Embedded liberalism is a term in international political economy for the global economic system and the associated international political orientation as they 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. Before 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.As World War II 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 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.This had recently happened to France after the Popular Front came to power in 1936. As 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) at p. 35.
The resulting compromise was embodied in the Bretton Woods system, which was launched at the end of World War II. The system was liberalThe word liberal has a special meaning here and should not be confused with the modern United States sense of the word which can be associated with left-leaning politics. As is common in most international political economy topics, the word in this article generally means supportive of free trade. 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, as well as engage in state-led development strategies, short-term IMF borrowing, and exchange rate adjustments. 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, who had introduced the concept of markets becoming disembedded from society during the 19th century. Polanyi went on to propose that the reembedding 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.Though not as a result of Polanyi's direct influence, many others, most notably Keynes, had independently reached parallel conclusions. In the 1950s and 1960s, 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. Ruggie's work on embedded liberalism rebutted hegemonic stability theory (the notion that a hegemon is necessary to sustain multilateral cooperation) by arguing that the international order was not just maintained through material power but "with legitimate social purpose".
Previous systems Embedded markets: all periods up to 1834 Karl 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.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 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. Polanyi calls this disembedding of markets from society a "singular departure"Quoted by Ruggie in the 1982 paper where the term embedded liberalism was coined. 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: disembedded markets, 1834–1930s
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.Full abolition of outdoor relief was only completed by the early 1840s, but it was largely accomplished with the 1834 Act. With the unemployed poor unable to get any form of financial help except by entering workhousesThough Polyani notes that a few were still able to receive charity from Lords, Ladies or clergy who offered it in defiance of the Law. 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 as seemingly paradoxically a rapid general increase in prosperity was accompanied by a rapid increase in the number of paupers. To some extent, this phenomenon 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 Karl Marx and Friedrich 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..
By the 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. Polanyi explained this in terms of a double movement for the dialectical process of marketization along with an opposing push for social protection against that marketization..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, thus socialism was not to become a powerful political force until a few decades later. 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 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.The link between progressive developments in the United States 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 (2000) by Daniel Rodgers. Other developments not necessarily associated with the progressive movement yet still opposed to the free market, included various countries such as the United States 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, international financiers were largely successful in re-establishing it in the 1920s. 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