Week 1: Introduction (Clément Imbert)
Week 2: The Politics of Economic Policy (Ben Richardson)
Week 3: Political Economy (Clément Imbert)
Week 4: Finance Ministries (Ben Richardson)
Week 5: Public Sector Management (Clément Imbert)
Week 6: Central Banks (Ben Richardson)
Week 7: Public Economics (Amrita Kulka)
Week 8: Think Tanks (Ben Richardson)
Week 9: Local Public Finance (Amrita Kulka)
Week 10: International Organisations (Ben Richardson)
Week 11: Labour Policy (Clément Imbert)
Week 12: Labour Policy (Ben Richardson)
Week 13: Education Policy (Amrita Kulka)
Week 14: Education Policy (Ben Richardson)
Week 15: Health Policy (Amrita Kulka)
Week 16: Health Policy (Ben Richardson)
Week 17: Housing Policy (Amrita Kulka)
Week 18: Housing Policy (Ben Richardson)
Week 19: Environment Policy (Clément Imbert)
Week 20: Environment Policy (Ben Richardson)
,Cross cutting themes: reflect on them after each question
• Connect between different parts of the module, can also connect between politics economic
lectures, for example selection and moral hazard can be applied universally
• Formulate your on answer!!
• In general: its always about trade offs and how trade offs are changing when you introduce
policies, how are people’s incentives changing when you introduce taxes, private, public
insurance, housing incentives
• Questions about how to design policy in different contexts, think about structure of
incentives, policies lead to distortions or undo distortions, institutional set up matters e.g.
health insurance context such as freezing health risks when you’re young, luxury good, etc
• Partial/ general equilibrium, people or markets being affected by the policy that were not
specifically targeted e.g. stay at home orders US, density externality of zoning regulations,
what are we holding fixed when talking about policies, fix other markets, people or not, if
not taken into account effects are misinterpreted
• Conduct cost benefit/ welfare analysis e.g. marginal value of public funds, how much weight
do you want to put on each groups of individuals
• How would you analyse success, how would you do it, what kind of data to collect, how to
measure the outcome, what are empirical pitfalls
• How can we comprehend the politics of economic policy-making? Cross-cutting themes
include:
• Role of ideology, expertise and ignorance in (de)politicising issues and
(de)legitimating policy
• Organisation of state power in different ministries, agencies, branches and levels
• Importance of political coalitions to drive or resist change, often linked to vested
interests and transnational actors, links between structure and agency
• Distributional effects along axes of class, statehood, gender, race, age and others
• “interests are evolving and not necessarily self evident” e.g. intellectual property
that becomes an interest and ideas and institutions can step in, Think Tanks
• “Institutions contain or enable agency and are dynamic”
• “ideas traced through narratives”
, 1. Introduction
Lecture:
Persson/ Torten: Political economics: explaining economic policy
Good introduction
In general, economic policy varies significantly across place and time. Total government spending,
for instance accounts for over 60% of GDP in Sweden but only around 35% in the United States. The
unemployment rate too varies greatly across countries as well as inflation, corruption or other
characteristics of states. Nevertheless, common patterns can be observed in policy making such as
the acceleration of inflation in industrial countries, it is aimed to establish how and why these
patterns vary and what impacts they might have on factors such as the social and economic
environment. Alternatives and optimal policies are investigated, and factors such as the structure of
labour markets, government deficits, electoral cycles or taxation are considered. The two disciplines
of political science studying collective choice, institutions and incentives and constraints of policy
makers economics examining ultimate outcomes of these policies and their impact on private agents
are brought together.
Political economics has only recently become a discipline of its own and could historically long be
interchanged with economics since economists from the 20th century as well as classical economists
such as Ricardo or Malthus have not only examined “pure” economics how it would be called today,
but were concerned with overarching topics such as trade, population, land, taxes and more. An
example of a public policy issues examined by a political economist would be Ricardo, who was a
political economist of the 19th century, and criticized several policy issues, from his critique of the
Bank of England to his work on profit, rent and value in relation to his criticism of the corn laws and
his appeal for a free trade principle.
The Methodenstreit, which took place during the marginalist revolution in the second half of the 19th
century and aimed to establish appropriate methods for explaining economic phenomena, initiated
the separation of the disciplines. It marked the development of sophisticated analytical techniques,
computations, abstraction and generality within the discipline of economics which, however, also
lead to the neglect of historical and comparative studies. The study of new political economics
revived this and can thus sometimes be understood as the revival of classical political economy in its
integrationist principle.
In the first half of the 20th century economists and their ideas, such as Keynes’ theory of monetary
and fiscal policies to target unemployment, Pigou’s model of optimal taxation and Pareto’s
optimality thesis laid the foundation for what we call public economics now. Since the sciences are
better categorized nowadays their theories contributed not just to the development of public
economics but also laid the foundation for other fields such as macroeconomic policy, public finance
and the study of market failures.
In the 1950ies the public choice critique was developed which challenged the political processes as a
whole and accounted for individual and rational agents as the basis of the analysis and for possibly
self-interested behaviour of politicians. Public choice is therefore also referred to as “politics without
romance”. Theories are established that are concerned with the aggregation of individual
,preferences in relation to voting and the agency problem of imperfect information in order to
discipline governments, as well as a critique of the welfare state.
Parallel to public choice theory the economic theory of voting was developed under which different
thinkers contributed theories about the voting process. In the 70ies authors considered political
incentives in relation to macroeconomic models such as time inconsistent governments of the
credibility of policies.
