Page 145 - Global Political Economy_Understanding The International Economic Order

CHA PTER S IX
and the technological success of the West have been due primarily to
institutional innovations; the unique economic, political, and other
institutions that have characterized the modern West have greatly fa-
cilitated technological advance, capital accumulation, and rapid eco-
nomic growth. It was, Rosenberg and Birdzell point out, the freedom
of individual entrepreneurs to experiment with novel institutions and
economic arrangements that differentiated the West from other civili-
zations, and this freedom has been vital to the West’s enormous eco-
nomic success. Economic freedom created a powerful incentive for
entrepreneurs to innovate, invest, and accumulate wealth.
Even though the modern state has been central to development of
the national system of political economy and technological innova-
tion, the state’s role in fostering economic growth and international
competitiveness has been largely neglected by neoclassical economics.
The emphasis in neoclassical growth theory on factor accumulation
is indeed appropriate, but it is only a first approximation to an expla-
nation of the causes of a nation’s growth. A particular society’s pos-
session of an institutional framework or national system of political
economy that facilitates factor accumulation, technological innova-
tion, and economic growth is crucial to its economic success. Those
societies that adapt themselves to the requirements of economic
growth and technological innovation in a particular epoch become
the economic leaders of that epoch, and societies that do not or can-
not adjust to such requirements fall behind.

Oligopoly and Power in Economic Outcomes
The economic universe of the new theories is populated by a few
important economic actors and characterized by imperfect or oligop-
6
olistic competition. In an oligopolistic market, power and strategy
strongly affect economic outcomes; consequently, many international
markets function differently from the predictions of conventional
neoclassical economics. In the world of oligopolistic competition,
powerful players can and frequently do use their market power to
7
alter and manipulate the terms of exchange. Indeed, powerful firms
are frequently “price-setters” rather than “price-takers.” In the neo-

6
The significance of oligopolistic competition for economic theory is discussed in
John R. Hicks, The Crisis in Keynesian Economics (Oxford: Basil Blackwell, 1974),
23–25.
7
A collection of articles on the neglect of power in economic analysis is in Kurt W.
Rothschild, ed., Power in Economics: Selected Readings (Harmondsworth, U.K.: Pen-
guin Books, 1971).
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