Embedded liberalism

The post-war welfare state harboured a strong global dimension (Block, 1977). Within the wider geopolitical and economic international context, the postwar compromise was structured by two interlinked commitments: first, a dedication to international trade liberalization; and second, a commitment to domestic compensation for the social costs associated with economic change and dynamism. At the Bretton Woods Conference of 1944, again the towering figure of John Maynard Keynes advocated a rules-based global system of pegged-but-adjustable exchange rates, to be overseen by the newly established International Monetary Fund (IMF), to allow national policymakers the freedom to pursue relatively independent social and employment policies without undermining international economic stability and trade liberalization. With the establishment of Bretton Woods, the twin objectives of full employment and welfare state expansion were anchored in what John Ruggie (1982, 1994) has described as a regime of 'embedded liberalism' at the level of the international political economy. In Ruggie's words, 'governments asked their publics to embrace the change and dislocation that comes with liberalization in return for the promise of help in containing and socializing the adjustment costs' (1994: 4-5). Free trade was thereby made politically legitimate on the proviso of full employment and the welfare state. As part and parcel of the embedded liberalism compromise, the General Agreement on Tariffs and Trade (GATT) was not intended to maximize free trade, but to achieve the satisfactory amounts of trade compatible with different nations pursuing their own social and economic objectives, helping them to enhance domestic productive capacities before subjecting them to the vagaries of international competition. Capital controls and fixed but adjustable exchange rates were especially designed to provide stability in international commerce and to prevent potentially footloose capital from evading obligations to help finance social safety nets. The multilateral compromise of embedded liberalism was designed not as a one-time fix but rather as a dynamic, albeit tempered, global equilibrium—a steadily evolving balance of obligations to external and internal stability (Berger and Dore, 1996; Rodrik, 2007). Free trade, also one of the key objectives of post-war European integration, was hereby made socially sustainable through the welfare state.