical Rerum Novarum; and national leaders like Otto von Bismarck and David Lloyd George, who both introduced early precursors of the welfare state. In the United States, this period has been labelled the Progressive Era. Other developments not necessarily associated with the progressive movement but still opposed to the free market, included various countries such as the US significantly increasing their trade tariffs. In contrast, within mainstream academia and the practice of international finance, free market thinking remained largely ascendant until the 1930s. Although the gold standard had been suspended by World War I, in the 1920s international financiers were largely successful in re-establishing it. It was not until the crisis of 1931 that Britain decided to leave the gold standard, with the United States following in 1933 – by the mid-1930s the global liberal economic order had collapsed, with the old highly integrated trading system replaced by a number of closed economic blocks. Similarly, in mainstream economics, free market thinking was undermined in the 1930s by the success of the New Deal and by the Keynesian Revolution. After a transition period and world war II, embedded liberalism emerged as the dominant economic system.
Embedded Liberalism: 1945 - 1970s
Mainstream scholars such as Ruggie tend to see Embedded liberalism as a compromise between the desire to retain as many as possible of the advantages from the previous era's free market system, while also allowing States to have the autonomy to pursue interventionist and welfare based domestic policies. Anticipating the trilemma that would later be formulated as the Impossible trinity, Lord Keynes and White argued that freedom of movement for capital conflicted both with nation state's freedom to pursue economic policies based on their domestic circumstances, and also with the semi fixed exchange rate system that was widely agreed to be important to maximise international trade in goods and services. As such, it was widely agreed that states would be free to enact Capital Controls, which would help them simultaneously maintain both fixed exchange rates and, if desired, expansionary domestic policies. During the 1950s and 60s, embedded liberalism and Keynesian economics were so popular that conservative politicians found they had to largely adopt them if they were to have a chance of getting elected. This was especially the case in Britain and was called the Post-war consensus, with a similar though somewhat less Keynesian consensus existing elsewhere, including in the US.
Marxist scholars tend to broadly agree with the mainstream view, though they emphasise embedded liberalism as a compromise between class interests, rather than between different desirable but partially incompatible objectives. David Harvey argues that at the end of World War II, the primary objective was to develop an economic plan that would not lead to a repeat of the Great Depression during the 1930s. Harvey states:
|“||To ensure domestic peace and tranquility, some sort of class compromise between capital and labor had to be constructed. The thinking at the time is perhaps best represented by an influential text by two eminent social scientists, Robert Dahl and Charles Lindblom, published in 1953. Both capitalism and communism in their raw forms had failed, they argued. The only way ahead was to construct the right blend of state, market, and democratic institutions to guarantee peace, inclusion, well-being, and stability.||”|
Harvey notes that under this new system free trade was regulated "under a system of fixed exchange rates anchored by the US dollar's convertibility into gold at a fixed price. Fixed exchange rates were incompatible with free flows of capital." (See also: Bretton Woods system) In addition, there was a worldwide acceptance that "the state should focus on full employment, economic growth, and the welfare of its citizens and that state power should be freely deployed, alongside of or, if necessary, intervening in or even substituting for market processes to achieve these ends." He also states that this new system came to be referred to as "embedded liberalism" in order to "signal how market processes and entrepreneurial and corporate activities were surrounded by a web of social and political constraints and a regulatory environment that sometimes restrained but in other instances led the way in economic and industrial strategy."
In 1960 Daniel Bell published a book, The End of Ideology, where he celebrated what he anticipated to be an enduring change, with extreme free market thinking permanently relegated to the fringe. He was wrong. Harvey argues that while embedded liberalism led to the surge of economic prosperity which came to define the 1950s and 1960s, the system began to crack beginning in the late sixties. The 1970s were defined by an increased accumulation of capital, unemployment, inflation (or stagflation as it was dubbed), and a variety of fiscal crises. He notes that "the embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and no longer working." A number of theories concerning new systems began to develop, which led to extensive debate between those who advocated "social democracy and central planning on the one hand" and those "concerned with liberating corporate and business power and re-establishing market freedoms on the other." Harvey notes that by 1980, the latter group had emerged as the leader, advocating and creating a global economic system that would become known as neoliberalism.
