Page 119 - Global Political Economy_Understanding The International Economic Order

CHA PTER F IVE
powerful impact on the evolution of those institutions that shape eco-
4
nomic affairs. Although the new concepts attempt to overcome the
inherent limitations ofneoclassical theories, they have by no means
overturned the basic theories or the assumptions ofconventional eco-
nomics.

World View of the New Theories

As Paul Krugman has argued, the new trade, growth, and other eco-
nomic theories have profound implications for the analysis and func-
tioning ofthe international economy. They provide a “world view of
economics” very different from most of pre-1980 theory; they include
increasing returns and imperfect competition, multiple equilibria, a
crucial role for history, accident, and self-fulfilling prophecy. In this
new and still controversial economic universe, there are arbitrary and
accidental components that affect international economics. 5
As a group, the new theories introduce both spatial and temporal
dimensions into economic analysis, place technological innovation at
the center oftheir analyses, and assign a prominent role in the econ-
omy to such institutions as national governments and corporations.
The “new endogenous growth theory,” “new economic geography,”
and “new strategic trade theory” have important implications for the
study ofinternational political economy.
Based on the fundamental behavioral assumption of neoclassical
economics that society is composed ofrational individuals whose pri-
mary purpose is to maximize their interests, these new theories depart
from conventional neoclassical economics as they (1) assume that
there are imperfect or oligopolistic markets, (2) emphasize the impor-
tance oftechnological innovation, and (3) utilize history or path de-
pendence as an explanatory variable. Together, these novel theories
remain highly controversial, and the evidence supporting them cannot
be characterized (to use the language ofeconomists) as “robust.”
With this caveat in mind, what are the common elements in the three
theories that make them important for the study of international po-
litical economy?

Institutions, Scale Economies, and Imperfect Competition
All three theories—the new growth theory, the new economic geogra-
phy, and the new trade theory—are based on the assumption ofim-
4
W. Brian Arthur,“Path Dependence in the Economy,” Scientific American (Febru-
ary 1990): 92–99.
5
Krugman, Geography and Trade, 8–9
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