POLITICAL ECONOMY NOTES WITH DETAILED READING SUMMARIES - MIDTERM
Lecture 1)
Political Science → the study of politics: analysis of political ideas, norms, behaviors, and
institutions
Economics → The study of scarcity: how people use resources and respond to incentives.
But isn’t political power used to control or distribute resources?
Reading 1: Frieden, J. (2020). “The political economy of economic policy”
Classic thinkers like Adam Smith, David Ricardo, and John Stuart Mill are regarded as the
originators of modern economics, but they called themselves political economists: Mill’s
Principles of Political Economy (1848) was the fundamental text until the end of the
nineteenth century. For these early thinkers, the economic and political worlds were
inseparable.
David Ricardo, On the Principles of Political Economy and Taxation (1817) and John
Stuart Mill, Principles of Political Economy (1848) (central text of the discipline for decades)
Up until the late 19th century, political economy was not a split field but a unified way of
understanding society. However, two trends divided political from economic analysis:
governments reduced their direct control over the economy, and new political forms emerged
as Europe shifted from monarchies to increasingly representative and diverse governments.
By the early twentieth century, economics and political science were established as separate
disciplines. For much of that century the separation persisted. The Great Depression and
development issues demanded economists’ attention, while the political problems of world
wars, fascism, and communism required separate focus.
By the 1970s, however, the separation between politics and economics was clearly
misleading. The collapse of the Bretton Woods monetary order, oil price shocks, and
stagflation demonstrated that the two were deeply intertwined.
In fact, the collapse of the Bretton Woods monetary order was not just a technical economic
breakdown but a result of conflicting national interests over exchange rates, monetary
stability, and international payments. The oil price shocks of 1973 and 1979 were the result
of deliberate political action by OPEC states, showing that geopolitical power could directly
alter global economic performance. Stagflation—simultaneous inflation and
unemployment—undermined the prevailing economic theories of the time and revealed that
domestic politics, interest group pressures, and international events combined to create
economic outcomes.
In short, the economy could not be treated as an autonomous system. Political decisions,
international power struggles, and institutional choices were inseparable from economic
performance. That is why political economy re-emerged as a necessary way of
understanding how societies functioned.
,What is political economy today?
According to Frieden, over the past half-century, political economy has gained increasing
prominence in both economics and political science in three ways:
→ it investigates how political forces shape the economy.
Voters and organized interest groups exert significant influence over virtually every policy
choice, and political economists seek to identify which groups matter, what their interests
are, and how institutions condition their impact
→ it investigates how the economy shapes politics.
Large-scale macroeconomic trends can make or break incumbents, while the structures and
activities of particular firms or industries can alter the direction of their political engagement.
→ It employs economic tools to analyze political behavior.
Politicians can be treated as if they were firms, voters as consumers, and governments as
monopolistic providers of public goods and services. By modeling political–economic
interactions in this way, scholars aim to generate a more rigorous theoretical understanding
of the forces driving politics.
Which sums up to two definitions:
1 → “How politics affects the economy and how the economy shapes politics.”
2 → Another definition is that of “using the tools of economics to study politics”. (outdated
definition, it refers to the usage tools of economics such as econometrics, game theory and
randomized experiments)
Let us delve deeper in the first definition:
Example questions asked by political economists: Is democracy better for economic growth?
Do economic conditions predict election outcomes? Do voters punish politicians for
corruption? Do regulations usually favor producers or consumers? Why? Why do economies
sometimes undersupply critical goods? E.g., housing
Political economy is both a theoretical and empirical discipline. It asks:
Normative questions that deal with what societies should value: for instance, should
society value more lower prices for consumers or job protection?
Empirical questions that ask why things happen as they do: why can one thousand
workers in a single industry exert more political pressure than twenty million consumers?
As Frieden emphasizes, political economists do not usually take stands on complex moral or
ethical issues. Their task is not to declare which outcome is right or wrong, but to understand
why societies make the choices they do.
A basic economic principle holds that any policy that benefits society as a whole can, in
principle, be structured to benefit everyone, even if it creates winners and losers. This
would simply require taxing the winners slightly in order to compensate the losers, leaving
everyone better off. Economists have powerful tools to clarify which policies maximize
welfare, so the question arises: why, then, is economic policy often so controversial?
,Political economy provides a different principle: winners do not like to be taxed in order
to compensate losers. As a result, political battles are not fought over what is best for
society but over who will be the winners and who will be the losers. What benefits the
country as a whole may not benefit my region, group, industry, or class, and so I will resist it.
Producer interests vs. consumer welfare (Frieden + Candle Makers’ Petition)
The Candle Makers’ Petition (1845) is a famous satire of protectionist tariffs. It claimed that
candlemakers were suffering from the unfair competition of a foreign rival—the sun—and
proposed the absurd remedy of requiring people to keep their curtains shut during the day in
order to protect candlemakers against this “foreign” competition.
