Introduction to Political Economy
Political Economy today:
“How politics affect the economy and how economy shapes politics”
“Using the tools of economics to study politics”
Ex: Game theory to study political competition.
Political economists try to understand why society chooses to do what it does, they don’t
really take stands on complicated moral ethical issues.
But do research how to reduce clearly harmful phenomena.
“Using the tools of economics to study politics”
Game theory = formal theory or microeconomic theory.
Mathematical models of strategic interactions among usually rational agents are used to
predict theoretical outcomes.
Kind of games applied to international trade deals or optimal campaign.
Capitalism
“An economic system in which private actors own and control property in accord with their
interests, and demand and supply freely set prices in markets” - International Monetary
Fund.
Essential features:
Private property
Self-interests
Competition - firms can enter and exit markets at their own will.
Market mechanism.
Consumer choices.
Political economy approach:
Markets and competition set prices, but govs provide public goods that they can’t
create, create the institutional foundation and laws that underpin markets and
enforces the rules.
Gov also uses its power to modernise the rules of the game as circumstances change.
Problem with the tools definition of PE.
These tools were not common in polisci when this was said. They are now.
This definition implies that analyses that are 100% on the topic of the political are political
economy if certain tools are used and assumptions made.
Some key definitions
Causality vs association
Causation implies association;
Association does not imply causation.
1
,Endogeneity
Effect of an independent variable on a dependent variable cannot be casually
interpreted because it includes omitted causes leading to biased estimates.
Prevents us from making causal claims.
Institutions
Rules of the game in a society : informal constraints (taboos, customs) or formal
rules (constitutions, laws).
Rationality
Correspondence between the choices that a person makes and the interests the
person holds.
Special interests
Concentrated vs diffuse interests.
International Political Economy (IPE)
Primary focus is international trade and international finance.
Ex: The role of international organisations, international financial crises.
Comparative Political Economy (CPE)
Domestic political economy.
The interaction between states and markets, capitalism and democracy, etc withing
countries or societies.
Ex: Interest groups politics and collective action
2
,Adam Smith
What is Capitalism?
• Private property
• Markets for goods and services, land, labor, and capital
• Capital markets
• Rules and regulations (governance) for the protection of property rights, contracts
• Imperative for profit maximization
• Tendency towards growth and expansion
Historical: merchant capitalism; agricultural capitalism; industrial capitalism; financial
capitalism; imperialism; financialized monopoly capitalism; etc.
Adam Smith (1723-1790)
• Firm believer in freedom, increasing the wealth of the working classes, anti-
paternalistic, and for freedom of speech. Also strongly opposed to slavery and
imperialism.
• Famous primarily for The Theory of Moral Sentiments (1759) and An Inquiry into the
Nature and Causes of the Wealth of Nations (1776)
History and Economy 01: The Four-Stage Theory of
History
• Societies are defined in terms of their Mode of Subsistence.
• Four kinds: (1) hunting and gathering; (2) herding; (3) agriculture (including
feudalism); and (4) commerce/commercial society.
• Progression is:
• Unilinear.
• mechanical to a significant (but not complete) degree.
• possibly deterministic.
History and Economy 02: Implications
Different Modes of Subsistence have different divisions into classes/ranks.
States and laws are formed by ruling classes to defend their interests against the working
classes.
As a Mode of Subsistence changes, so do forms of government, law, ethics etc.
Good institutions, legislation, and policy are better/worse depending on the stage they’re
implemented within.
• e.g. private property in land will be pointless and ineffective among hunter-
gatherers, but is very important in agricultural and commercial societies).
3
, The Purpose of Political Economy
• It has two purposes: (1) “to provide a plentiful revenue or subsistence for the
people” and (2) “to supply the state or commonwealth with a revenue sufficient for
the public services”.
The Theory of Value
Explains changes in Equilibrium Prices.
The Value of a commodity determines its equilibrium price:
• Assumption: market prices fluctuate unpredictably. But they tend towards
equilibrium prices, which are more stable and predictable.
What determined the Value of a commodity? Labor.
• Problem 1: Does all labor produce or enhance value?
• Problem 2: Where do profits come from?
The Dynamics of Commercial Society
Actors trading in “the market” are generally driven by self-interest, but this can serve social
benefits. Actors in the marketplace compete for consumers.
Competition drives greater efficiency, and in turn drives economic growth and higher wages.
Government regulators deciding on investment will generally do a worse job of increasing
efficiency/maximizing economic growth,
Govs will generally act to reduce wages for workers and do things that reduce economic
growth in order to satisfy interests of “merchants and manufacturers”.
- Assumption: 3 class theory (landlords, M&Ms, workers).
The Argument for Free Markets
1. The legislator ought to promote the general interest = maximal increase of the real
wealth of workers
2. Economy of a commercial society perpetuates without government interference.
3. Individual workers/M&M best at determining which investments will be the most
profitable.
4. Interests of M&M are never the same as the general interest.
5. Gov is in general an instrument of M&M, acts in accordance with their interests.
6. Therefore, gov can’t be relied upon to promote the general interest.
7. Legislator ought to work towards an ideal of commercial society where the economic
mechanism is left without government interference = markets as free as possible.
Adam Smith of the Four Debates:
1. Capitalism as “Commercial Society”.
2. Arguably only one kind of Commercial Society, compatible with a range of possible
legislation and policy.
