Political Economy
Lecture 1
What is Political Economy?
Definitions
- Political Science: the study of politics (analysis of political ideas, norms, behaviours,
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)
Brief history of political economy
- Classical thinkers considered economy and politics inseparable
- Smith, Ricardo, Mill called themselves political economists
What is political economy today?
1. “How politics affects the economy and the economy shapes politics.”
• Interdisciplinary
• E.g., recognizes that the best economic policy may not be politically feasible.
2. “Using the tools of economics to study politics.”
• Commonly refers to using game theory to study political competition.
“How politics affects the economy and how the economy shapes politics.”
- Questions to ask:
• Is democracy necessary (or better) for economic growth?
• Do economic conditions predict election outcomes?
• Do regulations favour producers or consumers?
A theoretical and empirical discipline
- Normative vs. empirical questions:
• Normative: Which should society value more, lower consumer prices or
protecting jobs from foreign competition?
• Empirical: Why can’t 1.000 workers in one industry exert more political pressure
than 20 million consumers?
Capitalism
International Monetary Fund definition:
- “An economic system in which:
• Private actors own and control property in accord with their interests
• Demand and supply freely set prices in markets.”
- Dominant form of economic organization today
- Aspects
• Private property: people can own tangible and intangible assets
• Self-interest: people act in pursuit of their own good/profit motive
• Competition: firms can enter and exit markets at their own will
, • Market mechanism: supply and demand determine prices
• Consumer choice: customers can choose different products and investments
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
• Enforce the rules of the game
• Modernize the rules as circumstances, priorities, or knowledge change
- Aspects
• Private property: state ensures that I can’t steal
• Self-interest: state ensures self-interest doesn’t harm others
• Competition: must be guaranteed by laws
• Market mechanisms: government can inflate prices when negative externalities
exist
• Consumer choice: government doesn’t allow certain goods to be
produced/consumed, and bans certain investor practices
“Using the tools of economics to study politics”
- Often this refers to using game theory to study political competition.
- “People react to the incentives facing them… these material or social incentives,
combined with their personal preferences, define their behavior” (Tirole 2016).
Example: the prisoners’ dilemma
Game theory
- Different to the prisoners’ dilemma because the two players can communicate and
there is no dominant strategy/Nash equilibrium
- Either Ibrahim steals, in which case they’re both getting nothing, or he splits and
hopes that he’s going to get something from Nick.
- These simple models can become much more complex
- Underpin much of modern-day microeconomic theory
- International trade, campaign strategies, and even nuclear war.
- Many theoretical predictions in political economy come from these kinds of models.
• E.g., why producers often dominate government regulation.
Game theory
- Theory vs. empirics
• Theory = based on (logical) theories and hypotheses
• Empirical = based on observation and data
- Rationality
• Link between choices that a person makes and the interests the person holds
Political economy and common good?
- Institutional rules (i.e. the rules of the game) constrain our choices
- This in turn changes our behaviour and can direct societal outcomes
, - The task of economics is “to identify the institutions and policies that will promote
the common good.”
- How do we define the common good?
• Veil-of-ignorance: in what society would you like to live?
Other tools
2. Statistical methods and experiments
• Often used to attempt to estimate causal effects
• Experiments use random assignment to ensure causality.
➢ If an article is described as an experiment, you know it’s a causal argument
- Correlation vs. causation: why do we care?
Correlation vs. causation
- Association: not a causal argument
- Effect: a causal effect
International political economy (IPE)
- Branch of IR
• Primary focus is international trade and international finance
• Examples: role of international organizations, protectionism and trade barriers,
international financial crises, liberal/capitalist peace theory
Comparative Political Economy (CPE)
- Branch of comparative politics (CP)
• Domestic political economy (interaction between states and markets, capitalism
and democracy, within countries or societies)
• Basically anything that is not IPE
Some related concepts
- Public economics (economics)
• The economic implications of government policy (effect on human and economic
behaviour and welfare and distributional effects)
- Economic sociology (sociology)
• Social consequences of economic exchanges
- Non-market strategy (management)
• How businesses pursue strategic goals through political and social leverage
Lecture 2
Classic political theory: Adam Smith
Classical PE concepts that are often misunderstood
- Wealth and value
- Civil society: (capitalist) economy (Smith)
- Rank, order, class
- Middle class: business owners (Smith), capitalists (Marx)
- Producers: own means of production (Smith), workers (Marx)
, - Invisible hand
- States vs markets: should state interfere with market?
Four key debates
- What is capitalism?
- Capitalism or capitalisms?
- Capitalism: for or against?
- Capitalism and the future
What is capitalism?
- Private property
- Markets for goods and services
- Markets for land
- Markets for labour
- Capital markets
- Rules and regulations (governance) for the protection of property rights, contracts
- Imperative for profit maximisation
- Tendency towards growth and expension
Contrasting economic systems: slavery, feudalism, central planning
Capitalism or capitalisms?
- Historical: merchant capitalism; agricultural capitalism; industrial capitalism; financial
capitalism; imperialism; financialized monopoly capitalism; etc.
- Geographic/cultural: Western Europe; North America; East Asia.
- Does globalisation mean a convergence to one dominant variety of capitalism or
divergence, e.g. between core/periphery?
Capitalism, For or Against?
Adam Smith (1723-1790)
- Born in June 1723, in Kirkcaldy, Fife, Scotland. His father was a lawyer and customs
comptroller who died when Smith was only 2 months old.
- Studied at the University of Glasgow and at Balliol College, Oxford (which he hated),
going on to work at the University of Edinburgh and the University of Glasgow. Later
in life worked as commissioner of customs in Scotland.
