Ayesha Tahir- 18542 Assignment 2

MBA-M

4/16/2020

Question

Based on what you have read and know about the great depression, the financial crisis of 2008

and the current Covid19 Pandemic, do you think that both of the crisis have undermined the

economic liberal ideas and policies? Debate and Explain.

(I expect you to approach this answer with a discussion on the three main theoretical

perspectives in IPE, the connections and disconnections between them and address different

levels of analysis (state, markets, societies etc.)

Answer

Black Swan Event, is a term that was coined by Wall Street Trader Nassem Nicholas Taleb in the

book “Fooled by Randomness in 2001” he discussed how events in past have occurred have

been sudden, unanticipated and anonymous. For an event to be considered a black swan event, it

should accomplish three predefined attributes. Firstly, it has to be unpredictable. Secondly, the

results are severe and consequences are widespread. Thirdly, after the event has occurred,

experts and gurus will have a rationale that they predicted the event to happen prior to its

occurrence. Hence, events like The Great Depression 1930, The Financial Crisis 2008 and

currently COVID-19 are black swan events.

The Great Depression of 1930 is explained in paper “The Great Crash and the Onset of Great

Depression” by [ CITATION Rom90 \l 1033 ] . The fall in real output occurred in 1929 due to

collapse of stock market on October 29, 1929. It is considered the ruthless market crash in the

history of United States of America. Black Tuesday was the point of initiation for Great

Depression, which hit the economy of USA and had its ripple effects all over Europe. Prior to
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crash economy was running on principles of liberalism, where market forces of demand and

supply adjust and determine real output and prices. After World War I, United States turned out

to be a hegemonic state in the world, since, Europe was still recovering from the after effects of

war. In US spending on consumer goods increased that set the business cycle trajectory towards

expansion and boom. US was leading in many industries and started novel production methods

of mass production of automobile. For example, company named Ford was one of the pioneers in

bringing the concept of mass production that increased level of output in less time, catering to

large number of consumers. During this period, stock market grew. People perceived that stock

market will operate eternally and expected that market will expand. When economist analyzed

they saw that market growth was partially speculated. This led to large sums of borrowing to

fund stock trading, which caused bubble to grow big to a point where it had no option, but to

burst. That resulted, panic selling of stocks in market. After the bubble, busted consumers and

producers became reluctant to demand and supply in an economy due to high volatility. Thus,

they delayed their spending and production on durable and semi durable goods to see the

progress to economic activity. The decline in spending in an economy surged real income

pushing down the business cycle towards recession and ultimately to a great depression.

The Financial Crisis of 2008 is another economic meltdown, which originated from US. In paper

“Causes of Financial Crisis” by [ CITATION Ric09 \l 1033 ] discusses how housing bubble seized

the whole financial system rather than just housing market. It all started will a dream that was

showed public to own a house at US land. It was possible since interest rates went down. Hence,

Banks started giving out sub-prime loans to public without holding any background checks.

Housing prices started to fall and creditors defaulted resulting a shock to financial system. Other

than that, investor took default risk because they had insured their risk in form of credit default
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swaps. Hence, deregulation of financial sector is considered to be a main cause of financial crisis

of 2008. Since, US banks had its hands spread all over the world, hence, the crisis in US had

domino effect on all over world. Unemployment rose, economy was pushed into recession, banks

filed for bankruptcy like Lehman Brothers. As overall consequence, $10 trillion were washed

away from world’s equity markets.

COVID-19 is a global pandemic that world is suffering nowadays. It originated from Wuhan,

China in late December 2019 and has affected now almost every country on this globe. The virus

that does not have vaccine and is spreading continuously. Two million people have engulfed by

this virus and 135,000 deaths have occurred until now, according to worldometer. This virus has

led to worldwide lockdown of cities around the world. Production of goods and services have

halted, retail stores have shut down, and educational institution have closed down. The most

affected nations are Italy, United States, Spain, United Kingdom, France, Iran and China. Due to

lockdown, shares around the world plunged in US as Dow and S&P 500 were hit hard by their

Steepest daily falls since 1987, according to one of BBC reports. Main UK Index dropped more

than 10% worst since 1987. In Pakistan, trading halts were placed to sustain markets from

crashing. On the other hand in US for the first time in the history of USA Federal Reserve cuts

interest rate to near zero to stimulate US economy and pull out the economy from recession.

