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Recent studies on commercial liberalism have paid more attention to microfoundations linking economic interdependence to peace. Using a bargaining model of war, these studies have specified and tested different causal mechanisms through which economic ties function as a constraint, a source of information, or a transformative agent. Recent scholarly efforts in theoretical development and some empirical testing of different causal processes suggest the need to consider scope conditions to see when an opportunity cost or a signaling mechanism is likely to be salient. Future research can be best benefited by focusing on how economic interdependence affects commitment problems and empirically assessing the relative explanatory power of different causal arguments.

Nearly everything a state does has distributional consequences, including grand strategy. Societal groups with different stakes in the international economy and defense spending often have conflicting strategic priorities, and these groups pursue their parochial interests by supporting the nomination and election of like-minded politicians. Thus, grand strategy is a product of political economy. An overview of American foreign policy over the last several decades illustrates this logic. In the 1980s, the Democratic and Republican coalitions had conflicting interests over the international economy, so the two parties diverged on grand strategy. The recovery of the Rust Belt in the 1990s and 2000s, however, brought increasing convergence. Political discourse over foreign policy was fiercely partisan, but, with the notable exception of George W. Bush’s decision to go to war in Iraq in 2003, the two parties shared essentially the same view of America’s role in the world. The disastrous outcome in Iraq led the Bush administration back to the middle ground in its second term, and Obama followed the same course. In contrast, the election of Donald Trump augurs change. Trump’s electoral coalition consists of a different balance of interests in the international economy than that of past Republican presidents, so he is likely to pursue different strategic priorities.

First-wave international political economy (IPE) was preoccupied with the “complex interdependencies” within a world system that (it believed) was rapidly devolving following the 1971 collapse of the Bretton Woods system of fixed exchange rates. The original IPE scholars were more dedicated to theorizing about the emergence and evolution of global systems than any strict methodology. As IPE developed, it began to emphasize the possibility that institutions could promote cooperation in an anarchic environment, so IPE scholarship increasingly studied the conditions under which these institutions might emerge. Second-wave IPE scholars began to focus on the domestic “level of analysis” for explanatory power, and in particular analyzed the role of domestic political institutions in promoting global economic cooperation (or conflict). They also employed a “second-image reversed” paradigm in which the international system was treated as an explanatory variable that influenced the domestic policymaking process. In opening up the “black box” of domestic politics, in particular as it pertained to foreign economic policy, the “American school” of IPE thoroughly explored the terrain with regression-based statistical models that assume observational independence. As a result, complex interdependencies in the global system were increasingly ignored. Over time the analytical focus progressively shifted to micro-level units—firms and individuals, whenever possible—using neoclassical economic theory as its logical underpinning (with complications for political factors). This third wave of IPE, “open economy politics,” has been criticized in the post-crisis period for its narrow focus, rigid methodology, and lack of systemic theory. Leading scholars have called modern IPE “boring,” “deplorable,” “myopic,” and “reductionist,” among other epithets. A “fourth-wave” of IPE must retain its strong commitment to empiricism while re-integrating systemic processes into its analysis. A new class of complex statistical models is capable of incorporating interdependencies as well as domestic- and individual-level processes into a common framework. This will allow scholars to model the global political economy as an interdependent system consisting of multiple strata.

