Political Economy

What is Political Economy• Economy is one arena where the struggle for freedom and

equality is a reality

• Interactions between political and economic institutions in any country has an impact on the prosperity of citizens.

• The study of how politics and economcs are related and how their relationship shapes the balance between freedom and equality is known as political economy.

Components of Political Economy

• Markets and Property

• Public Goods• Social Expenditures• Taxation• Money, Inflation, and Economic Growth• Regulation• Trade

Markets

• Markets - interactions between the forces of supply and demand.

• Resources are allocated through the process• This interaction enables values placed on goods and

services.• Millions of individuals making decisions about what they

buy and sell dictate value• Markets are communities of buyers and sellers interacting

through the economic choices the make.

Property

• Generally refers to the ownership of the goods and services exchanged through markets.

• In terms of physical property, the state has the task of regulation.

• State regulations may vary depending upon the role they play in constructing and enforcing property rights.

Public Goods

• Defined as those goods, provided or secured by the state, that are available for society and indivisible.

• For example - roads, defense, education and health care.

Social Expenditures

• Social expenditures - public benefits such as education, health care, transportation.

• Also known as welfare of the welfare state.• Set up for those who require greater care - elderly, poor,

and the disabled.

Taxation

• Is used to pay for social expenditures

• Taxes can consume a high percentage of a country's GDP (gross domestic product). GDP represents total market value of goods and services produced in one year.

Money, Inflation, and Economic Growth

• States manage money via a central bank

• Can set national interest rates• Lower rates - stimulate borrowing and spending• Higher rates - foster saving and allow people to take

advantage of earning off of their saved income.• Inflation - an overal increase in prices• Hyperinflation - inflation which is 50% higher for more than

two months in a row.• Deflation - reduction of the general level of prices in an

economy.

Regulation

• Regulations - rules or orders that set boundaries of a given procedure.

• Can be economic - for example Solar industry• Can be social - licensing occupational and professional

certification.

Trade

• Tariffs - taxes on imported goods

• Quotas - limit the quantity of goods coming into a country• Nontariff regulatory barriers - rules enacted to protect

citizens and make it difficult for foreign goods to be sold within the state.

Regulate- Generate state revenue- Foster local industry- Protect local jobs- Keep wealth in the countryDeregulate- Promotes competition- Keep costs of goods low- Stimulate domestic innovation in areas of comparative advantage

Political-Economic Systems

Is used to describe the relationship between political and economic institutions in a particular country as well as its policies and outcomes.

• Liberalism• Social Democracy• Communism• Mercantilism

Liberalism

• Seeks to limit state power with an emphasis on individual politics and economic freedom

• The best state is a weak one• Focus is on the public good of defense and education• Enjoys minimal taxation • Promotes light economic regulation• Favors trade stimulus to encourage competition and

innovation• Believes in "laissez-faire" capitalism• The power of market trumps that of the state

Social Democracy

• Capitalism is a "runaway" train and if left unchecked will foster income inequality.

• State must be involved with the market and economy• State must regulate trade• Public goods should include healthcare, pensions and

higher education• Believes in higher taxes to allow for equality.• Neocorporatism - guilds or associations work with the state

to insure equity.• State can own firms within the economy• Common in Europe

Communism

• Eliminate individual freedom to reach equality

• Economic competition creates exploitation and the development of social classes in which a small group of the wealthy dominate and benefit from the labor of the poor majority.

• Private property is nationalized• Economic decisions are made by the state for the public

good.• They have fixed prices and wages• All profits go to the state• Labor is allocated by the state• Have extensive social expenditures - all basic services are

state run.• Trade is highly restricted• State controls the people's fate

Mercantilism

• Closely resembles the British colonial system. Colonies would supply the mother country with imports and thus exclusively consume exports from the home country.

• Active industrial policy via the state• State directs economy to take advantage of certain

segments• State trade regulations in the form of tariffs are used to

shield domestic industries.• Less emphasis on social expenditures• Pros: Ability to direct an economy to areas of industrial

development• Good for developing countries• Countries such as Japan, S. Korea and Brazil have this

type of economy.

Comparing Outcomes of Political-Economic Systems

• GDP - average per capita income of one year

• PPP - Purchasing-power parity: estimated buying power of income

• Gini Index: 0=equality, 100=inequality (see table 4.1)• HDI - Human Development Index: Assess health, education

and wealth of the population. (High income = high education = high life expectancy)