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 World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposing ...

to the 1970s. The system was set up to support a combination of

free trade Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...

with the freedom for states to enhance their provision of

welfare Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...

and to regulate their economies to reduce unemployment. The term was first used by the American political scientist

John Ruggie John Gerard Ruggie (18 October 1944 – 16 September 2021) was the Berthold Beitz Research Professor in Human Rights and International Affairs at Harvard Kennedy School at Harvard University and an affiliated professor in international legal studie ...

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 World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, the United States, and the Ottoman Empire, with fightin ...

, 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. 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. The resulting compromise was embodied in the Bretton Woods system, which was launched at the end of World War II. The system was liberal 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 control Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measure ...

s, 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 The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

and the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

. When Ruggie coined the phrase embedded liberalism, he was building on earlier work by

Karl Polanyi Karl Paul Polanyi (; hu, Polányi Károly ; 25 October 1886 – 23 April 1964),''Encyclopædia Britannica'' (Chicago: Encyclopædia Britannica Inc. 2003) vol 9. p. 554 was an Austro-Hungarian economic anthropologist and politician, best known ...

, 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 The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, Unite ...

. 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 Hegemonic stability theory (HST) is a theory of international relations, rooted in research from the fields of political science, economics, and history. HST indicates that the international system is more likely to remain stable when a single sta ...

(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

argues that until the rise of 19th-century liberalism

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...

s, 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 In the history of Europe, the Middle Ages or medieval period lasted approximately from the late 5th to the late 15th centuries, similar to the post-classical period of global history. It began with the fall of the Western Roman Empire ...

, 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. 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 Autarky is the characteristic of self-sufficiency, usually applied to societies, communities, states, and their economic systems. Autarky as an ideal or method has been embraced by a wide range of political ideologies and movements, especiall ...

(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 The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe, and the United States, that occurred during the period from around 1760 to about 1820–1840. This transition included going f ...

, he contends that it was not until 1834 that the establishment of truly free markets became possible. Polyani calls this disembedding of markets from society a "singular departure" 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. With the unemployed poor unable to get any form of financial help except by entering

workhouses In Britain, a workhouse () was an institution where those unable to support themselves financially were offered accommodation and employment. (In Scotland, they were usually known as poorhouses.) The earliest known use of the term ''workhouse' ...

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 Pauperism (Lat. ''pauper'', poor) is poverty or generally the state of being poor, or particularly the condition of being a "pauper", i.e. receiving relief administered under the English Poor Laws. From this, pauperism can also be more generally ...

. 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 movement The labour movement or labor movement consists of two main wings: the trade union movement (British English) or labor union movement (American English) on the one hand, and the political labour movement on the other. * The trade union movement ...

s 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 Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...

and

Friedrich Engels Friedrich Engels ( ,"Engels"
'' 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 Thomas Babington Macaulay, 1st Baron Macaulay, (; 25 October 1800 – 28 December 1859) was a British historian and Whig politician, who served as the Secretary at War between 1839 and 1841, and as the Paymaster-General between 1846 and 1 ...

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 Herbert Spencer (27 April 1820 – 8 December 1903) was an English philosopher, psychologist, biologist, anthropologist, and sociologist famous for his hypothesis of social Darwinism. Spencer originated the expression " survival of the fi ...

, 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 The Double Movement is a concept originating with Karl Polanyi in his book '' The Great Transformation''. The phrase refers to the dialectical process of marketization and push for social protection against that marketization. First, laissez-faire ...

for the

dialectical Dialectic ( grc-gre, διαλεκτική, ''dialektikḗ''; related to dialogue; german: Dialektik), also known as the dialectical method, is a discourse between two or more people holding different points of view about a subject but wishing ...

process of

marketization Marketisation or marketization is a restructuring process that enables state enterprises to operate as market-oriented firms by changing the legal environment in which they operate. This is achieved through reduction of state subsidies, organizati ...

along with an opposing push for

social protection Social protection, as defined by the United Nations Research Institute for Social Development, is concerned with preventing, managing, and overcoming situations that adversely affect people's well-being. Social protection consists of policies and ...

against that marketization. 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 The Fabian Society is a British socialist organisation whose purpose is to advance the principles of social democracy and democratic socialism via gradualist and reformist effort in democracies, rather than by revolutionary overthrow. The Fab ...

; individuals such as

Keir Hardie James Keir Hardie (15 August 185626 September 1915) was a Scottish trade unionist and politician. He was a founder of the Labour Party, and served as its first parliamentary leader from 1906 to 1908. Hardie was born in Newhouse, Lanarkshire. ...

and

Pope Leo XIII Pope Leo XIII ( it, Leone XIII; born Vincenzo Gioacchino Raffaele Luigi Pecci; 2 March 1810 – 20 July 1903) was the head of the Catholic Church from 20 February 1878 to his death in July 1903. Living until the age of 93, he was the second-old ...

with his social encyclical '' Rerum novarum''; and national leaders like Otto von Bismarck and

David Lloyd George David Lloyd George, 1st Earl Lloyd-George of Dwyfor, (17 January 1863 – 26 March 1945) was Prime Minister of the United Kingdom from 1916 to 1922. He was a Liberal Party politician from Wales, known for leading the United Kingdom during ...