Neoliberalism: re-disembedded markets, 1981 - 2009
After the transition period of the 1970s, the neoliberal era is commonly said to have begun at about 1980. Also referred to by economic historians as the Washington Consensus era, its emergence was marked by the rise to power of Margaret Thatcher in Great Britain, and Ronald Reagan in the US. While there was no attempt to revive the previous system of fixed exchange rates on a global scale, Neoliberalism upheld a similar commitment to free trade as had the previous era. Similar to the era of classical economic liberalism, neoliberalism involved the "dis-embedding" of markets - on a practical level some of the main changes involved pressure for governments to abolish their capital controls, and to refrain from economic interventions. Many of the institutions established in the previous era remained in place however, and free market ideology never became as influential as it had been during the peak years of classical liberalism. In a 1997 paper, Ruggie himself discussed how some of the protection gained for workers with the embedded liberal compromise still lived on, though he warned it was being eroded by the advance of market forces.
In Britain and the US, domestic free market reforms were pursued most aggressively from about 1980 - 85. Yet from a global perspective, the peak years of neoliberal influence were the 1990s. After the 1991 Collapse of the soviet union, there was an acceleration of the pace at which countries throughout the world choose or were coerced into implementing free market reforms. In 1992, political scientist Francis Fukuyama published his book The End of History and the Last Man, where he suggested free market capitalism coupled with liberal democracy may be a stable end point of human social evolution. Yet by 1999, various adverse economic events, most especially the 1997 Asian Financial Crisis and the harsh response by the International Monetary Fund (IMF), had already caused free market policies to be at least partially discredited in the eyes of developing world policy makers, especially in Asia and South America.
Post Washington consensus: mixed liberalisms, 2009 and later
In 2009, in the wake of the 2008 worldwide financial crisis, a number of journalists, politicians and senior officials from global institutions such as the World Bank began saying that the Washington Consensus was over.  As part of the 2008–2009 Keynesian resurgence, it briefly appeared that there might be a prospect of a return to embedded liberalism - there had been an upsurge in global collaboration by the world's policy makers, with several heads of state calling for a "New Bretton Woods". Yet by 2010 the short lived consensus for a return to Keynesian policy had fractured. Economic historian Robert Skidelsky suggested its too soon to identify the characteristics of the new global economic order. It may be that no single order will emerge; with the rise of the BRICs and other emerging economies, there is less scope for a single power to effectively set the rules for the rest of the world. As of late 2011 there had been some trends consistent with a move away from economic liberalism, including a growing acceptance for a return to the use of Capital controls, for Macroprudential regulation and for the unapologetic practice of State capitalism. On the other hand, China has been progressively liberating her capital account well into 2012, while in the US the Tea party emerged as a powerful political force, with members who appear to be committed to a purer vision of the free market than has existed since the peak of classical liberalism in the 1840s. In 2011, professor Kevin Gallagher suggested that rather than being largely governed by a single ideology as had been the case for the previous eras, the newly emerging global order is influenced by "varieties of liberalism." 
Notes and citations
- Ruggie, John Gerard. 1982. "International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order." International Organization 36(2). The term was later used by many IPE scholars and economic historians, with an early example occurring in Stephen Krasner ed. International Regimes.
- As WWII was drawing to a close, there was more political support for redistributive policies than ever before. The working classes had increased influence due to the recent expansion of the Electoral franchise, and the wealthier classes were generally more sympathetic, due to the shared experience of participating in the war, and as moderate Keynesian policies were seen as the best measure to stabilise liberal democracy by reducing poverty and unemployment, thus forestalling the rise of extremists such as fascists.
- This had recently happened to France after the Popular Front came to power in 1936. As Lord Keynes said at the Bretton Woods conference: "Surely in the post-war years there is hardly a country in which we ought not to expect keen political discussions affecting the position of the wealthier classes and the treatment of private property. If so, there will be a number of people constantly taking fright because they think that the degree of leftism in one country looks for the time being likely to be greater than somewhere else." - quoted in Helleiner (1995) p35
- The word "liberal" has a special meaning here, and should not be confused with the modern US sense of the word, which can be associated with left leaning politics. As is common in most international political economy (IPE) topics, the word in this article generally means supportive of free trade.
- Though not as a result of Polanyi's direct influence, many others, most notably Lord Keynes, had independently reached parallel conclusions.
- In addition to Chapter 3-6 of Polanyi (1944), for a wide ranging and easily digestible discussion of these restrictions see Chapter 1 of The Worldly Philosophers by Robert Heilbroner.
- Polanyi 1944, p 45
- Quoted by Ruggie in the 1982 paper where the term embedded liberalism was coined.
- Polanyi 1944, passim, esp chapters 7 - 12.
- Ravenhill 2005, pages 12, 156 -163
- Full abolition of outdoor relief was only completed by the early 1840s, but it was largely accomplished with the 1834 act.
