WEEK 1
Smith Noah (2019): “Economists Need to Add a Little History to Their
Tool Kit“
● Currently, economists learn much from mathematical models/empirical facts about the
present, but not much from economic history course on history also not required in
undergraduate program
● However, economic history is really useful because:
a) It focuses on real events (and not just theoretical notions)
b) It can generate answers for the big questions since it uses economic theory to analyze
past events
e.g. why did China fall behind the west economically and technologically?
Robert Allen argues that this was the case because European wages were much higher
than Chinese ones, which is why the industry was forced to innovate and automate to save
money (many critics of this theory tho)
c) They can collect and analyze data from old archives that aren’t widely available
d) Can provide a check for (dramatic) claims of mainstream historians
e.g. Edward Baptist theorizes that cotton production increased drastically through new
torture methods, while economic historians Alan Olmstead and Paul Rhode argue that
new strains of cotton plants caused that increase
e) Sometimes it can be used to make predictions for the future
f) Can help understand broader social phenomena
Jeffrey Frieden: The political economy of economic policy
What is Political Economy?
● originators of modern economics: Adam Smith, David Ricardo, John Stuart Mill → called
themselves political economists
● fundamental text of the discipline: Mill’s Principles of Political Economy
● two trends divided the political from the econ analysis:
1) governments began to reduce their direct control over the economy
2) different political forms emerged
a) Europe went from monarchical to representative with many variations of
government
● by the early 20th century economics and poli sci were separate disciplines, that was until the
1970s when the Bretton Woods monetary order collapsed, there were two oil price shocks and
stagflation
● pol econ prominent in both econ and poli sci in 3 ways:
1) it analyzes how political forces affect the economy
2) it assesses how the economy affects politics
3) it uses the tools of economics to study politics
, ● basic econ principle: any policy that is good for society as a whole can be made to be good
for everyone in society, even if the policy creates winners and losers (achieved by e.g.,
progressive taxation)
● basic political economy principle: winners don’t like being taxed to compensate losers
● concentrated interests usually win over diffuse interests (e.g., sugarcane planters in the US)
● best political targets: swing voters
● political institutions mediate the pressures constituents bring to bear on leaders
● also in authoritarian countries, rulers have to pay attention to a bit of public opinion → the
selectorate = the portion of the population that matters to policymakers
○ in authoritarian regimes: economic elite or the armed forces
○ electoral democracy: voters and interest groups
● in democracies, the variety of electoral institutions affect how policymakers feel constituent
pressures
● legislative institutions
Jeffry Frieden – Political Economy of Economic Policy
● Political Economy analyses how politics affects economy and how the economy affects
politics
● Adam Smith, David Ricardo and John Stuart Mill founders of modern (political)
economics
→ two trends divided the political from the economic:
1. Governments began to reduce direct control over economy
2. Different political forms emerged
→ Essentially, the economic problems (great depression, hyperinflation etc.) and the political
problems (two world wars, rise of fascism) were so big on their own that they required
separate attention
● This changed in the 70s after stagflation and collapse of the bretton woods monetary order
● Political economy has become prominent in three ways:
1. Analyses how politics affect the economy (voters, interest groups..)
2. Assesses how economics affects politics (can be decisive for elections, actions of
industries...)
3. Uses tools of economics to analyze politics (voters as consumers, governments as
monopoly providers of goods…)
● Main question: Why do governments struggle to get economic policies right?
answer: politics – but how?
