Core Principles of Economic Liberalism and Trade

Economic Liberalism

Humans act rationally to maximize self-interest.

• When individuals act rationally, markets develop to produce, distribute, and consume goods.
• Markets enable individuals to carry out necessary transactions to improve their own welfare.
• If there are many buyers and sellers, competition ensures prices as low as possible.
• Low prices mean increased consumer welfare.
• Markets must be virtually free of government interference.

Pro-market interventionism: When governments step in to create the conditions for markets to function.

Note: Laissez-faire economic policy was not favored by Adam Smith, contrary to common belief.

Later versions posit both economic and political advantages: economic wealth comes with the formation of an international market.

Key Concepts in Liberal Economics

• States differ in land, labor, and capital endowments.
• Worldwide wealth is maximized by international trade.
• Trade organized by comparative advantage:
  • States produce and export those products which they can produce most efficiently, relative to other states.
  • Key role for multinational corporations (MNCs); promote internationalization of production and consumption.

International System of Free Trade?

Governments have other objectives besides economic efficiency (as do individuals):

• To protect certain industries and agriculture from competition while they develop.
• To protect laborers/producers.
• To protect consumers.
• For reasons of national security.

Overall, between 1946–1997, tariffs were reduced from an average of 40% to 5% on imported goods for major trading countries.

Restrictions are increasingly over issues of consumer safety, packaging, labor well-being, and environmental protections.

Liberal View of Multinational Corporations (MNCs)

1. Move money to the most efficient markets.
2. Open manufacturing facilities and assembly operations in foreign countries.
3. Finance projects that industrialize and improve agricultural output.
4. Act independently of states.
5. Direct importing and exporting.
6. Make significant investments in foreign countries.

International Finance Facts

• Today, over 80,000 MNCs, with 800,000 subsidiaries, employing over 90 million people.
• Top 1,000 produce 80 percent of world’s industrial output.
• 90 of largest are in the United States, Europe, Japan, or a few Latin American and Asian countries.
• Africa receives only 8 percent of private capital.
• Two ways international capital traditionally moves:
  • Direct foreign investment
  • Portfolio investment