I will begin by giving a liberal account f the relationship between the economy, the state and power.
Liberal idealism in international politics did not re-emerge, after the devastation f the Second World War, until the 1970s. Rapid advances in technology, the growth f organisations like the European Community, and the impact f events like the 1973 oil crisis pointed towards evidence f growing interdependence between states.
At the same time liberal literature made significant inroads into the rigid inside/outside, domestic/international distinctions characteristic f realism, with the emergence f trans-national relations and world society.
Modern interdependency theory uses free trade and the removal f barriers to commerce as prof to their claims. "The rise f regional economic integration in Europe was inspired by the belief that the likelihood f conflict between states would be reduced by creating a common interest in trade and economic collaboration amongst members f the same geographical region."
European powers, instead f resolving their differences militarily, would cooperate within a commonly agreed economic and political framework for their mutual benefit. Eventually cooperation between states would increase and broaden as mutual advantages could be gained. Membership f the European Union would entail compliance with its rules, which itself would discourage the absolute pursuit f national interests and weaken state sovereignty.
Liberal institutionalists such as Rosecrance argued that the "growth f economic interdependency had been matched by a corresponding decline in the value and importance f territorial conquest for states." In the modern world the benefits f trade and cooperation among states greatly exceed that f military competition and territorial control. Traditionally nation states regarded the acquisition f territory and land as the means to increasing national wealth. The state has transformed from being a 'military state' to a 'trading state'.
Statesmen increasingly became aware that the accumulation f national wealth and development relied more heavily on macro-economic policies that increased the competitiveness f their economy compared to other states. Higher levels f efficiency, technology intensive modes f production and valuable human capital all give incentives for multi-national corporations and businesses to invest in the country. Neo-liberals point out that commercial relations between businesses and individuals have diminished the influence and power f the state.
Although there is suspicion the role oil has played in the ongoing war in Iraq one cannot doubt the repercussions the war has had internationally. Britain and America have to some extent isolated themselves diplomatically from Europe (their closet allies) and the wider world.
Nowadays due to the complications f economic interdependence it makes states less able to act aggressively because otherwise they face risking economic penalties imposed by other members f the international community.