a. Governments try to pump the policy before elections to get re-elected (created
economic ebbs and flows around election period) these economic conditions have
huge impact on elections
b. Results in short term thinking, since policymakers might be voted out before they can
harvest fruits from long term investment
c. The best economic solution might not be politically feasible (sometimes better to
settle for second best)
● Basic economy principle: any policy that is good for society can be made good for everyone
in society, as long as winners are taxed to compensate the losers
, ● Basic political economy principle: winners don’t like to be taxed to compensate for the
losers – and what’s best for the county might not be best for certain individuals or interest
groups so they fight back
● Common principle of both: concentrated interests win over diffuse interest (and often:
producers are concentrated while consumers are not)
● Politics as the way society balances conflicting interests
● Political economy does not take chance on ethical question, but tries to answer the why
● The way a country is organized affects who wins the battle over policy:
a. Elections
governments will try to satisfy swing voters, not society as a whole, policy
makers forced to think short term
b. Social Institutions (bigger influence if well organized)
c. Political institutions
the “selectorate”: portion of population that matters for policymakers (democracy: swing
voters, authoritarian regime: economic elite or armed forces)
d. Electoral institutions (parties have a reputation to uphold and might therefore act
differently than a system with individual politicians)
e. Legislative institutions (depending on the system, there might be possibility for big
and fast change or not; also federalized vs. centralized systems give different
priorities to certain groups)
Stilwell
What is political economy?
● addresses real-world concerns in a way that emphasizes the connections between econ
problems, social structures, and political processes
● challenge: to go beyond critique to the formulation of effective alternatives
● neoclassical economics emerged in the late 19th century and still the dominant econ
orthodoxy
○ stresses the beneficial effects of competitive markets as a means of allocation econ
resources
○ government is an adjunct to the free-market economy
○ capitalist econ is a stable, self-equilibrating system
○ criticism:
■ the theoretical model of market exchange under competitive conditions fails
to illuminate the world in which we live
○ we can see it in policies: liberalization of trade, deregulation of financial markets,
privatization of public enterprises
○ contemporary concerns:
■ challenges posed by multinational corporations, tension between econ growth
and ecological sustainability, econ insecurity and inequality, proliferation of
speculative financial activities and their adverse consequences for econ
stability and productivity, problems of promoting balanced econ and social
development
The political econ questions:
What is happening? Why? Who gains and who loses? Does it matter? If so, what can be done and by
whom?
, Classical political economy
● Smith, Ricardo
● notion of an economic system producing goods and services surplus to what is required for
social reproduction remains valuable
Marxist economics
● roots in classical pol econ
● source of econ surplus is the exploitation of labor
Institutional economics
● emerged from the German historical school of the nineteenth century and flourished in the
20th
● reaction to the abstract econ theory
● Thorstein Veblen, J.K. Galbraith
● focus on econ evolution
● themes: growth of big business, transnational corporations, varied governmental econ
activities in different nations, influence of trade unions
Keynesian economics
● capitalism cannot guarantee full employment
● orthodox economists responded to the ideas by producing a neoclassical synthesis, combining
microeconomics emphasizing market freedoms with a macroeconomics emphasizing the
necessity of gov intervention
Neoclassical economics
● this theory embodies an ideology presenting a particular image of a free market capitalist
economy serving societal preferences
● this ideology makes it hard to mix and match it with other analyses
Modern political economy
● Joseph Schumpeter, Joan Robinson, Nicholas Kaldor, Michal Kalecki, Paul Sweezy, Gunnar
Myrdal, Veblen, Galbraith, Keynes
● desire for a down-to-earth approach that addresses real political economic problems and
makes values explicit
Stilwell
● Political economy seeks to illuminate real world so we can act intelligently
● Very interdisciplinary
● Focuses on real world problems (direct engagement with big issues):
a. Individual economic concerns (earning a living, spending and saving)
b. Collective economic concerns (like how to balance economic growth and
environmental concerns)
● Addressing of these issues influenced heavily by neoclassical economics
→ stresses the beneficial effects of the competitive market as a means of allocating economic
resources
→ limited role of government
→ capitalist economy stable and self-equilibrating
→ critique: fails to illuminate world we actually live in and actually had a strong influence on
shaping reality instead of (at first) reflecting it
● This orthodox economic reasoning has given rise to policies like deregulation of market and
liberalization of trade
Smith Noah (2019): “Economists Need to Add a Little History to Their
Tool Kit“
● Currently, economists learn much from mathematical models/empirical facts about the
present, but not much from economic history course on history also not required in
undergraduate program
● However, economic history is really useful because:
a) It focuses on real events (and not just theoretical notions)
b) It can generate answers for the big questions since it uses economic theory to analyze
past events
e.g. why did China fall behind the west economically and technologically?
