POLS 1500 EXAM 3 QUESTIONS AND ANSWERS
Global Capitalism and Its Critics - CORRECT ANSWER✅✅I. Historical Origins and the Evolution of the
Free Market (Liberal/Capitalist) International Economic System.
1. Intellectual origins of the liberal (capitalist/free market) international economic system;
2. the rise and fall of the first liberal international economic order;
3. the rise and fall of the postwar Bretton Woods System;
4. The rise and potential fall of the neoliberal international economic order.
The Economic Liberalism of Adam Smith - CORRECT ANSWER✅✅1. "liberal" defined as a commitment
to free market, private property, individualism and a minimalist state. (I.e. what we in the U.S. regard as
economic conservative. Similar to Lipset's use of the term).
2. The individual pursuit of self-interest produces the public good.
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but
from their regard to their own interest. We address ourselves, not to their humanity but to their self-
love, and never talk to them of our own necessities but of their advantages".[pp.26-7]
The Intellectual Origins of the First Liberal International Order - CORRECT ANSWER✅✅The Main
Arguments of Adam Smith:
- the free market will lead to the provision of goods that society wants, in the quantity that society
desires, and at the price society is willing to pay.
- The competition created under a free market will serve as an "Invisible Hand" that maximizes
economic efficiency, growth and human welfare.
- Division of labor and specialization will lead to greater levels of production and wealth. (Adam Smith's
example: The Pin Factory)
,The Intellectual Origins of the First Liberal International Order - CORRECT ANSWER✅✅David Ricardo
(1772-1823):
- The Law of Comparative Advantage and the benefits of free trade;
- Extended both Adam Smith's argument about the benefits of free market and specialization/division of
labor at the international level;
- To enhance the wealth of nations, nations should embrace free trade, not mercantilism;
- Nations should focus on producing and trading goods where they have a comparative advantage.
Bottom Line: The wealth of nations is best served under an international free trading system, and as
nations prosper under this system, so too will peace.
Illustrate Example of Comparative Advantage - CORRECT ANSWER✅✅British production of wool and
wine: 300 bundles, 100 cases;
French production of wool and wine: 100 bundles; 300 cases:
British opportunity cost to produce 100 cases = 300 bundles, or 1 case = 3 bundles
French opportunity cost produce 300 cases = 100 bundles, or 1 case = 1/3 bundles
France's opportunity cost to produces wine lower than Britain's, or it cheaper to produce wine in France
and France has a 'comparative advantage' in producing wine.
Question: What if each nation decided to devote half its resources to producing each. What would they
produce? What would happen if they specialized and traded?
The 19th century classical gold exchange system under British hegemony: - CORRECT ANSWER✅✅- a
nation's currency was fixed and pegged to gold.
- monetary policy tied to gold reserve.
,- Belief in an automatic mechanism to restore trade balance.
- Economic policy heavily determined by international economic system.
- Economic policy for domestic social and economic purposes minimal.
Impact: Accompanied by strong growth in world trade and world economic growth, but collapses after
WWI & Great Depression.
What undermined the system? - CORRECT ANSWER✅✅Part 1: WWI and Its Aftermath
WWI: To finance the war effort and expand government spending, countries abandoned the gold
exchange system;
The Harsh Peace Settlement of the Versailles Treaty;
What undermined the system? - CORRECT ANSWER✅✅Part 2: The Great Depression
Phase 1. speculation and euphoria:
The Dow Jones industrial average in early 1928 was 191. By September 1929, doubled to 381. daily
turnover 4 million shares in 3/28, but 8.2 million in 3/29.
Phase 2. The panic
After the crash ("Black Thursday", October 24), The Dow plummets down to 198 by November 1929.
Phase 3: The financial panic - Crisis spreads to banks that were unregulated and globally linked. Bank
default and bank runs mutually reinforcing, economy shuts down as finance stops.
Understanding the Evolution of the International Economic System. - CORRECT ANSWER✅✅The Great
Depression and Its Impact on the postwar international economic system [Bretton Woods System].
- Challenged the economic conservative argument that a free market always produces the greatest good
for the greatest number of people.
, - Challenged the economic conservative argument that democratic politics harms capitalism.
- At domestic level, led to the New Deal; at international level, led to the creation of the Bretton Woods
system [1944].
Understanding the Evolution of the International Economic System The Bretton Woods System -
CORRECT ANSWER✅✅- governed by the principles of free trade, but allowed for nations to use
economic policy to meet domestic economic and social needs.
-free trade, but not free finance. Capital controls were important to avoid global systemic risk and
preserve monetary autonomy.
- fixed exchange rate system pegged to the dollar and tied to gold at $35 an ounce.
- creation of 3 key international institutions: World Bank (finance), GATT (trade), and IMF (exchange
rates).
The three key Bretton Woods institutions and the collective action problem - CORRECT ANSWER✅✅I.
GATT and free trade:
One country may seek to protect their workers and companies by adopting protectionist policies, but if
all countries did this, none will benefit, and total benefits will drop sharply.
II. IMF and exchange rate stability:
One country may seek to improve exports and export related jobs and reduce imports and help workers
and companies that compete against foreign companies by devaluing their currency, but if all countries
did this, non will benefit and the currency market will collapse.
