Understanding Neo-liberalism in International Relations

The end of the Second World War left scholars of international politics with a difficult question: if states are self-interested and there is no world government to enforce rules, how can countries ever cooperate? Neo-liberalism emerged as one of the most influential answers. It accepts that the international system is competitive, yet argues that cooperation is still possible and durable when states build the right institutions. This approach has shaped how we understand trade agreements, the United Nations, climate negotiations, and much of the cooperation that holds the modern world together.

What neo-liberalism actually means in international relations 🔗

Neo-liberalism, also called neo-liberal institutionalism or liberal institutionalism, is a theory holding that cooperation between states is feasible and sustainable, and that such cooperation can reduce conflict and competition. Alongside neo-realism, it is one of the two most influential contemporary approaches to the discipline.

What makes the theory distinctive is its starting point. Neo-liberals share several assumptions with neo-realists. They agree that the international system is anarchic, meaning there is no central authority above states. They agree that states are the main actors and that states rationally pursue their own self-interest. But they reach a very different conclusion from these same premises. Where neo-realists doubt that lasting cooperation is possible, neo-liberals argue that it is both achievable and stable.

This is why neo-liberalism is often described as a revised version of liberalism rather than a complete break from it. It keeps liberalism’s faith in cooperation but rebuilds the argument on more cautious, hard-nosed foundations.

How neo-liberalism differs from traditional liberalism 🔗

Classical liberalism, with roots in thinkers like Immanuel Kant, carried a strong sense of optimism about human nature and the inevitability of progress. It assumed that people and states had a natural tendency toward peaceful cooperation, and that reason and commerce would gradually push the world toward harmony.

Neo-liberalism tempers this optimism significantly. The theory developed in the second half of the twentieth century, after the world had witnessed two devastating world wars and the long tension of the Cold War. These events made it impossible to assume that progress was guaranteed or that humans would naturally cooperate. Neo-liberals are therefore far more sceptical about the natural human tendency toward cooperation and progress.

Despite this scepticism, neo-liberals do not give up on cooperation. Instead, they relocate the source of cooperation. It does not flow automatically from good intentions or human goodness. It is built deliberately, through institutional mechanisms and non-coercive means. In other words, traditional liberals trusted people; neo-liberals trust well-designed structures.

The central role of institutions 🔗

The single most important idea in neo-liberalism is the role of international institutions. For neo-liberals, institutions are not just talking shops. They are the practical machinery that makes cooperation possible in a world without a global police force.

The key reason institutions matter is that they provide information, which reduces the collective action problems states face when trying to provide public goods and enforce compliance. When countries can monitor each other’s behaviour, see who is keeping their promises, and predict what others will do, the temptation to cheat falls and trust rises.

How institutions foster cooperation 🔗

Institutions help states work together in several concrete ways. They reduce uncertainty by making other states’ actions more transparent and predictable. They lower transaction costs by establishing standard rules and procedures, so countries do not have to renegotiate everything from scratch each time. They also discourage cheating by acting as observatory bodies that supply states with information about who is complying and who is not.

Think of organisations like the World Trade Organization, the International Monetary Fund, or the United Nations. The IMF, established in December 1945, was designed to promote international monetary cooperation and facilitate trade. These bodies create a stable framework of expectations within which countries find it rational to cooperate rather than defect.

The role of regimes 🔗

Closely related is the concept of an international regime. The scholar Robert Keohane defined regimes as sets of implicit or explicit principles, norms, rules, and decision-making procedures around which the expectations of states converge in a given area of international relations. Regime theory examines how these rule-based arrangements shape state behaviour, from arms control treaties to environmental agreements.

The thinkers behind the theory 🔗

Two scholars are widely regarded as the founders of the neo-liberal school: Robert Keohane and Joseph Nye. Their 1977 book Power and Interdependence established the principles of neo-liberal institutionalism and offered a serious alternative to the state-centric, security-dominated view of world politics.

Keohane’s later 1984 work, After Hegemony, pushed the argument further. Drawing on the new institutional economics, he argued that the international system could remain stable even without a dominant hegemon, directly challenging the idea that order requires a single powerful enforcer. He showed that cooperation could be sustained through repeated interactions, transparency, and monitoring over time.

Complex interdependence 🔗

One of Keohane and Nye’s most important contributions is the idea of complex interdependence. They observed that as economic, social, and transnational connections between countries multiplied, states became tied together in mutual dependency. Military force was becoming less useful as a tool, while economics and other non-military issues were rising in importance.

