PS 210

Political Economy

How politics and economics are related

Shane Stevens

Components of Political Economy: Markets and Property

• Markets: Interaction between forces of supply and demand. Creates value for goods and services. Decentralized

• Property: Ownership of goods and services. • Property rights—what can I do with my

property?• Regulation: States regulate and protect

markets and property

Components of Political Economy: Public Goods

• Non-Rival and Non-Excludable• Available to everyone• These goods don’t function well in market or in

private hands• Examples?• Public goods: used by society, not privately owned• These vary widely from country to country

Components of Political Economy:Social Expenditures

• “Welfare”

• State provision of public benefits

• For example: Education, healthcare, transportation

• Redistributive power placed in hands of state

• Often controversial—who benefits?

Taxation

• Who pays for public goods and social expenditures?

• Taxation varies in who is taxed (income tax, workers, employees)

• Taxation varies in how much is taxed

Money and Inflation

• Money is a medium of exchange

• A form of IOU

• Legitimacy backed by the state

• Central banks control its supply, typically through interest rates

• Oversupply can lead to inflation

• Extreme cases: Hyperinflation—inflation of more than 50% a month!

Regulation

• Orders that set the boundaries of given procedure

• States manage markets and property through regulations

• Examples:– Monopoly (Microsoft)– Cartel (OPEC)

Trade

• States manage sale of goods and services between themselves and other countries

• How open or closed should this be?

• Tools of trade regulation:– Tariffs– Quota– Non-tariff barriers

Political Economic Systems

Discussed various institutions that link politics and economics

How do these differ across countries?

Political economic systems: actual relationship between political and economic institutions in a particular country, and the outcomes they create

Matrix of Political Economic Systems

Liberalism

• Related to ideology of the same name

• High priority on individual political and economic freedom, less on equality

• Pro-capitalism

• Democracy requires a free market

• US and other former British colonies

Liberal Policies

• Best state is a weak one• Limited regulations• Fewer public goods• Lower taxes• Free trade• Laissez-faire—allow economy to function as it

wishes• Greater tolerance for inequality and poverty

Social Democracy

• Attempts to balance individual freedom and collective equality

• Accepts private property and markets, but seeks to regulate

• Many European countries fall into this category

Social Democratic Policies

• More public goods than in liberalism—less tolerance for inequality, poverty

• Trade and competition under state management

• Outright ownership of some industries by state seen as acceptable or necessary

• Neo-corporatism: state, labor and business set policy in concert, not through conflict (like strikes)

Communism

• Attempt to realize communist theory of Marx

• Emphasis on collective equality over individual freedom

• Property, markets viewed as instruments of exploitation

• Soviet Union and much of Eastern Europe until 1989-91. Cuba, North Korea, China(?)

Communist Policies

• No private property—nationalized

• No markets—directed by state

• No unemployment

• Trade restricted

• Wide range of public goods

Mercantilism

• De-linked from any particular ideology• Predates modern ideologies—associate with earlier

empires• Modern mercantilism associated with fascism• Can be found today in non-democratic and

democratic settings• State views market as tool of international power• Japan, South Korea, India and other developing

countries

Mercantilist Policies

• Private property along with national ownership

• Active industrial policy—state tries to direct production, parastatals

• Small welfare state

• Tariffs and other trade barriers

• Neither individual freedom or collective equality emphasized—rather, state power relative to other states

Limitations of Each System

Liberalism: Inequality and monopolies

Social Democracy: Expense of welfare state, inefficiency

Communism: Authoritarianism, inefficiency

Mercantilism: Tends toward Authoritarianism? Distorts market

Political Economic Systems: Comparing Outcomes

• How can we compare and measure successes or limitations of each?

• Gross Domestic Product (GDP)

• Purchasing Power Parity (PPP)

• Gini Index

• Human Development Index

Gross Domestic Product

Purchasing Power Parity

• Limits of GDP in that it does not take into account costs of living in different countries

• PPP looks at GDP in terms of buying power

• In countries where costs are low, GDP is increased when adjusted for PPP

• In countries where costs are high, GDP is lowered when adjusted for PPP

PPP

Limits of GDP and PPP

• Captures all economic transactions, including bad ones!

• For example, disasters, expenditures based on crime prevention

• Costs of economic growth not factored in, such as pollution

• Economic distribution not measured—who gets the wealth?

Gini Index

• Mathematical formula that measures inequality (not poverty) in countries

• Perfect equality = 0 Perfect inequality = 100• What percent of the population owns what

percent of the country’s total wealth?• Higher inequality in liberal countries than

social democratic ones• Higher inequality in poorer than richer

countries

Human Development Index

• Emphasis on poverty/development over inequality

• Not focused on wealth, but rather outcome of that wealth

• What is the quality of life?– Literacy and education– Life expectancy and health

• Strong correlation between GDP and HDI

Future of Political Economy?

• World has become more liberal over time• Neo-liberalism: return/resurgence of liberal

policies and institutions• Decline of communism, roll-back of social

democratic institutions and policies

Review

• The shift in political science toward seeking causality and using quantitative methods is known as the

• A.) mathematical revolution.

• B.) behavioral revolution.

• C.) statistical revolution.

• D.) analytical revolution.

• Modernization theory can be defined as the view that

• A.)few countries will ever modernize and embrace democracy.

• B.)as societies develop they will become capitalist democracies.

• C.)each country and region will modernize in a different way, each with a different result.

• D.)significant change is possible only through revolution.

• A greater focus on collective equality is associated with

• A.)a smaller state.

• B)a larger state.

• C.)political violence.

• D.)civic responsibility.

• Sovereignty is defined as the ability of

• A.) individuals to vote freely in elections.

• B.) individuals to depend on laws and regulations.

• C.) states to carry out actions or policy independent of outside actors or rivals.

• D.) states to function without the need of an army or other coercive apparatus.

• Regimes are defined as

• A.) legitimate political systems.

• B.) the elected officials of a country.

• C.) an organization that maintains a monopoly of violence over a territory.

• D.) the basic rules and norms of politics.

• The emergence of the modern state is closely tied to what specific event?

• the emergence of Globalization

• the collapse of the Roman Empire

• the expansion of European empires around the globe

• the end of World War Two

• Which of the following does O’Neil not list as a basic form of political legitimacy?

• traditional

• charismatic

• liberal

• rational-legal

• Ethnic identity can be defined as

A.) specific attributes that make one group of people culturally different.

B.) biological elements that separate people by race.

C.) linguistic differences between otherwise similar peoples.

D.) economic differences interconnected with cultural values.

• In their political attitudes, Chinese radicals would have much in common with American _________.

A.) radicals

B.) conservatives

C.) reactionaries

D.) liberals

• Mercantilism is best associated with which of the following policies?

A.) free trade

B.) tariff barriers

C.) elimination of all private property

D.) social expenditures

• Neocorporatism is an example of which political economic system?

A.) social democracy

B.) communism

C.) mercantilism

D.) liberalism