Lecture 1
What is Political Economy?
Definitions
- Political Science: the study of politics (analysis of political ideas, norms, behaviours,
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)
Brief history of political economy
- Classical thinkers considered economy and politics inseparable
- Smith, Ricardo, Mill called themselves political economists
What is political economy today?
1. “How politics affects the economy and the economy shapes politics.”
• Interdisciplinary
• E.g., recognizes that the best economic policy may not be politically feasible.
2. “Using the tools of economics to study politics.”
• Commonly refers to using game theory to study political competition.
“How politics affects the economy and how the economy shapes politics.”
- Questions to ask:
• Is democracy necessary (or better) for economic growth?
• Do economic conditions predict election outcomes?
• Do regulations favour producers or consumers?
A theoretical and empirical discipline
- Normative vs. empirical questions:
• Normative: Which should society value more, lower consumer prices or
protecting jobs from foreign competition?
• Empirical: Why can’t 1.000 workers in one industry exert more political pressure
than 20 million consumers?
Capitalism
International Monetary Fund definition:
- “An economic system in which:
• Private actors own and control property in accord with their interests
• Demand and supply freely set prices in markets.”
- Dominant form of economic organization today
- Aspects
• Private property: people can own tangible and intangible assets
• Self-interest: people act in pursuit of their own good/profit motive
• Competition: firms can enter and exit markets at their own will
, • Market mechanism: supply and demand determine prices
• Consumer choice: customers can choose different products and investments
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
• Enforce the rules of the game
• Modernize the rules as circumstances, priorities, or knowledge change
- Aspects
• Private property: state ensures that I can’t steal
• Self-interest: state ensures self-interest doesn’t harm others
• Competition: must be guaranteed by laws
• Market mechanisms: government can inflate prices when negative externalities
exist
• Consumer choice: government doesn’t allow certain goods to be
produced/consumed, and bans certain investor practices
“Using the tools of economics to study politics”
- Often this refers to using game theory to study political competition.
- “People react to the incentives facing them… these material or social incentives,
combined with their personal preferences, define their behavior” (Tirole 2016).
Example: the prisoners’ dilemma
Game theory
- Different to the prisoners’ dilemma because the two players can communicate and
there is no dominant strategy/Nash equilibrium
- Either Ibrahim steals, in which case they’re both getting nothing, or he splits and
hopes that he’s going to get something from Nick.
- These simple models can become much more complex
- Underpin much of modern-day microeconomic theory
- International trade, campaign strategies, and even nuclear war.
- Many theoretical predictions in political economy come from these kinds of models.
• E.g., why producers often dominate government regulation.
Game theory
- Theory vs. empirics
• Theory = based on (logical) theories and hypotheses
• Empirical = based on observation and data
- Rationality
• Link between choices that a person makes and the interests the person holds
Political economy and common good?
- Institutional rules (i.e. the rules of the game) constrain our choices
- This in turn changes our behaviour and can direct societal outcomes
, - The task of economics is “to identify the institutions and policies that will promote
the common good.”
- How do we define the common good?
• Veil-of-ignorance: in what society would you like to live?
Other tools
2. Statistical methods and experiments
• Often used to attempt to estimate causal effects
• Experiments use random assignment to ensure causality.
➢ If an article is described as an experiment, you know it’s a causal argument
- Correlation vs. causation: why do we care?
Correlation vs. causation
- Association: not a causal argument
- Effect: a causal effect
International political economy (IPE)
- Branch of IR
• Primary focus is international trade and international finance
• Examples: role of international organizations, protectionism and trade barriers,
international financial crises, liberal/capitalist peace theory
Comparative Political Economy (CPE)
- Branch of comparative politics (CP)
• Domestic political economy (interaction between states and markets, capitalism
and democracy, within countries or societies)
• Basically anything that is not IPE
Some related concepts
- Public economics (economics)
• The economic implications of government policy (effect on human and economic
behaviour and welfare and distributional effects)
- Economic sociology (sociology)
• Social consequences of economic exchanges
- Non-market strategy (management)
• How businesses pursue strategic goals through political and social leverage
Lecture 2
Classic political theory: Adam Smith
Classical PE concepts that are often misunderstood
- Wealth and value
- Civil society: (capitalist) economy (Smith)
- Rank, order, class
- Middle class: business owners (Smith), capitalists (Marx)
- Producers: own means of production (Smith), workers (Marx)
, - Invisible hand
- States vs markets: should state interfere with market?
Four key debates
- What is capitalism?
- Capitalism or capitalisms?
- Capitalism: for or against?
- Capitalism and the future
What is capitalism?
- Private property
- Markets for goods and services
- Markets for land
- Markets for labour
- Capital markets
- Rules and regulations (governance) for the protection of property rights, contracts
- Imperative for profit maximisation
- Tendency towards growth and expension
Contrasting economic systems: slavery, feudalism, central planning
Capitalism or capitalisms?
- Historical: merchant capitalism; agricultural capitalism; industrial capitalism; financial
capitalism; imperialism; financialized monopoly capitalism; etc.
- Geographic/cultural: Western Europe; North America; East Asia.
- Does globalisation mean a convergence to one dominant variety of capitalism or
divergence, e.g. between core/periphery?
Capitalism, For or Against?
Adam Smith (1723-1790)
- Born in June 1723, in Kirkcaldy, Fife, Scotland. His father was a lawyer and customs
comptroller who died when Smith was only 2 months old.
- Studied at the University of Glasgow and at Balliol College, Oxford (which he hated),
going on to work at the University of Edinburgh and the University of Glasgow. Later
in life worked as commissioner of customs in Scotland.