Complex interdependence has three main features. First, there are multiple channels connecting societies, not just contact between heads of state. Second, there is no clear hierarchy of issues, so economic and social concerns can matter as much as security. Third, military force becomes less relevant as a way to resolve disputes among deeply interconnected countries. Where these conditions hold, the incentive structure of world politics tilts toward cooperation rather than conflict.

Game theory and the logic of cooperation 🔗

Neo-liberal thinkers often use game theory to explain why states do or do not cooperate. Because their approach emphasises the possibility of mutual wins, they are interested in how repeated interactions can build cooperation even among self-interested players. The work of Robert Axelrod, who collaborated with Keohane on achieving cooperation under anarchy, showed that strategies based on reciprocity can encourage states to cooperate over the long run.

Absolute gains versus relative gains 🔗

One of the clearest ways to grasp neo-liberalism is to understand the debate over gains. This single issue separates neo-liberals from neo-realists more sharply than almost anything else.

Neo-liberal institutionalism assumes that states focus primarily on their own absolute gains and are largely indifferent to how much others gain. As long as a deal makes a country better off than before, it is worth pursuing, even if a rival benefits more. This treats cooperation as a non-zero-sum game in which all parties can benefit simultaneously through comparative advantage.

Neo-realists disagree. They argue that states care about relative gains, meaning how much they gain compared to others. In a competitive, anarchic system, a state worries that a partner who gains more today could become a threat tomorrow. From this view, the fear of falling behind can block cooperation even when both sides would benefit.

Neo-liberals respond that institutions ensuring transparency, reciprocity, and enforceability can ease these relative-gains worries enough to allow cooperation to go ahead. The dispute over relative gains was sharpened by Joseph Grieco, whose realist critique argued that neo-liberals underestimate how deeply anarchy inhibits the willingness of states to cooperate.

The neo-liberal and neo-realist debate 🔗

The contest between neo-liberalism and neo-realism dominated international relations theory from the 1990s onward. It is worth stressing that these two schools are closer than they look. Both are state-centric and structural, both treat states as rational actors, and Keohane himself once described institutional theory as a close relative of neo-realism.

Their disagreements cluster around a few recurring questions: the nature and consequences of anarchy, whether cooperation is feasible, absolute versus relative gains, and how much real influence institutions actually have. Neo-realists like John Mearsheimer argue that institutions matter far less than neo-liberals claim and that state power still drives outcomes. Neo-liberals counter that institutions genuinely change behaviour by reshaping incentives and information.

Real-world events keep testing both theories. During the COVID-19 pandemic, for instance, the early response of many states was self-centred and competitive, prioritising sovereignty over institutional coordination. This was read by some as evidence for neo-realism, even as the eventual development and sharing of vaccines through cooperative mechanisms pointed back toward the neo-liberal case.

Why neo-liberalism still matters 🔗

Neo-liberalism remains essential for understanding the cooperative architecture of today’s world. Free trade agreements, multilateral environmental treaties, financial coordination, and the everyday work of international organisations all rest on the logic the theory describes. The approach explains why countries that compete fiercely in some areas still build durable rules and institutions in others.

Its lasting value lies in its balance. It is realistic enough to accept anarchy and self-interest, yet hopeful enough to insist that cooperation can be engineered through patient institution-building rather than force. In a world facing shared challenges like climate change, pandemics, and economic instability, that combination of caution and constructive optimism feels especially relevant.

What do you think? If institutions are what make cooperation possible, what should happen when powerful states simply ignore the rules they helped create? And in an age of growing global challenges, is the neo-liberal faith in institutions still justified, or are we seeing the limits of what cooperation can achieve?

References

1. https://en.wikipedia.org/wiki/Liberal_institutionalism
2. https://encyclopedia.pub/entry/33867
3. https://www.thescholedge.org/index.php/sijmas/article/download/612/549
4. https://banotes.org/international-relations/keohane-nye-neoliberal-global-interdependence/
5. https://www.aapss.org/fellows/fellow/robert-keohane/
6. https://en.wikipedia.org/wiki/Complex_interdependence
7. https://www.e-ir.info/2011/04/28/absolute-and-relative-gains-in-the-real-world/
8. https://www.academia.edu/26087551/NEOLIBERALISM_NEOREALISM_AND_WORLD_POLITICS
9. https://www.e-ir.info/2012/06/11/neorealism-and-neoliberal-institutionalism-born-of-the-same-approach/
10. https://pmc.ncbi.nlm.nih.gov/articles/PMC8841398/