, who both introduced early precursors of the

welfare state A welfare state is a form of government in which the state (or a well-established network of social institutions) protects and promotes the economic and social well-being of its citizens, based upon the principles of equal opportunity, equita ...

. In the United States, this period has been labelled the

Progressive Era The Progressive Era (late 1890s – late 1910s) was a period of widespread social activism and political reform across the United States focused on defeating corruption, monopoly, waste and inefficiency. The main themes ended during Am ...

. 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 A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the l ...

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

Mainstream scholars such as

tend to see embedded liberalism as a compromise between the desire to retain as many as possible of the advantages from the previous era's free market system while also allowing states to have the autonomy to pursue interventionist and welfare based domestic policies. Anticipating the

trilemma A trilemma is a difficult choice from three options, each of which is (or appears) unacceptable or unfavourable. There are two logically equivalent ways in which to express a trilemma: it can be expressed as a choice among three unfavourable option ...

that would later be formulated as the impossible trinity,

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...

and

Harry Dexter White Harry Dexter White (October 29, 1892 – August 16, 1948) was a senior U.S. Treasury department official. Working closely with the Secretary of the Treasury Henry Morgenthau Jr., he helped set American financial policy toward the Allies of World ...

argued that freedom of movement for capital conflicted both with nation state's freedom to pursue economic policies based on their domestic circumstances and also with the semi-fixed exchange rate system that was widely agreed to be important to maximise international trade in goods and services. As such, it was widely agreed that states would be free to enact

s, which would help them simultaneously maintain both fixed exchange rates and, if desired, expansionary domestic policies. During the 1950s and 1960s, embedded liberalism and Keynesian economics were so popular that conservative politicians found they had to largely adopt them if they were to have a chance of getting elected. This was especially the case in Britain and was called the

post-war consensus The post-war consensus, sometimes called the post-war compromise, was the economic order and social model of which the major political parties in post-war Britain shared a consensus supporting view, from the end of World War II in 1945 to the ...

, with a similar though somewhat less Keynesian consensus existing elsewhere, including in the United States. Marxist scholars tend to broadly agree with the mainstream view, though they emphasise embedded liberalism as a compromise between class interests, rather than between different desirable yet partially incompatible objectives.

David Harvey David W. Harvey (born 31 October 1935) is a British-born Marxist economic geographer, podcaster and Distinguished Professor of anthropology and geography at the Graduate Center of the City University of New York (CUNY). He received his P ...

argues that at the end of

the primary objective was to develop an economic plan that would not lead to a repeat of the Great Depression during the 1930s. Harvey states: Harvey notes that under this new system free trade was regulated "under a system of fixed exchange rates anchored by the US dollar's convertibility into gold at a fixed price. Fixed exchange rates were incompatible with free flows of capital". In addition, there was a worldwide acceptance that "the state should focus on full employment, economic growth, and the welfare of its citizens and that state power should be freely deployed, alongside of or, if necessary, intervening in or even substituting for market processes to achieve these ends". He also states that this new system came to be referred to as embedded liberalism in order to "signal how market processes and entrepreneurial and corporate activities were surrounded by a web of social and political constraints and a regulatory environment that sometimes restrained but in other instances led the way in economic and industrial strategy". In 1960,

Daniel Bell Daniel Bell (May 10, 1919 – January 25, 2011) was an American sociologist, writer, editor, and professor at Harvard University, best known for his contributions to the study of post-industrialism. He has been described as "one of the leading A ...

published '' The End of Ideology'', where he celebrated what he anticipated to be an enduring change, with extreme free market thinking permanently relegated to the fringe. However, Harvey argues that while embedded liberalism led to the surge of economic prosperity which came to define the 1950s and 1960s, the system began to crack beginning in the late 1960s.. The 1970s were defined by an increased accumulation of capital, unemployment, inflation (or

stagflation In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actio ...

as it was dubbed) and a variety of fiscal crises. He notes that "the embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and no longer working". A number of theories concerning new systems began to develop, which led to extensive debate between those who advocated "social democracy and central planning on the one hand" and those "concerned with liberating corporate and business power and re-establishing market freedoms on the other".. Harvey notes that by 1980 the latter group had emerged as the leader, advocating and creating a global economic system that would become known as

neoliberalism Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent fa ...