3. Generally positive.
4. More capitalism (as he sees it).
4
Political Economy today:
“How politics affect the economy and how economy shapes politics”
“Using the tools of economics to study politics”
Ex: Game theory to study political competition.
Political economists try to understand why society chooses to do what it does, they don’t
really take stands on complicated moral ethical issues.
But do research how to reduce clearly harmful phenomena.
“Using the tools of economics to study politics”
Game theory = formal theory or microeconomic theory.
Mathematical models of strategic interactions among usually rational agents are used to
predict theoretical outcomes.
Kind of games applied to international trade deals or optimal campaign.
Capitalism
“An economic system in which private actors own and control property in accord with their
interests, and demand and supply freely set prices in markets” - International Monetary
Fund.
Essential features:
Private property
Self-interests
Competition - firms can enter and exit markets at their own will.
Market mechanism.
Consumer choices.
Political economy approach:
Markets and competition set prices, but govs provide public goods that they can’t
create, create the institutional foundation and laws that underpin markets and
enforces the rules.
Gov also uses its power to modernise the rules of the game as circumstances change.
Problem with the tools definition of PE.
These tools were not common in polisci when this was said. They are now.
This definition implies that analyses that are 100% on the topic of the political are political
economy if certain tools are used and assumptions made.
Some key definitions
Causality vs association
Causation implies association;
Association does not imply causation.
1
,Endogeneity
Effect of an independent variable on a dependent variable cannot be casually
interpreted because it includes omitted causes leading to biased estimates.
Prevents us from making causal claims.
Institutions
Rules of the game in a society : informal constraints (taboos, customs) or formal
rules (constitutions, laws).
Rationality
Correspondence between the choices that a person makes and the interests the
person holds.
Special interests
Concentrated vs diffuse interests.
International Political Economy (IPE)
Primary focus is international trade and international finance.
Ex: The role of international organisations, international financial crises.
Comparative Political Economy (CPE)
Domestic political economy.
The interaction between states and markets, capitalism and democracy, etc withing
countries or societies.
Ex: Interest groups politics and collective action
2
,Adam Smith
What is Capitalism?
• Private property
• Markets for goods and services, land, labor, and capital
• Capital markets
• Rules and regulations (governance) for the protection of property rights, contracts
• Imperative for profit maximization
• Tendency towards growth and expansion
Historical: merchant capitalism; agricultural capitalism; industrial capitalism; financial
capitalism; imperialism; financialized monopoly capitalism; etc.
Adam Smith (1723-1790)
• Firm believer in freedom, increasing the wealth of the working classes, anti-
paternalistic, and for freedom of speech. Also strongly opposed to slavery and
imperialism.
• Famous primarily for The Theory of Moral Sentiments (1759) and An Inquiry into the
Nature and Causes of the Wealth of Nations (1776)
History and Economy 01: The Four-Stage Theory of
History
• Societies are defined in terms of their Mode of Subsistence.
• Four kinds: (1) hunting and gathering; (2) herding; (3) agriculture (including
feudalism); and (4) commerce/commercial society.
• Progression is:
• Unilinear.
• mechanical to a significant (but not complete) degree.
• possibly deterministic.
History and Economy 02: Implications
Different Modes of Subsistence have different divisions into classes/ranks.
States and laws are formed by ruling classes to defend their interests against the working
classes.
As a Mode of Subsistence changes, so do forms of government, law, ethics etc.
Good institutions, legislation, and policy are better/worse depending on the stage they’re
implemented within.
• e.g. private property in land will be pointless and ineffective among hunter-
gatherers, but is very important in agricultural and commercial societies).
3
, The Purpose of Political Economy
• It has two purposes: (1) “to provide a plentiful revenue or subsistence for the
people” and (2) “to supply the state or commonwealth with a revenue sufficient for
the public services”.
The Theory of Value
Explains changes in Equilibrium Prices.
The Value of a commodity determines its equilibrium price:
• Assumption: market prices fluctuate unpredictably. But they tend towards
equilibrium prices, which are more stable and predictable.
What determined the Value of a commodity? Labor.
• Problem 1: Does all labor produce or enhance value?
• Problem 2: Where do profits come from?
The Dynamics of Commercial Society
Actors trading in “the market” are generally driven by self-interest, but this can serve social
benefits. Actors in the marketplace compete for consumers.
Competition drives greater efficiency, and in turn drives economic growth and higher wages.
Government regulators deciding on investment will generally do a worse job of increasing
efficiency/maximizing economic growth,
Govs will generally act to reduce wages for workers and do things that reduce economic
growth in order to satisfy interests of “merchants and manufacturers”.
- Assumption: 3 class theory (landlords, M&Ms, workers).
The Argument for Free Markets
1. The legislator ought to promote the general interest = maximal increase of the real
wealth of workers
2. Economy of a commercial society perpetuates without government interference.
3. Individual workers/M&M best at determining which investments will be the most
profitable.
4. Interests of M&M are never the same as the general interest.
5. Gov is in general an instrument of M&M, acts in accordance with their interests.
6. Therefore, gov can’t be relied upon to promote the general interest.
7. Legislator ought to work towards an ideal of commercial society where the economic
mechanism is left without government interference = markets as free as possible.
Adam Smith of the Four Debates:
1. Capitalism as “Commercial Society”.
2. Arguably only one kind of Commercial Society, compatible with a range of possible
legislation and policy.
3. Generally positive.
4. More capitalism (as he sees it).
4