This satire highlights a timeless tension: producers seek protection, while consumers benefit
from openness and lower prices and the competition clearly benefits society as a whole.
This maps onto the discussion in Politics at play about why governments rarely implement
policies that economists see as “best for society.” Economists would argue, much like with
free trade, that lower prices and efficiency would make everyone better off, but in political
economy, the winners and losers matter.
In this framework, candlemakers (the concentrated group) have a strong incentive to lobby
for protection, whereas consumers (the diffuse group) gain only marginally from cheaper
goods like sunlight. This mirrors Frieden’s example of sugar: a few thousand farmers
successfully lobby for protection, while millions of consumers—who each lose only a few
cents a day—remain unorganized and silent.
The Candle Makers’ Petition illustrates, through satire, the very dynamic that political
economy tries to explain: why policies that favor producers often triumph over those
that would benefit consumers, even when the latter make more economic sense.
Even in democracies, many citizens believe politics follows the golden rule: those with the gold make the rules.
Special-interest groups do seem to play an outsized role worldwide, regardless of regime type. Wealthy
individuals, powerful industries, big banks and corporations, and formidable labor unions are all key players.
Consider the case of sugar in the United States. Americans pay two or three times the world price for sugar
because of subsidies and trade barriers that have been in place for decades. A handful of sugarcane plantations
and a few thousand sugar beet farmers benefit, while 330 million consumers pay more. One might assume the
330 million would outweigh the few thousand, but in practice it is the opposite.
This imbalance is explained by a commonplace of political economy: concentrated
interests tend to prevail over diffuse interests. Sugar producers are tightly organized,
lobbying and funding politicians to protect their survival. Without favorable government
treatment, they would go out of business. Consumers, on the other hand, each lose only a
few cents a day—two to three billion dollars a year in total, but negligible for each
individual—so they have little incentive to organize or pressure politicians.
The same logic applies to trade protection more broadly. A few automobile manufacturers
can coordinate effectively, whereas tens of millions of car buyers cannot. Moreover,
management and labor in the auto industry, though often divided, unite in support of
protection against foreign competition. Politicians, especially those representing
automobile-producing regions, find it difficult to resist such a powerful coalition.
, Whether this is good or bad is debatable. Sugar farmers and autoworkers depend on
supportive policies for their livelihoods. Who is to decide whether their jobs matter less than
lower consumer prices? There is no straightforward way to weigh benefits against costs. Is
cheaper sugar really worth bankrupting thousands of hardworking farmers? Politics is, in
fact, the mechanism through which society adjudicates these conflicting interests, and
perhaps those with more at stake deserve a stronger voice.
Political economists do not usually attempt to resolve such moral or ethical questions. Their
goal is to explain why societies choose the policies they do. The crucial point is that
producers, whether in sugar or automobiles, have much more at stake and are much
better organized than consumers, which helps explain why governments often favor
producers over consumers.
At times, however, consumers can also be concentrated. For example, the Sweetener
Users Association, with corporations like Coca-Cola and Hershey, has lobbied strongly for
cheaper sugar. At the end of the day, the fact that there are powerful concentrated
interests on both sides helps explain why prices aren’t even higher than they are.
Therefore trade policy isn’t just a simple story of organized producers versus
unorganized consumers. If that were the whole story, then every industry would succeed in
lobbying for protection, and governments would end up closing markets almost completely.
But in reality, not all producers want the same thing.
Some industries benefit from protection, like sugar farmers or steelmakers, who want
tariffs to shield them from foreign competition. Other industries, however, depend on
cheap imports—think of candy companies that need sugar, or car manufacturers that need
steel. These firms actually lose if tariffs raise their input costs, so they push for freer trade.
The result is that trade policy is often a struggle between different sets of big
corporations, each with conflicting interests. One group seeks protection to survive or to
profit, while another demands openness to keep costs down or to access global markets.
This explains why we do not see universal protectionism: governments are constantly
mediating between these competing corporate interests, and the balance of power
between them shapes the actual policies.
In theory, economists can point to the policies that would maximize welfare for
society as a whole (like free trade, cheaper sugar). But in practice, politics decides
outcomes. Politics is about winners and losers, about who is organized, who has influence,
and which groups politicians need to satisfy to stay in office.
That is why concentrated groups like sugar farmers or auto workers can win protection at the
expense of millions of diffuse consumers. It’s why presidential candidates in the US cater to
Midwestern swing voters with protectionist promises, even though most Americans support
trade. It’s why governments struggle to fund long-term goals like pandemic preparedness:
the political rewards lie in short-term gains before the next election.