They have incorporated economic stimulus as well to save up its financial markets and economy.

Moreover, recently Dawn newspaper published news that IMF chief Kristalina Georgieva

addressed that world has entered in recession, worse that financial crisis of 2008. She stated that

government of emerging markets are suffering from a wipeout of more than $83 billion capital.

Additionally, Saudi Arabia on 8 March 2020 went with price war with Russia cutting 27% by

increasing their production. As a result the OPEC broke. Moreover, due to coronavirus outbreak
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the demand for oil has fallen in first quarter, causing excess supply in market. Aramco, a Saudi

state owned oil producing company are working to push world prices of oil down, to hurt the

countries that depend on oil exports, reported by The Guardian.

To understand these events of crisis, it is imperative to be aware of the kind of perspectives we

need to look each of these events at and on what principles international political economy is

operating. Three of the main theoretical perspectives are; structuralism, mercantilism and

liberalism. Structuralism is when one force or one party dominates the whole nation and

economy. In other words, states being power-seeking rationale with a zero sum approach

towards decisions. It is a command economy that we can see in North Korea presently. Back in

early 1990s, China and Russia were considered communist states. Karl Marx is a pioneer in

structural approach of political economy. He identified definition of class, class differences, and

exploitation of worker and control of state. This approach all focuses on equality and

redistribution of income equally by incorporating monetary, fiscal and fair trade policies.

Mercantilism is when state plays a pre-emptive role in economy to guide and protect major

industries. Economy is state managed with partial equality. It incorporates protectionist industrial

and trade policies to protect its domestic markets against ruthless competition from capitalism. It

helps in enhancing national wealth and welfare. States who follow this approach are Japan and

South Korea. Moreover, Europe adopted this approach for their political strategy where they kept

on exploiting resources from Americas and Africa and other colonial states to fulfil their desire

to become hegemons state, prior to World War I. Liberalism use Laiseez- Faire approach where

there is minimum state intervention and market is dominated by forces of demand and supply.

Values of this approach lies in entrenched international markets, globalization, and economic

efficiency. Adam Smith is one of vital personality in identifying this approach. There tends to be
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few policies involved like monetary and fiscal, used only to help market function well. They

believe in free trade. Great Britain is an example of adopting this kind of approach.

According to book “Global Political Economy Evolution and Dynamics” [ CITATION Bri16 \l

1033 ] in 1400s Europeans began to move out from their own continent to interact with

established civilizations, economic systems and military forces. They moved out to transatlantic

voyages to discover world outside Europe, to import luxurious goods that were available in east

side of the world along with a desire to get hands on the products that were not available

domestically. They were no technological advancements that particularly occurred, but the

strategy of who will produce what and for whom was one that determined production in the

region. Europeans subjugation of Americas changed the way production would occur in two

continents. They either used hard power by destroying economies or reorganize to supply with

raw materials to Europe. They were on a voyage to reach China, but they landed Americas. The

European diseases destroyed their civilization. Europeans contact with Americans was

considered the first political economy identified in the world. European relations with American

were imperialists. However, commercial activities were mercantilist. Silver attracted many of

Europeans to confiscate wealth from Americas.

Hence, this shows that Americas were forcefully

entered in world economy while Europeans were

reaping the benefits of that integration. With mining

silver American economy came into existence. To

extract silver, Native Americans and African slaves

provided labor. In period of 1450 to 1900 9 to 13

million slaves from Africa were transported to

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America. This horrendous economic activity was termed as “Triangular Trade”, where

Europeans traded manufactured goods like textile, guns and semi-precious stones in exchange

for slaves in Africa. These salves were sent to America to work on plantations and work on

mines of silver that was exported to Europe.

First industrial revolution lasted from mid-18th century until late 19th century. Second Industrial

Revolution was after 1870, led by Germany and America. Britain was able to rise in Western

world due to liberal approach adopted, which promoted the capability of economic agents to

involve in economic activity with limited government intervention. US used British capital to

finance its industrialization. US civil war gave rise to industrialization through manufacturing of

arms. They experienced economic growth behind high tariff barriers. US was protecting itself

through mercantilist approach, rather than embracing free trade.