Robert Allen argues that this was the case because European wages were much higher
than Chinese ones, which is why the industry was forced to innovate and automate to save
money (many critics of this theory tho)
c) They can collect and analyze data from old archives that aren’t widely available
d) Can provide a check for (dramatic) claims of mainstream historians
e.g. Edward Baptist theorizes that cotton production increased drastically through new
torture methods, while economic historians Alan Olmstead and Paul Rhode argue that
new strains of cotton plants caused that increase
e) Sometimes it can be used to make predictions for the future
f) Can help understand broader social phenomena
Jeffrey Frieden: The political economy of economic policy
What is Political Economy?
● originators of modern economics: Adam Smith, David Ricardo, John Stuart Mill → called
themselves political economists
● fundamental text of the discipline: Mill’s Principles of Political Economy
● two trends divided the political from the econ analysis:
1) governments began to reduce their direct control over the economy
2) different political forms emerged
a) Europe went from monarchical to representative with many variations of
government
● by the early 20th century economics and poli sci were separate disciplines, that was until the
1970s when the Bretton Woods monetary order collapsed, there were two oil price shocks and
stagflation
● pol econ prominent in both econ and poli sci in 3 ways:
1) it analyzes how political forces affect the economy
2) it assesses how the economy affects politics
3) it uses the tools of economics to study politics
, ● basic econ principle: any policy that is good for society as a whole can be made to be good
for everyone in society, even if the policy creates winners and losers (achieved by e.g.,
progressive taxation)
● basic political economy principle: winners don’t like being taxed to compensate losers
● concentrated interests usually win over diffuse interests (e.g., sugarcane planters in the US)
● best political targets: swing voters
● political institutions mediate the pressures constituents bring to bear on leaders
● also in authoritarian countries, rulers have to pay attention to a bit of public opinion → the
selectorate = the portion of the population that matters to policymakers
○ in authoritarian regimes: economic elite or the armed forces
○ electoral democracy: voters and interest groups
● in democracies, the variety of electoral institutions affect how policymakers feel constituent
pressures
● legislative institutions
Jeffry Frieden – Political Economy of Economic Policy
● Political Economy analyses how politics affects economy and how the economy affects
politics
● Adam Smith, David Ricardo and John Stuart Mill founders of modern (political)
economics
→ two trends divided the political from the economic:
1. Governments began to reduce direct control over economy
2. Different political forms emerged
→ Essentially, the economic problems (great depression, hyperinflation etc.) and the political
problems (two world wars, rise of fascism) were so big on their own that they required
separate attention
● This changed in the 70s after stagflation and collapse of the bretton woods monetary order
● Political economy has become prominent in three ways:
1. Analyses how politics affect the economy (voters, interest groups..)
2. Assesses how economics affects politics (can be decisive for elections, actions of
industries...)
3. Uses tools of economics to analyze politics (voters as consumers, governments as
monopoly providers of goods…)
● Main question: Why do governments struggle to get economic policies right?
answer: politics – but how?
