There are four theories that explain global financial crisis, which are realism, liberalism, Marxism, and constructivism. While all these four theories present indispensable perspectives on the analysis of global poverty, what appears to be the best explanation for the problem is liberalism. Realism, the industrial approach, was only beneficial for aristocrats, constructivism posits the reciprocal nature of ideas and interests, and Marxism does not blame the individual for being poor. On the other hand, liberalism aims to solve global financial crisis in the political, governmental and social contexts.
In 2007, liberalism is the basis of the global financial crisis. The center
of the political philosophy of liberalism is to secure the liberty of an individual and to defend the supreme task of the state (Cohen, 2008). Individual freedom is the basic norm of liberal belief base and a human society, towards which the state and its political and economic order are aligned. The state intervenes only when the freedom of individuals is violated (Gray, 1995). Liberalism is opposed to totalitarianism in the Western world and is often a prerequisite for a modern, pluralistic democracy (Reitan, 2003).Financial markets faced the worst crisis ever in 2007 and 2008, and the liberalist approach can be held responsible for this. Around US$32 trillion was lost and this amount is equal to the total GDP of the G7 countries (Gill, 1988). The credit markets went dry and hit an all time low and house prices plummeted. The problem was created by the liberalism based approach of the system itself. The financial crisis was caused because of the 30-year ruling of liberalism as an economic policy. A free-market ideology, liberalism limits the power of the government and substitutes it with privatized market strength (Phillips, 2005). Had the government been allowed to interfere earlier, this crisis could have been avoided.
The market forces had focused on capitalist approaches and had been free of government intervention due to liberalism (Rawls, 2005). This has led to the banks to reach a dangerous position. As soon as the crisis hit
the world, even its most staunch followers abolished it. The governments got involved almost overnight in order to reduce mass panic and control the falling market. All modern risk management strategies failed to prevent the crisis but the government performed extraordinarily in order to help the market back on its feet (Watson, 2005). This proves that a liberalist approach is not practical and safe. In order to avoid capitalism and another financial crisis, the government must be allowed to monitor and control the market forces.The liberalism-based political approach is based on starving the beast (Gilpin, 2001). Taxes were discounted and this led to minimizing the government’s investments in important sectors like education, medicine and financial infrastructure (Mises & Goddard, 1979). This had been done in order to create maximum space in the market for capitalist private concerns. Constant tax cuts and minimized debt levels were observed due to this. Initially, these things seemed positive. However, these led to long-term economic problems. The lack of investments in education, training to improve expertise, and repudiation of financial aspects like loans was the consequential problem that, in turn, led to the financial crisis. Indeed, liberalism is the economic theory that best explains this crisis (Narveson & Dimock, 2000).
References:
Cohen, Benjamin. International Political Economy: An Intellectual History. (Princeton, NJ: Princeton University Press, 2008).
Gill, Stephen. Global Political Economy: perspectives, problems and policies. (New York: Harvester, 1988).
Gray, John. Liberalism. (Open University Press, 1995).
Gilpin, Robert. Global Political Economy: Understanding the International Economic Order. (Princeton, NJ: Princeton University Press, 2001).
Mises, Ludwig Von & Goddard, Arthur. Liberalism: a socio-economic exposition. (Sheed Andrews and McMeel, 1979).
Narveson, Jan & Dimock, Susan. Liberalism: new essays on liberal themes. (Kluwer Academic Publishers, 2000).
Phillips, Nicola. Globalizing International Political Economy. (Palgrave. Macmillan, 2005).
Rawls, John. Political liberalism. (Columbia University Press, 2005).
Reitan, Earl A. Liberalism: Time-Tested Principles for the Twenty-First Century. (USA: iUniverse Publishers, 2003).
Watson, Matthew. Foundations of International Political Economy. (Palgrave. Macmillan, 2005).