Page 48 - Global Political Economy_Understanding The International Economic Order

THE NATUR E OF PO LITIC AL ECO NOMY
Dynamics of the World Economy
In September 1992, an important and disturbing event occurred
when, without warning, private investors suddenly transferred huge
sums of money out of the British pound, the Italian lira, and other
currencies into the German mark, thereby forcing an unwanted deval-
uation of the pound and other currencies. This devaluation signifi-
cantly reshaped the economic and political landscape of Western Eu-
rope and tore apart the Exchange Rate Mechanism (ERM) of the
European Monetary System (EMS), whose purpose was to maintain
the values of the European Community currencies within specified
narrow bands. As a consequence of this financial crisis, Great Britain
withdrew from the ERM and caused the movement toward European
economic and monetary integration to divide into a “two-speed” pro-
cess of European unification.
Interpretations of this episode illustrate the differences between an
“economic” and a “political economic” analysis of the dynamics of
the world economy. Economists were certainly aware that political
developments like German reunification and the Danish rejection, in
June 1992, of the Maastricht Treaty had important roles in generat-
ing the financial crisis of that fall. However, such political develop-
ments were treated by economists as factors external to the formal
economic modeling of the crisis. Economists were interested in the
dynamics of the crisis itself and not the political dynamics that led to
the crisis. Therefore, the underlying political and other causes of this
crisis were not closely examined by economists. Instead, analysis of
the crisis by economists focused only on its economic aspects. For
example, formulation of a general model of financial crises was a
central purpose in one excellent study by economists. 19
Political economists, on the other hand, were more interested in the
political genesis of the crisis, its political resolution, and the longer-
term economic/political consequences. That is to say, they were most
interested in the external or exogenous political factors that lead to a
crisis, contribute to its resolution, and determine its long-term effects.
The point of this comparison is that economists and political econo-
mists were interested in different phenomena and asked different
questions. The 1992 financial crisis illuminated the relationship and

19
This is the case, for example, of an excellent study of the crisis by Willem H.
Buiter, Giancarlo Corsetti, and Paolo A. Pesenti, Financial Markets and European
Monetary Cooperation: The Lessons of the 1992–93 Exchange Rate Mechanism Crisis
(New York: Cambridge University Press, 1998).
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