Lecture 1)
Political Science → the study of politics: analysis of political ideas, norms, behaviors, and
institutions
Economics → The study of scarcity: how people use resources and respond to incentives.
But isn’t political power used to control or distribute resources?
Reading 1: Frieden, J. (2020). “The political economy of economic policy”
Classic thinkers like Adam Smith, David Ricardo, and John Stuart Mill are regarded as the
originators of modern economics, but they called themselves political economists: Mill’s
Principles of Political Economy (1848) was the fundamental text until the end of the
nineteenth century. For these early thinkers, the economic and political worlds were
inseparable.
David Ricardo, On the Principles of Political Economy and Taxation (1817) and John
Stuart Mill, Principles of Political Economy (1848) (central text of the discipline for decades)
Up until the late 19th century, political economy was not a split field but a unified way of
understanding society. However, two trends divided political from economic analysis:
governments reduced their direct control over the economy, and new political forms emerged
as Europe shifted from monarchies to increasingly representative and diverse governments.
By the early twentieth century, economics and political science were established as separate
disciplines. For much of that century the separation persisted. The Great Depression and
development issues demanded economists’ attention, while the political problems of world
wars, fascism, and communism required separate focus.
By the 1970s, however, the separation between politics and economics was clearly
misleading. The collapse of the Bretton Woods monetary order, oil price shocks, and
stagflation demonstrated that the two were deeply intertwined.
In fact, the collapse of the Bretton Woods monetary order was not just a technical economic
breakdown but a result of conflicting national interests over exchange rates, monetary
stability, and international payments. The oil price shocks of 1973 and 1979 were the result
of deliberate political action by OPEC states, showing that geopolitical power could directly
alter global economic performance. Stagflation—simultaneous inflation and
unemployment—undermined the prevailing economic theories of the time and revealed that
domestic politics, interest group pressures, and international events combined to create
economic outcomes.
In short, the economy could not be treated as an autonomous system. Political decisions,
international power struggles, and institutional choices were inseparable from economic
performance. That is why political economy re-emerged as a necessary way of
understanding how societies functioned.
,What is political economy today?
According to Frieden, over the past half-century, political economy has gained increasing
prominence in both economics and political science in three ways:
→ it investigates how political forces shape the economy.
Voters and organized interest groups exert significant influence over virtually every policy
choice, and political economists seek to identify which groups matter, what their interests
are, and how institutions condition their impact
→ it investigates how the economy shapes politics.
Large-scale macroeconomic trends can make or break incumbents, while the structures and
activities of particular firms or industries can alter the direction of their political engagement.
→ It employs economic tools to analyze political behavior.
Politicians can be treated as if they were firms, voters as consumers, and governments as
monopolistic providers of public goods and services. By modeling political–economic
interactions in this way, scholars aim to generate a more rigorous theoretical understanding
of the forces driving politics.
Which sums up to two definitions:
1 → “How politics affects the economy and how the economy shapes politics.”
2 → Another definition is that of “using the tools of economics to study politics”. (outdated
definition, it refers to the usage tools of economics such as econometrics, game theory and
randomized experiments)
Let us delve deeper in the first definition:
Example questions asked by political economists: Is democracy better for economic growth?
Do economic conditions predict election outcomes? Do voters punish politicians for
corruption? Do regulations usually favor producers or consumers? Why? Why do economies
sometimes undersupply critical goods? E.g., housing
Political economy is both a theoretical and empirical discipline. It asks:
Normative questions that deal with what societies should value: for instance, should
society value more lower prices for consumers or job protection?
Empirical questions that ask why things happen as they do: why can one thousand
workers in a single industry exert more political pressure than twenty million consumers?
As Frieden emphasizes, political economists do not usually take stands on complex moral or
ethical issues. Their task is not to declare which outcome is right or wrong, but to understand
why societies make the choices they do.
A basic economic principle holds that any policy that benefits society as a whole can, in
principle, be structured to benefit everyone, even if it creates winners and losers. This
would simply require taxing the winners slightly in order to compensate the losers, leaving
everyone better off. Economists have powerful tools to clarify which policies maximize
welfare, so the question arises: why, then, is economic policy often so controversial?
,Political economy provides a different principle: winners do not like to be taxed in order
to compensate losers. As a result, political battles are not fought over what is best for
society but over who will be the winners and who will be the losers. What benefits the
country as a whole may not benefit my region, group, industry, or class, and so I will resist it.
Producer interests vs. consumer welfare (Frieden + Candle Makers’ Petition)
The Candle Makers’ Petition (1845) is a famous satire of protectionist tariffs. It claimed that
candlemakers were suffering from the unfair competition of a foreign rival—the sun—and
proposed the absurd remedy of requiring people to keep their curtains shut during the day in
order to protect candlemakers against this “foreign” competition.
