Political Economy

• Political Economy = balance between political and market forces

• What balance between states and markets most enhances capabilities?• Balance that promotes best qualities of

markets (innovation and productivity) and avoids worst effects (instability and inequality)

Political Economy

• States determine how extensive markets are• Taxes on imports• Border control on currency• Treaties and/or international organizations• Foreign investment

• States determine how intensive markets are• Restrict what can be sold

States & Markets

• Market systems = private ownership over the means of production; production coordinated through interactions of buyers and sellers

• Markets require states to function; CANNOT exist without them• States create common currency to facilitate

trade and exchange; enforce contracts; supply public goods (transportation networks, police protection) markets cannot provide

• State “intervention” = fiscal, monetary, regulatory, and nationalization policy

Market Systems

Advantages• Extraordinarily

dynamic, promoting development of new products and more efficient methods of production and technology

• Enormously productive

• Enhances the prospects of democracy and political rights

• Extraordinarily dynamic, promoting development of new products and more efficient methods of production and technology

• Enormously productive

• Enhances the prospects of democracy and political rights

Disadvantages• Highly volatile (boom

and bust)• Tend to generate

extraordinary inequality

• Create harmful spillover effects (externalities)• Global warming• Pollution

• Highly volatile (boom and bust)

• Tend to generate extraordinary inequality

• Create harmful spillover effects (externalities)• Global warming• Pollution

Shifting Balance of Power

• States steer economies to counteract disadvantages of market systems• Welfare systems to counteract inequality;

regulations to minimize harmful spillover effects; budgets and money supply steady swings in business cycle

• Rise of market fundamentalism/neoliberalism (1970s-present; Washington Consensus)• Welfare state undermined work ethic; regulations

constrain entrepreneurialism; taxes divert too much income; public enterprises inefficient

Fiscal Policy

• Revenues and expenditures• Budget deficits: put money into circulation, increase

demand for goods, encourage businesses to invest, put people to work

• Budget surpluses: withdraw money from circulation, depress spending and discourage investment, reduce inflationary pressures

• States differ greatly in size of state sector (proportion of economy devoted to taxes and state expenditures)• U.S. = lighter tax burden than other rich democracies;

smaller public sector• Sweden = state revenues and spending amount to more

than half of GDP

Monetary Policy

• Manipulation of interest rates; how much it costs to borrow money• High interest rates discourage borrowing and

spending; counteract tendencies toward inflation

• Low interest rates encourage borrowing and spending

• Interest rates largely determined by Central Banks who issue currency and manage its value in foreign exchange• States have little control over them (Federal

Reserve in U.S.; European Central Bank)• Controlled by the state (China’s People’s Bank)

Regulatory Policy

• States set rules of behavior firms must follow• States vary in terms of degree/amount of

regulations• Number of procedures and days it takes to start

a new business is standard measure used to compare thickness of regulatory environment• Germany: 45 days, 9 separate interactions to

obtain licenses and permits to start a business• Brazil: 152 days, 17 steps• U.S.: 5 days, 5 steps (U.S. economy one of the

least regulated in the world)

Nationalization

• States own and control public enterprises• Permits state to control strategic assets and

influence economy (e.g., oil industries in Mexico, Venezuela, and Saudi Arabia)

• Help inject social criteria into economy• China: subsidize inefficient industries because

they provide jobs and services to millions who would be poor and jobless without them

• States differ in degree of nationalization• State Socialist countries (Cuba, North Korea) own and

control all means of production• Extreme market systems have little to no state-owned

enterprises

Good Society

• Do market-based systems do a better job enhancing people’s capability than countries with state-based political economies?

• Safety: lower homicide rates (but significant variation); political economy not strongly related to risk of war

• Physical well-being: lower infant mortality rates; other physical needs

• Informed Decision-making: higher literacy rates

• Rights/Democracy: do not guarantee democracy, but no democracies without market-based political economies