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Summary Political Economy Part II Lectures (7-12)
This is a summary of the last lectures of the course Political Economy that is part of the Political Science bachelor at the University of Amsterdam
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Lecture 7: Globalisation 1.0Globalisation 1.0
● 1896 – 1913
By the end of the 19th century, for the first time a real genuine global market has emerged.
This was due to industrialisation, innovation in transport, trading connections and
specialisation.
Also: a period of state formation. By the time a global market emerges, it is also the time for
state formation and institution building
● Global trade more than doubled
● Real world market (instead of disconnected micro-economies) → specialization of
countries → migration and transformation of countries
Example: migration of the Irish population to the North Americas after the potato famine
● Schwartz: world of today is the outcome of dynamics during globalization 1.0
○ Which countries in which form → core / periphery? Colonialism?
○ Who lives there → voluntary and involuntary migration
○ What is being produced → agriculture, infrastructure construction, etc.
When we’re entering the end of the 19th century/beginning 20th century this finance sphere
becomes more and more dominant.
Hegemony in cycles
There are upswings and downswings in hegemonies. In general you can think of the
hegemonic power as a power that has dominance over certain fields: military,
,trade/production and finance. And this dominance is not stable over time. In a particular
period it is stable. These cycles are not always in congruence. For instance: you may face a
decrease in your military power but you’re still top notch in your trade relations.
England: While their production and trade dominance goes down, they remain relatively in
place in their financial position for a much longer period in time
Political-economic hegemony?
Hegemony is built on dominance in four domains:
● 1. Consumption (developed domestic market)
Typically the hegemon is the dominant entity in consuming. It is the rich part of the world so
people there are relatively rich and they consume. So that creates a large demand. That
large demand has two benefits. First of all, the country has a big internal market, so it can
produce for its own market. But it also leads to import, which means that you can determine
what is produced in other parts of the world.
Example: US is dominant and they prefer particular toys that are made in China. The US can
set certain guidelines (safety, toxicity).
So your dominance in that field as a leading dominant consumption entity already steers
how production is organised
● 2. Production and export (leading sector)
Typically, you’re not only leading in consumption; that is often the effect of being dominant in
production and export. Usually a hegemonic power builds on a particular leading sector
which generates a lot of profit. In a sense you also influence what other people buy.
● 3. Investment (direct capital flows)
Money usually clusters/accumulates in the core because they have the leading sector,
higher profit margins. And then they can choose to invest it. A typical example is England in
the 19th century. There may be raw material in a particular region lets do FDI: send our firms
to Africa and mine some of the valuables that are in the ground and make sure that all the
profits go back to the hegemonic power and not stay in that country.
● 4. Money and finance (global currency)
The money and finance element relates to having a currency. If you are the hegemon
usually it is also your currency were the majority of the world trade is registered in and that
gives you
a big advantage and power position
Long term interest of the hegemon coincide with the way the international economic system
is structured but…
The structure of the international system typically supports the hegemonic system. Because
if you are in the periphery it makes sense to produce for that hegemonic market because
that is a big market. BUT it will not be like this forever: hegemony comes in cycles.
British hegemony
● First-mover advantage during industrialization (recap last week)
,They were able to turn some inventions into real innovations, one set of innovations
triggering another one. Because of that they became dominant in trade, finance and
production.
● Result: dominance in all three domains (trade, finance, production)
● London Global Financial Centre
○ Global capital flows through British hands; profits for British banking sector
○ Arbitrage:
■ Foreign capital flows into London at low interest rates (because
London = trustworthy)
■ London lends out this money to foreign markets at high interest rates
(because others are less trustworthy)
If you are the hegemon, it allows you a position of arbitrage. If you are somewhere outside
the hegemony and you have some money and you want to invest that money, you would be
very likely to send it to London because it is very safe. Because of their big reputation and
high level of expertise these banks have a low interest rate. But the investor who gives the
money to London is fine with it because the risk is low. What London then can do is take this
money, lend it out to foreign markets at high interest rates.
○ Outcome: countries dependent on British banking sector
Because of this position, if all the financial flows go through London, other countries also
become dependent on the British banking sector, adding yet another layer to this hegemonic
power.
But… the Britons miss out on key innovations
By the end of 19th century they miss out on some key innovations. Many of the inventions
that were the base of the third wave in the industrial revolution, most of the knowledge
actually came from the UK. But they were not able to innovate; they were not able to turn
those inventions into a new leading sector. And some other countries were able to do so, for
instance the Germans.
The British industry was family based. The factories were still relatively small. In the third
industrial wave they were much better served by larger factories, needed more investments
to set it up, it was more capital intensive. In Germany they were able to invest in those new
factories and invest in new management techniques. And in the UK this didn't happen.
● Economies of scale & Economies of scope
In other countries they were able to set up larger factories. They could create higher
economies of scale and they could easily increase the production in related products
● Chemical innovation, electricity, oil, steel 2.0 (hard innovations)
● Professionalization management (soft innovations)
In the UK most of the factory owners were still from family capital. It is not very professional.
It does not introduce new management techniques
● Taylor based division of labour
Scientific management. You look at a production process and you try scientifically to make it
as efficient as possible. You want to measure things etc. Much of what we now think of as
straight forward, was an invention then.
● Cartelization
, The dominance of England went together with a form believe in free trade, it was a pillar of
their empire (except of colonial relationships) in the international economic system free trade
was in the best interest of the British
What happened in for instance Germany but also in the US was that they said well you know
what we can actually introduce a bit more hierarchy and more coordination between the
firms in the industry to make sure that we keep supply and demand in tandem(?)
Samen deciden how much are we going to produce? What will be the prices that we set
that’ll also help us develop our industry but also develop the market
This cartelisation became a pillar of the German political economic development and the US
was formally opposed to it, especially after the second decade of the twentieth century when
a lot of very big trusts emerged. A few people who control many companies.
Many British companies were still making profits. The economy was still growing and there
wasn’t really a sense of urgency that the tables were turning. They didn’t see it coming
● dialectics of lead
● law of the handicap of a head start (coined by Jan Romein, 1937)
● ‘Wet van de remmende voorsprong’
Sometimes if you are in front of everybody, it may also be to your detriment. And that
happened to the UK.
The end of the British hegemony (and globalisation 1.0)
● UK loses hegemony in production (in relative terms!) but retains it in financial markets
They were not doing bad, but others were doing better.
● UK: slow but steady increased dislike of free trade (no longer fair...)
● Financial elite remains in favor of free trade
because they are still in a dominant position
● UK retreats in colonial empire
That is where they got their raw materials from and organised their production
● How long will the British continue to promote free trade against the background of
increasing competition?
Globalisation and debt crisis
Debt crisis has to do with interconnections in the global production system and the global
financial system.
Globalization 1.0 flourished by the availability of capital from London
Need to invest for Ricardian or Kaldorian strategy? Borrow abroad!
Debt crisis agriculture-based economies (Argentina, Australia, USA)
● Overproduction
You are producing a particular product for the centre, you lend money, you invest. Others
will also do that and there is an overproduction. Because others are following your
successful strategy. And if you’re not quick enough to change what you’re good at or to
increase your productivity, you’ll lose your competitive advantage and there is an
overproduction reducing the price. If you invested in your industry it takes a while for you for
the investments to pay off. But if all of a sudden you get into this situation of overproduction
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