a. Governments try to pump the policy before elections to get re-elected (created
economic ebbs and flows around election period) these economic conditions have
huge impact on elections
b. Results in short term thinking, since policymakers might be voted out before they can
harvest fruits from long term investment
c. The best economic solution might not be politically feasible (sometimes better to
settle for second best)
● Basic economy principle: any policy that is good for society can be made good for everyone
in society, as long as winners are taxed to compensate the losers
, ● Basic political economy principle: winners don’t like to be taxed to compensate for the
losers – and what’s best for the county might not be best for certain individuals or interest
groups so they fight back
● Common principle of both: concentrated interests win over diffuse interest (and often:
producers are concentrated while consumers are not)
● Politics as the way society balances conflicting interests
● Political economy does not take chance on ethical question, but tries to answer the why
● The way a country is organized affects who wins the battle over policy:
a. Elections
governments will try to satisfy swing voters, not society as a whole, policy
makers forced to think short term
b. Social Institutions (bigger influence if well organized)
c. Political institutions
the “selectorate”: portion of population that matters for policymakers (democracy: swing
voters, authoritarian regime: economic elite or armed forces)
d. Electoral institutions (parties have a reputation to uphold and might therefore act
differently than a system with individual politicians)
e. Legislative institutions (depending on the system, there might be possibility for big
and fast change or not; also federalized vs. centralized systems give different
priorities to certain groups)
Stilwell
What is political economy?
● addresses real-world concerns in a way that emphasizes the connections between econ
problems, social structures, and political processes
● challenge: to go beyond critique to the formulation of effective alternatives
● neoclassical economics emerged in the late 19th century and still the dominant econ
orthodoxy
○ stresses the beneficial effects of competitive markets as a means of allocation econ
resources
○ government is an adjunct to the free-market economy
○ capitalist econ is a stable, self-equilibrating system
○ criticism:
■ the theoretical model of market exchange under competitive conditions fails
to illuminate the world in which we live
○ we can see it in policies: liberalization of trade, deregulation of financial markets,
privatization of public enterprises
○ contemporary concerns:
■ challenges posed by multinational corporations, tension between econ growth
and ecological sustainability, econ insecurity and inequality, proliferation of
speculative financial activities and their adverse consequences for econ
stability and productivity, problems of promoting balanced econ and social
development
The political econ questions:
What is happening? Why? Who gains and who loses? Does it matter? If so, what can be done and by
whom?
, Classical political economy
● Smith, Ricardo
● notion of an economic system producing goods and services surplus to what is required for
social reproduction remains valuable
Marxist economics
● roots in classical pol econ
● source of econ surplus is the exploitation of labor
Institutional economics
● emerged from the German historical school of the nineteenth century and flourished in the
20th
● reaction to the abstract econ theory
● Thorstein Veblen, J.K. Galbraith
● focus on econ evolution
● themes: growth of big business, transnational corporations, varied governmental econ
activities in different nations, influence of trade unions
Keynesian economics
● capitalism cannot guarantee full employment
● orthodox economists responded to the ideas by producing a neoclassical synthesis, combining
microeconomics emphasizing market freedoms with a macroeconomics emphasizing the
necessity of gov intervention
Neoclassical economics
● this theory embodies an ideology presenting a particular image of a free market capitalist
economy serving societal preferences
● this ideology makes it hard to mix and match it with other analyses
Modern political economy
● Joseph Schumpeter, Joan Robinson, Nicholas Kaldor, Michal Kalecki, Paul Sweezy, Gunnar
Myrdal, Veblen, Galbraith, Keynes
● desire for a down-to-earth approach that addresses real political economic problems and
makes values explicit
Stilwell
● Political economy seeks to illuminate real world so we can act intelligently
● Very interdisciplinary
● Focuses on real world problems (direct engagement with big issues):
a. Individual economic concerns (earning a living, spending and saving)
b. Collective economic concerns (like how to balance economic growth and
environmental concerns)
● Addressing of these issues influenced heavily by neoclassical economics
→ stresses the beneficial effects of the competitive market as a means of allocating economic
resources
→ limited role of government
→ capitalist economy stable and self-equilibrating
→ critique: fails to illuminate world we actually live in and actually had a strong influence on
shaping reality instead of (at first) reflecting it
● This orthodox economic reasoning has given rise to policies like deregulation of market and
liberalization of trade
