Embedded Liberalism

by

Wesley Widmaier

• LAST REVIEWED: 03 June 2019
• LAST MODIFIED: 28 May 2013
• DOI: 10.1093/obo/9780199743292-0138

Introduction

To what extent should market forces be “embedded” in institutional contexts in order to protect populations from economic hard times? From liberal perspectives, markets should be unfettered on the grounds that state interventions threaten stability and growth. Yet, in recent years, the global financial crisis has revived debate over “embedded liberalism” and the scope for macroeconomic and regulatory activism. Such controversies are, of course, anything but new. Indeed, this article first provides an overview of seminal claims for the exercise of authority over markets in citing works that include those of Aristotle, Adam Smith, and John Maynard Keynes. Given this foundation, the article will then address the evolution of debates among economists over the scope for policy activism, followed by debates among political scientists over the determinants of actual policy choices. Finally, moving to a historical focus, the article will trace the evolution of scholarly debates over economic and policy trends from the Great Depression of the 1930s to the great stagflation of the 1970s to the global financial crisis itself.

Conceptual Foundations

In contemporary debates, proponents of liberal policies treat market competition as a natural state, opposing calls for regulation as unwarranted intrusions into the economic realm. Yet, such views themselves can be said to represent departures from the historical norm. Aristotle 1999 and Smith 2005 emphasize the need for institutional and ethical supports to “free” markets. Indeed, even the seeming triumph of liberalism in the 19th century would, in turn, prompt counterreactions in calls for social protection from market forces. These pressures culminated in the Great Depression–era emergence of what Polanyi 2001 and Ruggie 1982 cast as “embedded liberal” ideas, which stressed the need for safeguards to limit market excesses and, more specifically, led to the Keynesian revolution (Keynes 1997) in economic thought—aspects of which were accepted even by authors of works such as Hayek 1945 and that led to a recognition of the need for the political legitimacy of markets as addressed in Goff 2007.

• Aristotle. The Politics. Translated by Benjamin Jowett. Kitchener, Canada: Batoche, 1999.

  In The Politics, Aristotle highlights the primacy of the “household” over market forces, offering an early, influential argument that the polity precedes the economy.

• Goff, Patricia M. Limits to Liberalization: Local Culture in a Global Marketplace. Ithaca, NY: Cornell University Press, 2007.

  Goff extends discussions of embedded liberalism beyond the economic context, highlighting the importance of cultural values in legitimating market exchange and citing efforts in the European Union and Canada at preserving local cultural identities.

• Hayek, Friedrich. “The Use of Knowledge in Society.” American Economic Review 35.4 (1945): 519–530.

  While Hayek is often cast as a rival to Keynes, important commonalities united them. Hayek also highlighted the role of unconscious forces in markets, and he recognized the need for regulation to prevent collusion and private price fixing. Available online by subscription.

• Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Amherst, NY: Prometheus, 1997.

  Keynes provided an alternative intellectual framework to liberalism. He took direct aim at classical arguments that markets could make efficient use of information. Instead, Keynes countered that market “animal spirits” might ignite self-reinforcing crises, necessitating policy activism. Originally published in 1936.

• Polanyi, Karl. The Great Transformation. Boston: Beacon, 2001.

  Polanyi provides the definitive analysis of the public reaction to 19th-century “globalization,” when, for the first time, the gold standard and free trade exposed domestic populations to market forces. In response, Polanyi argues that social demands for protection spurred efforts to reassert political control over market forces. Originally published in 1944.

• Ruggie, John Gerard. “International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order.” International Organization 36.2 (1982): 379–415.

  DOI: 10.1017/S0020818300018993

  In his definitive treatment of the rise of embedded liberalism, Ruggie argues that a shift in domestic views of authority made possible the emergence of the embedded values and so the policy success of the Keynesian revolution.

• Smith, Adam. The Theory of Moral Sentiments. Edited by Sálvio M. Soares. Lausanne, Switzerland: MetaLibri Digital Library, 2005.

  Originally published in 1759. While Smith is best known for The Wealth of Nations (1776), Theory of Moral Sentiments highlights the importance of the social and ethical bases of economic exchange. From this perspective, institutional and social contexts themselves shape the efficiency of the “invisible hand.”