First-generation research in International Political Economy focused considerable attention on the relationship between hegemony and global economic stability. This focus was the result of a confluence of scholarly and policy concerns about the impact that the apparent decline of U.S. hegemony would have on international trade and investment regimes. Interest in this hegemonic stability hypothesis waned, however, as deeper explorations of the theoretical logic indicated that hegemony was not a necessary condition for international economic openness, and as the collapse of the Soviet Union and the consequent “unipolar moment” suggested that American hegemony was hardly in decline. Interest in hegemony resurfaced in the wake of the 2008 financial crisis. The crisis triggered many scholars to proclaim the end of the era of American global hegemony. Scholars argued that the U.S. government’s attachment to a large budget and trade deficits and the resulting growth of foreign debt were likely to weaken foreign confidence in the dollar and encourage the shift to an alternative reserve currency such as the Euro. At the same time, China’s rapid industrialization and emergence as a large creditor nation was creating a new pole in the international economy that constituted a meaningful alternative to a global economy organized around the United States’ economy. Thus, a shift toward a Beijing hegemony was all but inevitable. The predicted decline of American hegemony has yet to materialize. The U.S. economy remains the world’s largest, and the U.S. government continues to play the leading role in system making—creating new rules to govern international economic cooperation—and in privilege taking—manipulating these rules in ways that advantage U.S. public and private sector actors. Moreover, the U.S. government plays this role in all three economic subsystems: finance, knowledge, and production. Empirical scholarship conducted over the last decade encourages one to conclude by paraphrasing Mark Twain: Recent reports of the death of American hegemony are premature.

Since the 1970s, financial crises have been a consistent feature of the international economy, warranting study by economists and political scientists alike. Economists have made great strides in their understanding of the dynamics of crises, with two potentially overlapping stories rising to the fore. Global crises appear to occur highly amid global imbalances—when some countries run large current account deficits and others, large surpluses. A second story emphasizes credit booms—financial institutions greatly extend access to credit, potentially leading to bubbles and subsequent crashes. Global imbalances are, in part, the product of politically contested processes. Imbalances would be impossible if states did not choose to liberalize (or not to liberalize) their capital accounts. Global political structures—whether international institutions seeking to govern financial flows, or hierarchies reflecting an economic power structure among states—also influence the ability of the global system to resolve global imbalances. Indeed, economists themselves are increasingly finding evidence that the international economy is not a flat system, but a network where some states play larger roles than others. Credit booms, too, and the regulatory structures that produce them, result from active choices by states. The expansion of the financial sector since the 1970s, however, took place amid a crucible of fire. Financial deregulation was the product of interest group knife-fights, states’ vying for position or adapting to technological change, and policy entrepreneurs’ seeking to enact their ideas. The IPE (international political economy) literature, too, must pay attention to post-2008 developments in economic thought. As financial integration pushes countries to adopt the monetary policies of the money center, the much-discussed monetary trilemma increasingly resembles a dilemma. Whereas economists once thought of expanded access to credit as “financial development,” they increasingly lament the preponderance of “financialized” economies. While the experimentalist turn in political science heralded a great search for cute natural experiments, economists are increasingly turning to the distant past to understand phenomena that have not been seen for some time. Political scientists might benefit from returning to the same grand theory questions, this time armed with more rigorous empirical techniques, and extensive data collected by economic historians.

Capitalist peace theory (CPT) has gained considerable attention in international relations theory and the conflict literature. Its proponents maintain that a capitalist organization of an economy pacifies states internally and externally. They portray CPT either as a complement to or a substitute for other liberal explanations, such as the democratic peace thesis, but disagree about the facet of capitalism that is supposed to reduce the risk of political violence. Key contributions have identified three main drivers of the capitalist peace phenomenon: the fiscal constraints that a laissez-faire regimen puts on potentially aggressive governments, the mollifying norms that a capitalist organization creates, and the increased ability of capitalist governments to signal their intentions effectively in a confrontation with an adversary. CPT should be based on a narrow definition of capitalism and should scrutinize motives and constraints of the main actors more deeply. Future contributions to the CPT literature should pay close attention to classic theories of capitalism, which all considered individual risk taking and the dramatic changes between booms and busts to be key constitutive features of this form of economic governance. Finally, empirical tests of the proposed causal mechanism should rely on data sets in which capitalists appear as actors and not as “structures.” If the literature takes these objections seriously, CPT could establish itself as central theory of peace and war in two respects: First, it could serve as an antidote to “critical” approaches on the far left or far right that see in capitalism a source of conflict rather than of peace. Second, it could become an important complement to commercial liberalism that stresses the external openness rather than the internal freedoms as an economic cause of peace and that particularly sees trade and foreign direct investment as pacifying forces.