Political Economy
Lecture 1 – What is Political Economy
Brief History of Political Economy
Political Science
- The scientific study of politics
- Analysis of political ideas, norms, behaviors, and institutions to inform public choices
about government, governance, and public policy
Economics
- The study of scarcity; of how people use resources and respond to incentives
Classical thinkers considered the economy and politics inseparable
- Adam Smiths, David Ricardo, and John Stuart Mill called themselves political
economists
Candle Makers’ Petition (1845)
- Satire of protectionist tariffs by French economist Frederic Bastiat
- Urged government to pass a law requiring curtains be shut during the day to protect
candlemakers against unfair competition from the sun
o Frieden discusses tensions between producer protection and consumer prices
What is Political Economy Today?
Studied by both economists and political scientists
- “How politics affects the economy and how the economy shapes politics”
o Political economy is inherently interdisciplinary
o Recognized that the policy economic analysis indicates is best for the economy
may not be politically feasible, and vice versa
- “Using the tools of economics to study politics”
o Most commonly, this refers to using game theory to study political competition
o This definition is somewhat dated because these tools are now common in
political science
,Common topics of study in PE
- Inequality; redistribution and taxation; economic development; globalization, energy,
environment, and climate change; international trade and finance; special interest
politics; corruption …
A theoretical and Empirical discipline
Normative vs. Empirical questions
- Normative: Which should society value more, lower consumer prices or protecting jobs
foreign competition?
- Empirical: Why can 1,000 workers in one industry exert more political pressure than
20 million consumers?
“Political economists don’t usually take stands on complicated moral and ethical issues …
They try to understand why societies choose to do what they do” (Frieden 2020)
- But we do research on how to reduce clearly harmful phenomena
o E.g., corruption, negative externalities, climate change, disease, poverty …
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 Moentary Fund
Some essential features of capitalism
- Private property – allows people to own tangible and intangible assets
o State must ensure that I can’t steal your property
- Self-interest – people act in pursuit of their own good/profit motive
o State must ensure that my self-interest doesn’t harm others
- Competition – firms can enter and exit markets at their own will
o Must be guaranteed by e.g., anti-monopoly laws
- Market mechanism – supply and demand determine prices
o Government can inflate prices when negative externalities exist
- Consumer choice – customers can choose different products and investments
o Government doesn’t allow certain goods to be produced/consumed, and bans
certain investor practices
,Political economy approach to capitalism
- Markets and competition do indeed set prices
- But governments provide public goods that market forces will not create, create the
institutional foundations and laws that underpin markets, and enforces the rules
- Government must also use its power to modernize the rules of the game as
circumstances, societal priorities, or knowledge change
What are the “Tools of Economics”?
- Most commonly refers to game theory (aka formal theory or microeconomics
theory)
o Mathematical models of strategic interactions among (usually) rational
agents
o Used to predict theoretical outcomes
An example: the Prisoners’ Dilemma
There are four possible outcomes for prisoners A and B:
1. If A and B both remain silent, they will each serve 1 year in prison
2. If A testifies against B but B remains silent, A will be set free while B serves 3 years
in prison
3. If A remains silent but B testifies against A, A will serve 3 years in prison and B
will be set free
4. If A and B testify against each other, they will each serve two years
o “Socially optimal” outcome (from the prisoners’ perspective): option 1
o “Rational best response” (i.e., Nash Equilibrium): option 4
Game Theory
- These kinds of simple models can become much more complex and underpin much
of modern-day microeconomic theory
- These kinds of “games” can be applied to international trade deals. Optimal
campaign strategies, and even nuclear war
- Many theoretical predictions in political economy come from these kinds of models
o For examples, theories of producer dominance in government regulation
, Statistical methods and experiments
- Often used to attempt to estimate causal effects
- Experiments use random assignment to ensure causality
o If an article is described as an experiment, you know it’s a casual argument
Correlation vs. Causation
Examples from political economy
- Does providing development aid reduce corruption?
o Even if corruption is reduced, how do we know it was the effect of the aid
and not something else?
- Does donating money to a political campaign cause politicians to be more likely to
listen to you? Or do interest groups just donate to their allies, who are more likely
to listen anyway?
o Observing a high correlation between donations and meetings does not tell
us the answer
Note:
- Association = not a causal argument
- Effect = a causal effect
Problems
What is the problem with the “tools” definition of political economy?