- Though Polyani notes that a few were still able to receive charity from Lords, Ladies or clergy who offered it in defiance of the Law.
- Polanyi 1944, chapters 3-4
- Cockett 1944, pp. 321 - 333
- Polanyi 1944, pp 148 - 154
- Polanyi cites The Man Versus the State (1884) where Spencer provides a long list of what he saw as undesirable state interventions into economic affairs. Polyani goes on to says Spencer was wrong to blame socialism, arguing that the interventions resulted from pragmatic reactions by policy makers to the stresses caused by the free market - socialism was not to become a powerful political force until a few decades later.
- The link between progressive developments in the US and Europe is covered in Polyani's Great Transformation (1944), but for a much more detailed account, see Atlantic Crossings: Social Politics in a Progressive Age , by Daniel Rodgers, Harvard University Press , (2000)
- Polanyi 1944, passim, esp p. 1–7
- Blyth 2002, p 3-5
- Johnathan Kirshner (1999). "Keynes, capital mobility and the crisis of embedded liberalism.". Review of International Political Economy. 6:3, Autumn: 313–337.
- McNamara 1999, pp 54,55, 82-87
- Blyth 2002, passim, esp p 2-5
- Such as Keynesian public spending to boost employment and low interest - in the absence of capital controls, investors would tend to move their money away from countries that pursued such policies, causing downward pressure on the domestic currency that would make the maintenance of fixed exchange rates difficult or impossible.
- Blyth 2002, passim
- Harvey 2005, passim
- Harvey 2005, p10
- Harvey 2005, p11
- Harvey 2005, p12
- Harvey 2005, p13
- Meaning strong in theory, though mixed in practice, with actual agreement to remove all trade barriers never reached in any of the GATT / WTO trade rounds
- John Ruggie (1997-01-01). "Globalization and the Embedded Liberalism Compromise: The End of an Era?". Max Planck Institute for the Study of Societies. Retrieved 2012-07-04.
- Bateman 2010, chapter 1
- Some scholars such as David Graeber credit the Global Justice Movement with a leading role in reducing the influence of free market ideology on Asia and South America (see for example his book Debt: The First 5000 Years), though others point to a change of heart at the top, with politicians and senior official in multilateral orgs like the IMF themselves losing faith in free market thinking. For more on the historical opposition to neoLiberalism in Asia, see also Beijing Consensus and Mumbai Consensus. For more on the retreat from neoLiberallism in Latin America, see Pink tide.
- Green 2003, passim
- Skidelsky 2009, 101, 102, 116–117
- Helene Cooper and Charlie Savage (2008-10-10). "A Bit of ‘I Told You So’ Outside World Bank Talks". The New York Times. Retrieved 2010-11-17.
- Anthony Painter (2009-04-10). "The Washington consensus is dead". The Guardian. Retrieved 2010-11-17.
- "Prime Minister Gordon Brown: G20 Will Pump Trillion Dollars Into World Economy". Sky News. 2 April 2009.
- Henry Farrell and John Quiggin (March 2012). "Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis" (pdf). The Center for the Study of Development Strategies. Retrieved 2012-05-29.
- As was largely the case for most of the previous two centuries, where Britain and the US had performed this role.
- Several large developing states had already been practicing forms of State capitalism throughout the neoliberal era, but often it was justified as short term measures to protect "infant industries" and economies until they were sufficiently well developed to compete in the free market. After the crises, State capitalism became more common and several states became increasingly unapologetic about it, see Ian Bremmer's book, The End of the Free Market: Who Wins the War Between States and Corporations.
- See Thomas Frank's 2012 book, Pity the Billionaire
- Kevin Gallagher (2011-02-20). "Regaining Control? - Capital Controls and the Global Financial Crisis". University of Massachusetts Amherst. Retrieved 2012-07-03.
- Cockett,, Richard (1995). Thinking the unthinkable: think-tanks and the economic counter-revolution, 1931-1983. Fontana Press. ISBN 0-00-637586-3.
- Helleiner,, Eric (1995). States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Cornell University Press. ISBN 0-8014-8333-6.
- Kathleen R McNamara (1999). The Currency of Ideas: Monetary Politics in the European Union (Cornell Studies in Political Economy). Cornell University Press. ISBN 0801486025.
- Mark Blyth (2002). Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century. Cambridge University Press. ISBN 0521010527. Unknown parameter
- Harvey, David (2005). A Brief History of Neoliberalism. Oxford University Press.
- Eirc Helleiner, Louis W Pauly, et al (2005). John Ravenhill, ed. Global Political Economy. Oxford University Press. ISBN 0-19-926584-4.