Embedded liberalism

Embedded liberalism is a term for the global economic system and the associated international political orientation as they existed from the end of World War II to the 1970s. The system was set up to support a combination of free trade with the freedom for states to enhance their provision of welfare and to regulate their economies to reduce unemployment. The term was first used by the American political scientist John Ruggie in 1982.Karl Polanyi argues that until the rise of 19th-century liberalism markets, 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, 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.Mainstream scholars such as John Ruggie 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 that would later be formulated as the impossible trinity, John Maynard Keynes and Harry Dexter White 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 capital controls, 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, with a similar though somewhat less Keynesian consensus existing elsewhere, including in the United States.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 in Great Britain and Ronald Reagan 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.