Embedded Liberalism

Embedded liberalism is a term for the global economic system and the associated international political orientation as it 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.

Mainstream scholars generally describe embedded liberalism as involving a compromise between two desirable but partially conflicting objectives. The first objective was to revive free trade. Prior to World War I, international trade formed a large portion of global GDP, but the classical liberal order which supported it had been damaged by war and by the Great Depression of the 1930s. The second objective was to allow national governments the freedom to provide generous welfare programmes and to intervene in their economies to maintain full employment. This second objective was considered to be incompatible with a full return to the free market system as it had existed in the late 19th century - mainly because with a free market in international capital, investors could easily withdraw money from nations that tried to implement interventionist and redistributive policies.

The resulting compromise was embodied in the Bretton Woods system, which was launched at the end of World War II. The system was liberal in that in aimed to set up an open system of international trade in goods and services, facilitated by semi fixed exchange rates. Yet it also aimed to "embed" market forces into a framework where they could be regulated by national governments, with states able to control international capital flows by means of capital controls. New global multilateral institutions were created to support the new framework, such as the World Bank and the International Monetary Fund.

When Ruggie coined the phrase Embedded liberalism, he was building on earlier work Karl Polanyi, a scholar who had introduced the concept of markets becoming "dis-embedded" from society during the 19th century. Polanyi went on to propose that the "re-embedding" of markets would be a central task for the architects of the post war world order, and this was largely enacted as a result of the Bretton Woods Conference. In the 1950s and 60s, the global economy prospered under Embedded liberalism, with growth more rapid than before or since. Yet the system was to break down in the 1970s.