This satire highlights a timeless tension: producers seek protection, while consumers benefit
from openness and lower prices and the competition clearly benefits society as a whole.
This maps onto the discussion in Politics at play about why governments rarely implement
policies that economists see as “best for society.” Economists would argue, much like with
free trade, that lower prices and efficiency would make everyone better off, but in political
economy, the winners and losers matter.
In this framework, candlemakers (the concentrated group) have a strong incentive to lobby
for protection, whereas consumers (the diffuse group) gain only marginally from cheaper
goods like sunlight. This mirrors Frieden’s example of sugar: a few thousand farmers
successfully lobby for protection, while millions of consumers—who each lose only a few
cents a day—remain unorganized and silent.
The Candle Makers’ Petition illustrates, through satire, the very dynamic that political
economy tries to explain: why policies that favor producers often triumph over those
that would benefit consumers, even when the latter make more economic sense.
Even in democracies, many citizens believe politics follows the golden rule: those with the gold make the rules.
Special-interest groups do seem to play an outsized role worldwide, regardless of regime type. Wealthy
individuals, powerful industries, big banks and corporations, and formidable labor unions are all key players.
Consider the case of sugar in the United States. Americans pay two or three times the world price for sugar
because of subsidies and trade barriers that have been in place for decades. A handful of sugarcane plantations
and a few thousand sugar beet farmers benefit, while 330 million consumers pay more. One might assume the
330 million would outweigh the few thousand, but in practice it is the opposite.
This imbalance is explained by a commonplace of political economy: concentrated
interests tend to prevail over diffuse interests. Sugar producers are tightly organized,
lobbying and funding politicians to protect their survival. Without favorable government
treatment, they would go out of business. Consumers, on the other hand, each lose only a
few cents a day—two to three billion dollars a year in total, but negligible for each
individual—so they have little incentive to organize or pressure politicians.
The same logic applies to trade protection more broadly. A few automobile manufacturers
can coordinate effectively, whereas tens of millions of car buyers cannot. Moreover,
management and labor in the auto industry, though often divided, unite in support of
protection against foreign competition. Politicians, especially those representing
automobile-producing regions, find it difficult to resist such a powerful coalition.
, Whether this is good or bad is debatable. Sugar farmers and autoworkers depend on
supportive policies for their livelihoods. Who is to decide whether their jobs matter less than
lower consumer prices? There is no straightforward way to weigh benefits against costs. Is
cheaper sugar really worth bankrupting thousands of hardworking farmers? Politics is, in
fact, the mechanism through which society adjudicates these conflicting interests, and
perhaps those with more at stake deserve a stronger voice.
Political economists do not usually attempt to resolve such moral or ethical questions. Their
goal is to explain why societies choose the policies they do. The crucial point is that
producers, whether in sugar or automobiles, have much more at stake and are much
better organized than consumers, which helps explain why governments often favor
producers over consumers.
At times, however, consumers can also be concentrated. For example, the Sweetener
Users Association, with corporations like Coca-Cola and Hershey, has lobbied strongly for
cheaper sugar. At the end of the day, the fact that there are powerful concentrated
interests on both sides helps explain why prices aren’t even higher than they are.
Therefore trade policy isn’t just a simple story of organized producers versus
unorganized consumers. If that were the whole story, then every industry would succeed in
lobbying for protection, and governments would end up closing markets almost completely.
But in reality, not all producers want the same thing.
Some industries benefit from protection, like sugar farmers or steelmakers, who want
tariffs to shield them from foreign competition. Other industries, however, depend on
cheap imports—think of candy companies that need sugar, or car manufacturers that need
steel. These firms actually lose if tariffs raise their input costs, so they push for freer trade.
The result is that trade policy is often a struggle between different sets of big
corporations, each with conflicting interests. One group seeks protection to survive or to
profit, while another demands openness to keep costs down or to access global markets.
This explains why we do not see universal protectionism: governments are constantly
mediating between these competing corporate interests, and the balance of power
between them shapes the actual policies.
In theory, economists can point to the policies that would maximize welfare for
society as a whole (like free trade, cheaper sugar). But in practice, politics decides
outcomes. Politics is about winners and losers, about who is organized, who has influence,
and which groups politicians need to satisfy to stay in office.
That is why concentrated groups like sugar farmers or auto workers can win protection at the
expense of millions of diffuse consumers. It’s why presidential candidates in the US cater to
Midwestern swing voters with protectionist promises, even though most Americans support
trade. It’s why governments struggle to fund long-term goals like pandemic preparedness:
the political rewards lie in short-term gains before the next election.
