Lecture 7 – Political Economy
Political economy is the study between the relationship of politics and the economy. How much
should the state intervene in the economy and what can it do to intervene? The separation
between politics and economics is unstainable as political factors are crucial in determining
economic outcomes, and economic factors are crucial in determining political outcomes.
Historical perspectives on state economy relations
State centric political economy developed out of mercantilism, an economic philosophy that
takes the state to be the most significant economic actor, highlighting the extent to which
economic relations are determined by political power. Here economic markets are not ‘Natural’
but exist within a social context that is largely shaped by the exercise of state power. Classic
mercantilist strategy was to build up a state’s wealth, power and prestige by developing a
favourable trading balance through producing goods for export while keeping imports low. This
is done through protectionism where a defensive mechanism was designed to protect infant
industries and weaker economies from unfair competition from stronger economies.
Classical and neoclassical political economy focuses on Laissez-fair capitalism - Adam Smith
believes that the relationship between the state and the economy is based on the fact that the
market can self-regulate indivisible hand, the market will find an equilibrium which is the
perfect equilibrium. Focusing on the liberal assumption that humans will be expected to be
driven by utility maximization an unregulated market economy tends towards long-run
equilibrium – everyone acting in their own self-interest leads to healthy competition that
ultimately benefits everyone. The metaphor of an ‘invisible hand’ to describe the fact that in
market economies, even in the absence of central direction, products and services that people
want will be produced in great supply at reasonable prices that people can afford. There are
certain conditions needed to guarantee free and undistorted market for a happy society, where
state intervention is needed like laws for property rights and enforceable contract however
interventions here may lead to a distortion.
Liberalism, which seeks to maximize individual liberty and freedom, is argued not just as
a moral and political imperative, but an economic one, too – the public is happier and
wealthier when able to prioritize its own interests, relatively free of state interference.
Keynesianism – if the markets are not regulated, we will see crisis and instability, the state
enters the economy and creates demand
Neoliberalism - return to the free market principles, deregulation and privatization. Now we
live in a liberal era- states little to no interactions, they allow the market to be free which gives
rise to efficiency. Others say that we are moving away from the liberal era to something else,
seen by 2008 crisis, trump tariffs, covid.
Marxists political economy portrays capitalism as a system of class exploitation and treats
social classes as the key economic actors. Two great classes are the bourgeoisie and the
, proletariat. Capitalism’s quest for profit can only be satisfied through the extraction of surplus
value from its workers, by paying them less than the value their labour generates.
State and the economy
Laissez-faire argues that free markets, driven by competition are the most efficient allocators of
resources. Believes that state intervention distorts market signals and leads to inefficiencies
and is associated with classical liberal thinkers like Adam Smith.
State intervention argues that markets alone can lead to instability, inequality, and social
problems. Believes the state has a crucial role in regulating, stabilizing, and investing in the
economy and is associated with Keynesian economics and various forms of state-led
development.
Market enabler: state defines rules and provides currency. (Adam Smith’s view the state just
ensures that the market goes well, as well as enforcing rules)
Rule enforcer: state ensures rules and enforces them.
Regulator: state regulates the markets ensuring quality control, apple changing from usb to
usbc because the EU said so. Standards are made and need to be followed.
Provider: State provides infrastructure, it provides a service like education.
Economic manager: ensuring that prices are stable or incentivise that prices go higher
Redistributor: different tax rates creating transfers between rich and poor, level of redistribution
is different amongst countries.
Capitalist states are very different to each other why?
Power resource theory (PRT): Power of the working class, it was very politically aligned and was
able to get a party to represent them and would get good institutions and unions. The theory
argues that the development of the welfare state and social policy is a direct result of the power
of the working class. Social democratic welfare states are the result of sustained working-class
political power. It moved beyond economic determinism and focuses on political mobilization
and class struggle. Walter Korpi posited that the power of labour unions and left-wing political
parties is the most critical factor in explaining variation in welfare state generosity.
PRT analyzes different forms of power
Structural Power: A worker's ability to disrupt production (e.g., strikes).
Associational Power: The organizational strength of unions and political parties.
Institutional Power: The degree to which labor is formally included in political and economic
decision-making.
PRT's conclusions are that social democratic welfare states (e.g., Sweden, Norway) are the
result of sustained working-class political power, which led to universal and generous social
programs
Varieties of capitalism
Variety of capitalism is based on the relationship between business, state and others. Different
models of capitalism develop over time because of constrains and existing parameters rather
than a free choice, businesses need to find coordination between the state and labour powers
to coordinate price and strategy. If those institutions are not present business can only rely on
Political economy is the study between the relationship of politics and the economy. How much
should the state intervene in the economy and what can it do to intervene? The separation
between politics and economics is unstainable as political factors are crucial in determining
economic outcomes, and economic factors are crucial in determining political outcomes.