- These tools were not common in political science when this definition was devised;
they are today
o Many theories in political science were devised by applying rational-choice
economic theory to political questions
- This definition implies that analyses that are 100% on the topic of the political are
political economy if certain tools are used and assumption made
Lecture 1 – What is Political Economy
Brief History of Political Economy
Political Science
- The scientific study of politics
- Analysis of political ideas, norms, behaviors, and institutions to inform public choices
about government, governance, and public policy
Economics
- The study of scarcity; of how people use resources and respond to incentives
Classical thinkers considered the economy and politics inseparable
- Adam Smiths, David Ricardo, and John Stuart Mill called themselves political
economists
Candle Makers’ Petition (1845)
- Satire of protectionist tariffs by French economist Frederic Bastiat
- Urged government to pass a law requiring curtains be shut during the day to protect
candlemakers against unfair competition from the sun
o Frieden discusses tensions between producer protection and consumer prices
What is Political Economy Today?
Studied by both economists and political scientists
- “How politics affects the economy and how the economy shapes politics”
o Political economy is inherently interdisciplinary
o Recognized that the policy economic analysis indicates is best for the economy
may not be politically feasible, and vice versa
- “Using the tools of economics to study politics”
o Most commonly, this refers to using game theory to study political competition
o This definition is somewhat dated because these tools are now common in
political science
,Common topics of study in PE
- Inequality; redistribution and taxation; economic development; globalization, energy,
environment, and climate change; international trade and finance; special interest
politics; corruption …
A theoretical and Empirical discipline
Normative vs. Empirical questions
- Normative: Which should society value more, lower consumer prices or protecting jobs
foreign competition?
- Empirical: Why can 1,000 workers in one industry exert more political pressure than
20 million consumers?
“Political economists don’t usually take stands on complicated moral and ethical issues …
They try to understand why societies choose to do what they do” (Frieden 2020)
- But we do research on how to reduce clearly harmful phenomena
o E.g., corruption, negative externalities, climate change, disease, poverty …
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 Moentary Fund
Some essential features of capitalism
- Private property – allows people to own tangible and intangible assets
o State must ensure that I can’t steal your property
- Self-interest – people act in pursuit of their own good/profit motive
o State must ensure that my self-interest doesn’t harm others
- Competition – firms can enter and exit markets at their own will
o Must be guaranteed by e.g., anti-monopoly laws
- Market mechanism – supply and demand determine prices
o Government can inflate prices when negative externalities exist
- Consumer choice – customers can choose different products and investments
o Government doesn’t allow certain goods to be produced/consumed, and bans
certain investor practices
,Political economy approach to capitalism
- Markets and competition do indeed set prices
- But governments provide public goods that market forces will not create, create the
institutional foundations and laws that underpin markets, and enforces the rules
- Government must also use its power to modernize the rules of the game as
circumstances, societal priorities, or knowledge change
What are the “Tools of Economics”?
- Most commonly refers to game theory (aka formal theory or microeconomics
theory)
o Mathematical models of strategic interactions among (usually) rational
agents
o Used to predict theoretical outcomes
An example: the Prisoners’ Dilemma
There are four possible outcomes for prisoners A and B:
1. If A and B both remain silent, they will each serve 1 year in prison
2. If A testifies against B but B remains silent, A will be set free while B serves 3 years
in prison
3. If A remains silent but B testifies against A, A will serve 3 years in prison and B
will be set free
4. If A and B testify against each other, they will each serve two years
o “Socially optimal” outcome (from the prisoners’ perspective): option 1
o “Rational best response” (i.e., Nash Equilibrium): option 4
Game Theory
- These kinds of simple models can become much more complex and underpin much
of modern-day microeconomic theory
- These kinds of “games” can be applied to international trade deals. Optimal
campaign strategies, and even nuclear war
- Many theoretical predictions in political economy come from these kinds of models
o For examples, theories of producer dominance in government regulation
, Statistical methods and experiments
- Often used to attempt to estimate causal effects
- Experiments use random assignment to ensure causality
o If an article is described as an experiment, you know it’s a casual argument
Correlation vs. Causation
Examples from political economy
- Does providing development aid reduce corruption?
o Even if corruption is reduced, how do we know it was the effect of the aid
and not something else?
- Does donating money to a political campaign cause politicians to be more likely to
listen to you? Or do interest groups just donate to their allies, who are more likely
to listen anyway?
o Observing a high correlation between donations and meetings does not tell
us the answer
Note:
- Association = not a causal argument
- Effect = a causal effect
Problems
What is the problem with the “tools” definition of political economy?
- These tools were not common in political science when this definition was devised;
they are today
o Many theories in political science were devised by applying rational-choice
economic theory to political questions
- This definition implies that analyses that are 100% on the topic of the political are
political economy if certain tools are used and assumption made