III. World Bank the the Lender of Last resort:
Global Capitalism and Its Critics - CORRECT ANSWER✅✅I. Historical Origins and the Evolution of the
Free Market (Liberal/Capitalist) International Economic System.
1. Intellectual origins of the liberal (capitalist/free market) international economic system;
2. the rise and fall of the first liberal international economic order;
3. the rise and fall of the postwar Bretton Woods System;
4. The rise and potential fall of the neoliberal international economic order.
The Economic Liberalism of Adam Smith - CORRECT ANSWER✅✅1. "liberal" defined as a commitment
to free market, private property, individualism and a minimalist state. (I.e. what we in the U.S. regard as
economic conservative. Similar to Lipset's use of the term).
2. The individual pursuit of self-interest produces the public good.
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but
from their regard to their own interest. We address ourselves, not to their humanity but to their self-
love, and never talk to them of our own necessities but of their advantages".[pp.26-7]
The Intellectual Origins of the First Liberal International Order - CORRECT ANSWER✅✅The Main
Arguments of Adam Smith:
- the free market will lead to the provision of goods that society wants, in the quantity that society
desires, and at the price society is willing to pay.
- The competition created under a free market will serve as an "Invisible Hand" that maximizes
economic efficiency, growth and human welfare.
- Division of labor and specialization will lead to greater levels of production and wealth. (Adam Smith's
example: The Pin Factory)
,The Intellectual Origins of the First Liberal International Order - CORRECT ANSWER✅✅David Ricardo
(1772-1823):
- The Law of Comparative Advantage and the benefits of free trade;
- Extended both Adam Smith's argument about the benefits of free market and specialization/division of
labor at the international level;
- To enhance the wealth of nations, nations should embrace free trade, not mercantilism;
- Nations should focus on producing and trading goods where they have a comparative advantage.
Bottom Line: The wealth of nations is best served under an international free trading system, and as
nations prosper under this system, so too will peace.
Illustrate Example of Comparative Advantage - CORRECT ANSWER✅✅British production of wool and
wine: 300 bundles, 100 cases;
French production of wool and wine: 100 bundles; 300 cases:
British opportunity cost to produce 100 cases = 300 bundles, or 1 case = 3 bundles
French opportunity cost produce 300 cases = 100 bundles, or 1 case = 1/3 bundles
France's opportunity cost to produces wine lower than Britain's, or it cheaper to produce wine in France
and France has a 'comparative advantage' in producing wine.
Question: What if each nation decided to devote half its resources to producing each. What would they
produce? What would happen if they specialized and traded?
The 19th century classical gold exchange system under British hegemony: - CORRECT ANSWER✅✅- a
nation's currency was fixed and pegged to gold.
- monetary policy tied to gold reserve.
,- Belief in an automatic mechanism to restore trade balance.
- Economic policy heavily determined by international economic system.
- Economic policy for domestic social and economic purposes minimal.
Impact: Accompanied by strong growth in world trade and world economic growth, but collapses after
WWI & Great Depression.
What undermined the system? - CORRECT ANSWER✅✅Part 1: WWI and Its Aftermath
WWI: To finance the war effort and expand government spending, countries abandoned the gold
exchange system;
The Harsh Peace Settlement of the Versailles Treaty;
What undermined the system? - CORRECT ANSWER✅✅Part 2: The Great Depression
Phase 1. speculation and euphoria:
The Dow Jones industrial average in early 1928 was 191. By September 1929, doubled to 381. daily
turnover 4 million shares in 3/28, but 8.2 million in 3/29.
Phase 2. The panic
After the crash ("Black Thursday", October 24), The Dow plummets down to 198 by November 1929.
Phase 3: The financial panic - Crisis spreads to banks that were unregulated and globally linked. Bank
default and bank runs mutually reinforcing, economy shuts down as finance stops.
Understanding the Evolution of the International Economic System. - CORRECT ANSWER✅✅The Great
Depression and Its Impact on the postwar international economic system [Bretton Woods System].
- Challenged the economic conservative argument that a free market always produces the greatest good
for the greatest number of people.
, - Challenged the economic conservative argument that democratic politics harms capitalism.
- At domestic level, led to the New Deal; at international level, led to the creation of the Bretton Woods
system [1944].
Understanding the Evolution of the International Economic System The Bretton Woods System -
CORRECT ANSWER✅✅- governed by the principles of free trade, but allowed for nations to use
economic policy to meet domestic economic and social needs.
-free trade, but not free finance. Capital controls were important to avoid global systemic risk and
preserve monetary autonomy.
- fixed exchange rate system pegged to the dollar and tied to gold at $35 an ounce.
- creation of 3 key international institutions: World Bank (finance), GATT (trade), and IMF (exchange
rates).
The three key Bretton Woods institutions and the collective action problem - CORRECT ANSWER✅✅I.
GATT and free trade:
One country may seek to protect their workers and companies by adopting protectionist policies, but if
all countries did this, none will benefit, and total benefits will drop sharply.
II. IMF and exchange rate stability:
One country may seek to improve exports and export related jobs and reduce imports and help workers
and companies that compete against foreign companies by devaluing their currency, but if all countries
did this, non will benefit and the currency market will collapse.
III. World Bank the the Lender of Last resort:
