Critique of Economic Liberalism

Here is the summary of Robert Gilpin's critique on economic liberalism... I've put this together for the IPE seminar of professor Kreile.

Gilpin names one of the foremost critiques of economic liberalism to be the simplified and unrealistic assumptions, which allow economists to construct their models and conduct scientific analysis. For the market to be regarded as the most efficient mechanism of maximizing wealth and using scarce resources optimally, a number of assumptions should be fulfilled: rational economic agents, competitive markets, perfect information, no transaction costs, etc. There is however a defensive argument, because simplified assumptions are needed for the establishment of any scientific discipline and economics has proven as "a powerful analytical tool".

Liberal economics also exhibits a limited perspective on society. While economics is pronounced by Hirshleifer as the "one and only true social science", it has become detached from the rest of the academic scholarship and lacks comprehensiveness in its analytical approach. The mathematical models and abstract theories have made economics less and less relevant for the public discourse. Its isolation from the other social science fields results from its neglect of the social, political and historical circumstances of economic behavior. The neoinstitutionalist view for example regards economic institutions are a result from an effort to increase efficiency and from rational maximizing behavior, yet it takes no heed of the noneconomic factors for the establishment of institutions. 

In the liberal framework, the initial conditions for all economic actors are homogenous. In this sense liberal economics prescribes "a one-fits-all" solution for every efficiency maximizing problem regardless of the the particular circumstances and starting point. In this context liberalism fails to recognize the uneven distribution of resources, property rights, power and other endowments and that diverse sociopolitical structures could imply different optimization solutions.

Another important limitation, which results from the liberal assumption of competitive markets and perfect information, is the consideration that exchange is unrestrained and takes places on equal terms. This assumption is not necessarily true because exchange can be influenced by unequal bargaining positions, coercion and other restraints - essentially a consequence of non-economic determinants, which liberal economics fails to recognize.

Gilpin asserts than alike the Nationalist and the Marxist perspectives, liberalism is an ideology that makes intellectual and normative commitments. These commitments and "acts of faith" are subjected to the capitalist market economy, which is a critical point advanced also by Marx. Liberal economics is not concerned with the outcomes of the economic activities and ignores issues of social justice and equity since the distribution of wealth is a marginal issue for the realm of economic analysis.

Liberal economics also employs a static approach, which disregards the long-term dynamics of the capitalist system. Certain patterns like consumer preferences, institutions and economic resources are assumed to be constant over the short-run and the economic science has no theory about their dynamic evolution. Simplistically assuming that the sociopolitical conditions, technology and culture are exogenous in nature and should enter the economic analysis as constants, ignores important holistic insights about the dynamic interaction between politics and economics.

Despite its very restrictive assumptions and its failure to recognize interrelations between the political and economic world, liberal economics has promoted the market mechanism, which has resulted in unprecedented growth and accumulation of wealth not only in industrialized countries but in many emerging economies as well. Gilpin recognizes that the market with its price mechanism constitute the most effective organization of economic relations.

Economics students would have already heard those points in some context or another. I consider it essential to observe one's own scientific field from the perspectives of others and the international relations scholarship can indeed provide some valuable thoughts.