Prior to Great Depression US adopted liberal approach towards economic activities similarly like

Britain. However, When Great Depression stroked US economy, they were taken out from

recession through government spending, this is where John Maynard Keynes ideology of

government intervention came in, and their perspective moved towards neo liberalism where

stabilization policies are incorporated. After Great Depression, economic liberal ideas were

undermined through number of ways:

 Trade: US raised trade barriers even higher with Smoot-Hawley Tariff Act of 1930. This

worsen the economy even further and countries around the world, as it further reduced

consumer spending into economy.

 Production: Since consumer spending was slashed down, not enough demand existed in

economy; it impacted producers as well, because there was not enough consumers to

purchase the products, creating excess supply in the economy, slashing down prices and
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profitability of suppliers. Moreover, people were reluctant to make investments due to

high volatility. This led a reduction in number of business operation, creating

unemployment in the economy.

 Labor: Prior to great depression economy was flourishing, it gave rise to mass production

which encouraged division of labor. But after crisis higher levels of unemployment

occurred, when businesses started sacking out labor.

 Gender: Since, women were considered taking care of households; they did not

participated in economic activities. Hence, burden of earning all went up to males.

During the period of crisis, it became difficult for people to run household because

majority of employments opportunities were not available.

 State: On this level, the government adopted more of mercantilist along with neo

liberalist approach when it came to economic and political decisions. They made sure to

protect US against competition. However, what they lacked to understand was that they

had ability to show leadership actions if they could have opened their economy rather

than retreating in its own borders.

Hence, this shows how this crisis has undermined liberal policy and practices, because it became

imperative for government to intervene and take corrective measures since, market was unable to

reach back to equilibrium. In addition, US at that time was not hegemonic state, which could

easily implement liberalism, it was facing threats from other nations. Therefore, to protect its

economy it had to bring in role of government.

However, World War II became the point where US was able to get out of the Depression by

producing arms for the war. Post 1945 war US turned out to be hegemonic state, as Europeans

were shattered and decolonized. Hence, trade liberalization took place. Tariffs were gradually
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reduced. Hence, post 1945 US adopted economic liberalization as it turned out to be a

hegemonic state.

Prior to Financial Crisis of 2008, government was not regulating the banks and financial sector

properly. Hence, the housing bubble blew; when busted it created turmoil around the globe,

because it took whole economy down the drain. Analyzing the impact on economy of financial

crisis:

 State: The government had to face a huge spending option that constituted on $700

billion to take economy out of recession. Moreover, it took some serious action against

banks involved. Their CEOs were imprisoned. To take economy out of recession they

had to cut interest rate near to zero.

 Market: It went in to recession. Key businesses failed. Consumer spending was slashed

down. Consumer wealth decreased by trillion of dollars. Investors panic sell their shares,

led to stock market crash. Banks filed for bankruptcy.

 Society: Millions of people lost their jobs. Many of them committed suicides. Crime rates

increased. It became burden for government to provide social security to large number of

population. Investors lose their confidence

As a result, government stepped in bailed out the economy. Imposed acts and reforms to protect

investors in futures.

In sum these crisis situation are precedent for current situation of COVID 19, where liberal

economies like US and Europeans nations have failed to address the issue quickly. While on the

other hand China being Socialist nation, did not hesitate to direct all its funds for welfare of its

people and curbed Coronavirus within 4 months with strong health care facilities, stringent
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government policy against lockdown and proactive measures like building hospital within 10

days and free public tests of corona. It shows that it becomes inevitable for governments to step

in during crises rather than a liberal state, because all they are interest is in profits rather than

welfare of people.
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Critical Questions

1. How industrial revolution became stepping-stone for new imperialism?

2. How Pax Britannica helps in understanding international political economy?

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References

Brien, R. O., & Williams, M. (2016). Global Political Economy, Evolution and Dynamics. Macmillan.

Richardson, M., & Acharya, V. V. (2009). Causes of Financil Crisis. Journal of Politics and Society.

Romer, C. D. (1990). The Great Crash and Onset of Great Depression. The QUaterly Journal of Economics,
597-624.