Classic thinkers as diverse as Adam Smith, Alexander Hamilton, and Karl Marx have recognized that wealth and power go hand in hand. World politics and international economics are intimately connected and should never be treated as separate areas of intellectual inquiry, much less of national policy. Just as designing and implementing war is too important to be left to generals, an understanding of trade, finance, and globalization is too important to be left solely in the hands of professional economists.

The links between international politics and economics are as important in today’s post-September 11 world as they were during the balance of power struggles of the 18th and 19th centuries and during the collapse of the world economy and onset of two world wars in the 20th century. The global political economy currently stands at a crossroads. There are many key economic players—an integrated European Union, a resource-rich Russia, a recovering Japan, and a rising India and Brazil. But two countries, the United States and China, will continue to have disproportionate influence over the direction of the world economy, primarily due to their economic size and geopolitical prominence. Whether these two global players, simultaneously economic partners and security rivals, can cooperate in leading the world economy will be an essential determinant of how world politics develop in the years ahead.

Political Leadership: Essential Yet Elusive

Contemporary global capitalism is a remarkable mechanism. It allocates resources and produces wealth with a level of efficiency unsurpassed in human history. Yet notwithstanding the invisible hand of the marketplace and the formidable influence of transnational corporations, the world economy does not and simply cannot run itself. Left to its own devices, global capitalism will generate not only great prosperity but also great disparities in income and wealth, both within and between countries. Governments must work to address these disparities in order to maintain political support for continued economic liberalization. Global capitalism’s powerful twin motivators, fear and greed, also produce recurrent economic crises, such as the Asian financial crisis of the 1990s, the Latin American debt crisis of the 1980s, and of course the Great Depression of the 1930s. The latest crisis to shake the stability of the world economy, the sub-prime mortgage crisis of the summer of 2007, was the unintended consequence of profitable yet poorly understood innovations in global financial markets. Greed abruptly gave way to fear, and equity values plunged by 10 percent in seemingly stable Asian, European, and North American markets.

A prosperous world economy requires the steady hand of political leadership. One or more of the system’s most powerful states must provide both international political and economic stability in order to guard against such violent economic fluctuations. Security conflicts among the major powers or in resource-critical regions can create economic dislocations and an atmosphere of uncertainty that hinders trade and investment. When international politics are stable and predictable, private economic actors can make the longer-term calculations that lead to cross-border specialization and international economic expansion.

On the economic side, leading states must be prepared to step in to resolve market failures and manage the periodic crises generated by unexpected shocks or major miscalculations by corporations and governments. They must facilitate the provision of social safety nets, to provide protection for the casualties that global capitalism inevitably creates—displaced workers, collapsed banks and firms, and regions that are no longer competitive. Leading states must also enforce rules of governance and develop or modify institutions that help market forces to flourish. This latter task is especially critical today, as the relevance and effectiveness of long-standing, post-war institutions are continuously challenged and questioned. Members of the World Trade Organization (WTO) have been unable to strike the complicated political compromises necessary to conclude the Doha Round and move the multilateral trading system forward. Meanwhile the WTO’s sister institution, the International Monetary Fund (IMF), faces a crisis of confidence. Demand for the IMF’s services by middle-income countries is shrinking as criticism of its role in poorer developing countries grows.

History demonstrates that such international leadership is essential yet elusive. Charles Kindleberger noted in The World in Depression that an underlying cause of the economic collapse of the 1920s and 1930s was that Great Britain was unable and the United States unwilling to be the leaders of the world economy. The British economy turned out to be weak following the devastation of World War I. The United States had sufficient economic capacity to lead, but was politically short-sighted. It neglected to open its vast domestic market to a world in distress, and it failed to assure that adequate amounts of its surplus capital would reach parts of the world economy in which capital was scarce. US behavior stood in sharp contrast to the role Britain played during the 19th century—it served as the world’s banker, the guardian of international monetary stability, and the open market of last resort, thereby facilitating the international movement of goods, capital, technology, and people that led to the first golden age of the liberal world economy.

The United States learned its interwar lessons well and used its formidable power and prestige after World War II to reorganize the global economy in the direction of freer trade, nondiscrimination, and stable exchange rates. Western Europe and Japan recovered from the war, and the capitalist world flourished under the Bretton Woods system. But US prestige declined and its leadership weakened during the 1970s in the wake of the Vietnam War and the global oil crisis. Fortunately a “collective leadership” emerged—composed primarily of the United States, West Germany, and Japan—that would steer the world economy through the uncertain decades of the 1970s and 1980s. Then in the 1990s, the West’s collective leadership faltered, although few noticed these failings as the Cold War dramatically came to a close. The Japanese economy experienced a decade-long period of stagnation, and the states of Europe turned inward to pursue an ambitious regional integration project.

The three locomotives pulling the global economy were reduced to one, but the remaining one was up to the task. The United States, enjoying the new peace of the post-Cold War period, renewed technological prowess, and a boom in consumer spending and imports, helped to sustain global economic growth and lead the world economy into the new century. The 50 years after World War II rightly constituted a second golden age in the liberal world economy. Between 1950 and 2000, the world’s gross product increased by a factor of six. Average tariff levels in the advanced industrial world dropped from roughly 50 percent after the war to about 5 percent and world merchandise trade increased by a remarkable factor of 19. More and more countries became integrated into the liberal world economy—the General Agreement on Tariffs and Trade (GATT) had some 25 members in 1950, and its successor, the WTO, has over 125 members today.