Subsequent systems

Neoliberalism: redisembedded markets, 1981–2009

After the transition period of the 1970s, the neoliberal era is commonly said to have begun at about 1980. Also referred to by economic historians as the Washington Consensus era, its emergence was marked by the rise to power of

Margaret Thatcher Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1975 to 1990. S ...

in Great Britain and

Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...

in the United States. While there was no attempt to revive the previous system of fixed exchange rates on a global scale, neoliberalism upheld a similar commitment to free trade as had the previous era. Similar to the era of classical economic liberalism, neoliberalism involved the disembedding of markets. At a policy level, some of the main changes involved pressure for governments to abolish their capital controls and to refrain from economic interventions. However, many of the institutions established in the previous era remained in place and free market ideology never became as influential as it had been during the peak years of classical liberalism. In a 1997 paper, Ruggie himself discussed how some of the protection gained for workers with the embedded liberal compromise still lived on, though he warned it was being eroded by the advance of market forces. In Britain and the United States, domestic free market reforms were pursued most aggressively from about 1980–1985. Yet from a global perspective, the peak years of neoliberal influence were the 1990s. After the 1991

dissolution of the Soviet Union The dissolution of the Soviet Union, also negatively connoted as rus, Разва́л Сове́тского Сою́за, r=Razvál Sovétskogo Soyúza, ''Ruining of the Soviet Union''. was the process of internal disintegration within the Sov ...

, there was an acceleration of the pace at which countries throughout the world chose or were coerced into implementing free market reforms. In 1992, political scientist

Francis Fukuyama Francis Yoshihiro Fukuyama (; born October 27, 1952) is an American political scientist, political economist, international relations scholar and writer. Fukuyama is known for his book ''The End of History and the Last Man'' (1992), which argue ...

suggested that free-market capitalism coupled with liberal democracy may be a stable end point in human social evolution in the '' End of History and the Last Man''. Yet by 1999, various adverse economic events, most especially the

1997 Asian financial crisis The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1 ...

and the harsh response by the

had already caused free-market policies to be at least partially discredited in the eyes of developing world policy makers, especially in Asia and South America.

Post-Washington Consensus: mixed liberalisms, 2009–present

In the wake of the

financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...

, several journalists, politicians and senior officials from global institutions such as the World Bank began saying that the Washington Consensus was over. As part of the 2008–2009 Keynesian resurgence, it briefly appeared that there might be a prospect of a return to embedded liberalism—there had been an upsurge in global collaboration by the world's policy makers, with several heads of state calling for a "New Bretton Woods". Yet by 2010, the short lived consensus for a return to Keynesian policy had fractured. Economic historian

Robert Skidelsky Robert Jacob Alexander, Baron Skidelsky, (born 25 April 1939) is a British economic historian. He is the author of a three-volume award-winning biography of British economist John Maynard Keynes (1883–1946). Skidelsky read history at Jesus ...

suggested it was too soon to identify the characteristics of the new global economic order and it may be that no single order will emerge. For instance, with the rise of the

BRIC BRIC is a grouping acronym referring to the developing countries of Brazil, Russia, India, and China, which are identified as rising economic powers. It is typically rendered as "the BRIC," "the BRIC countries," "the BRIC economies," or alte ...

s and other emerging economies, there is less scope for a single power to effectively set the rules for the rest of the world. As of late 2011, there had been some trends consistent with a move away from economic liberalism, including a growing acceptance for a return to the use of

macroprudential regulation Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole (or "systemic risk"). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymak ...

and

state capitalism State capitalism is an economic system in which the state undertakes business and commercial (i.e. for-profit) economic activity and where the means of production are nationalized as state-owned enterprises (including the processes of capital a ...

. On the other hand, China has been progressively liberating its capital account well into 2012 while in the United States the

Tea Party movement The Tea Party movement was an American fiscally conservative political movement within the Republican Party that began in 2009. Members of the movement called for lower taxes and for a reduction of the national debt and federal budget defic ...

emerged as a powerful political force, with members who appear to be committed to a purer vision of the free market than has existed since the peak of classical liberalism in the 1840s. In 2011, professor Kevin Gallagher suggested that rather than being largely governed by a single ideology as had been the case for the previous eras, the newly emerging global order is influenced by "varieties of liberalism". However,

George Monbiot George Joshua Richard Monbiot ( ; born 27 January 1963) is a British writer known for his environmental and political activism. He writes a regular column for ''The Guardian'' and is the author of a number of books. Monbiot grew up in Oxfordsh ...

said in 2013 that neoliberalism remained an influential ideology. According to Edward Mansfield and Nita Rudra, the digital revolution has undermined embedded liberalism by facilitating a spread in global supply chains, facilitating automation, connecting capital in the developed world with labor in the developing world, and strengthening multinational corporations.

Notes and citations

References

* * * * * * * * {{DEFAULTSORT:Embedded Liberalism Political science terminology Liberalism