Historical perspectives on state economy relations
State centric political economy developed out of mercantilism, an economic philosophy that
takes the state to be the most significant economic actor, highlighting the extent to which
economic relations are determined by political power. Here economic markets are not ‘Natural’
but exist within a social context that is largely shaped by the exercise of state power. Classic
mercantilist strategy was to build up a state’s wealth, power and prestige by developing a
favourable trading balance through producing goods for export while keeping imports low. This
is done through protectionism where a defensive mechanism was designed to protect infant
industries and weaker economies from unfair competition from stronger economies.
Classical and neoclassical political economy focuses on Laissez-fair capitalism - Adam Smith
believes that the relationship between the state and the economy is based on the fact that the
market can self-regulate indivisible hand, the market will find an equilibrium which is the
perfect equilibrium. Focusing on the liberal assumption that humans will be expected to be
driven by utility maximization an unregulated market economy tends towards long-run
equilibrium – everyone acting in their own self-interest leads to healthy competition that
ultimately benefits everyone. The metaphor of an ‘invisible hand’ to describe the fact that in
market economies, even in the absence of central direction, products and services that people
want will be produced in great supply at reasonable prices that people can afford. There are
certain conditions needed to guarantee free and undistorted market for a happy society, where
state intervention is needed like laws for property rights and enforceable contract however
interventions here may lead to a distortion.
Liberalism, which seeks to maximize individual liberty and freedom, is argued not just as
a moral and political imperative, but an economic one, too – the public is happier and
wealthier when able to prioritize its own interests, relatively free of state interference.
Keynesianism – if the markets are not regulated, we will see crisis and instability, the state
enters the economy and creates demand
Neoliberalism - return to the free market principles, deregulation and privatization. Now we
live in a liberal era- states little to no interactions, they allow the market to be free which gives
rise to efficiency. Others say that we are moving away from the liberal era to something else,
seen by 2008 crisis, trump tariffs, covid.
Marxists political economy portrays capitalism as a system of class exploitation and treats
social classes as the key economic actors. Two great classes are the bourgeoisie and the
, proletariat. Capitalism’s quest for profit can only be satisfied through the extraction of surplus
value from its workers, by paying them less than the value their labour generates.
State and the economy
Laissez-faire argues that free markets, driven by competition are the most efficient allocators of
resources. Believes that state intervention distorts market signals and leads to inefficiencies
and is associated with classical liberal thinkers like Adam Smith.
State intervention argues that markets alone can lead to instability, inequality, and social
problems. Believes the state has a crucial role in regulating, stabilizing, and investing in the
economy and is associated with Keynesian economics and various forms of state-led
development.
Market enabler: state defines rules and provides currency. (Adam Smith’s view the state just
ensures that the market goes well, as well as enforcing rules)
Rule enforcer: state ensures rules and enforces them.
Regulator: state regulates the markets ensuring quality control, apple changing from usb to
usbc because the EU said so. Standards are made and need to be followed.
Provider: State provides infrastructure, it provides a service like education.
Economic manager: ensuring that prices are stable or incentivise that prices go higher
Redistributor: different tax rates creating transfers between rich and poor, level of redistribution
is different amongst countries.
Capitalist states are very different to each other why?
Power resource theory (PRT): Power of the working class, it was very politically aligned and was
able to get a party to represent them and would get good institutions and unions. The theory
argues that the development of the welfare state and social policy is a direct result of the power
of the working class. Social democratic welfare states are the result of sustained working-class
political power. It moved beyond economic determinism and focuses on political mobilization
and class struggle. Walter Korpi posited that the power of labour unions and left-wing political
parties is the most critical factor in explaining variation in welfare state generosity.
PRT analyzes different forms of power
Structural Power: A worker's ability to disrupt production (e.g., strikes).
Associational Power: The organizational strength of unions and political parties.
Institutional Power: The degree to which labor is formally included in political and economic
decision-making.
PRT's conclusions are that social democratic welfare states (e.g., Sweden, Norway) are the
result of sustained working-class political power, which led to universal and generous social
programs
Varieties of capitalism
Variety of capitalism is based on the relationship between business, state and others. Different
models of capitalism develop over time because of constrains and existing parameters rather
than a free choice, businesses need to find coordination between the state and labour powers
to coordinate price and strategy. If those institutions are not present business can only rely on