These disciplines all contributed to what we call now political economy.
Adam Smith represented a minimalist view of the state’s role in the economy. It should guarantee
the guidelines for a well-functioning economy such as the enforcement of property rights, the
provision of collective goods such as education, health and infrastructure and tax collection to
finance these. However, actual state intervention is and has been larger than only providing the
frames for functioning markets. There are several ways in which public economics is defined but one
can say that it is a range of instruments and objectives that are concerned with the economic policy
of governments and how to set optimal conditions for the state such as taxation, budgets, interest
rates and the money supply, regulation, administration, equality and poverty, political stability and
economic growth. These and more are areas in which the government interferes into the economy
which somewhat reminds of Adam Smith’s thesis of the government providing a framework and
conditions for the economy to function optimally. In practise governments provide these and more
services to states nowadays and take an active part in the making of economic policy. Economic
policy adopts strategies from different fields such as public choice, political economics or public
economics and is involved in tackling not just issues concerning a single state but also the global
system as a whole such as climate change or the Covid pandemic. It uses analytical tools to study the
political decision-making process as well as the outcomes of public policy.
Actors of public economies are all those who are involved in the many processes of its functions such
as political parties and their candidates, citizens and voters, bureaucrats or civil servants, media and
the press, interest groups, NGOs and all groups that are involved in the election process.
Where state intervention is needed:
States interfere in public economies if the functioning of the market is endangered. For instance,
market failures would justify the intervention of the state. To prevent monopolies and therefore a
market failure due to high prices the antitrust law in the United States was established in 1914 which
constitutes a collection of federal laws to deregulate businesses and works against price
discrimination and anti-competitive mergers.
Pollution is another popular example where state intervention is arguably needed since public
welfare requires that firms don’t neglect this negative externality but internalize it in their costs
which state intervention can achieve.
A more recent example would be the Covid crisis and the states intervention to regulate its spread.
To prevent an even worse crisis and thousands of deaths the state intervened and decided to take
measures to contain the virus by means of nationwide lockdowns and the provision of free medical
services such as tests and vaccinations.
Foundations of political economics include the disciplines of public economics, which refers to the
study of market failures and the role of governments in improving efficiency equity trade-offs, public
finance, which examines how taxes should be raised to generate revenue, to fix externalities, to
,minimise efficiency losses and to redistribute income, and macroeconomic policy that studies the
effects of policies on the wider economy and how higher employment and faster economic growth
can be achieved.
The school of public choice critiques the wide field of economics by suggesting scholars ignore
external incentive effects that might misalign their actions with the optimal policy that should be
undertaken. Voters lack information to discipline politicians and are trapped in an agency relation. It
has a methodological economics-based view of individual and rational agents but were also
concerned with normative critique of the benevolent social planner who does not respect individuals
consent. Parallel to the development of the public choice critique, other theories have developed
that contributed towards the more general theory of voting. Arrow (1951) establishes the
“Impossibility theorem” in which it is impossible to reconcile voters preferences. Black (1958)
responded to this which the “single peaked preferences voters” that says voters are ordered along
one policy dimension. Then Downs (1957) developed this further to a median voter that says parties
need to converge to the centre in order to win. In the 70ies more attention was given to
macroeconomic policies that consider political incentives such as Lukas (1972) who established that
expectations might determine economic policy success and Kydland and Prescott (1977) who
investigate the time inconsistency of governments and its effect on credibility.
,Besley: The new political economy
Besley states that the new political economy aims to examine issues that require both economic and
political analysis. In some regard it can be argued that it reverses the separation of politics and
economics through the Methodenstreit at the end of the 19th century.
With planned economies in eastern Europe dissolving in the 1990ies and the spread of mixed
economic systems around the globe, the question of different forms of democracy and their
underlying political systems have become more widely discussed. With competitive markets and
private ownership as the foundation of most western economic systems the question shifted
towards sustaining policies rather than re-establishing a good system as a whole. The importance of
institutions was recognised and government failure and market failure were weighted against each
other which has led to a rethinking.
Besley defines the new political economy as a “collection of studies of specific phenomena” that
“borrows ideas and develops themes from all of its historical predecessors”.
Besley argues that a distinctive feature of political economy is that it pays attention to the dynamics
of economics and policies since political parties and governments are typically short lived but many
policies are not.
He defines three key ideas in public choice; the implications of rational self-interest within political
interactions, the importance of constitutions that constrain self-interest and the normative
framework of invoking measures of social welfare to permit trade offs that shape policy outcomes.
Later:
One important theoretical difference between a majoritarian and a proportional system concerns
the incentive to target particular groups of voters. Majoritarian systems encourage targeting on
‘swing districts’ while proportional systems encourage broader based targeting.
The constitutions of the main democracies in the world can be classified in terms of two key
dimensions – Presidential versus Parliamentary and Majoritarian versus Proportional. The main
finding is that we tend to find larger governments under proportional representation.
The New Political Economy occasionally engages in debates about grand issues such as the role of
states versus markets and the differences between democracy and autocracy.22 However, a lot of
the work is focused on how the institutional details of political structure matter for policy outcomes
‘in the small’.
At a broad level, it is looking behind the institutions that generate policy outcomes. While this
occasionally results in a more conservative appraisal of the capacity for government intervention, it
also gives a way of thinking about how to make government intervention more effective.
The New Political Economy is not about economic imperialism. The aim is to generate new, policy‐
relevant insights, particularly in areas where economists may have a comparative advantage. What
we learn complements rather than substitutes knowledge generated in other branches of the social
sciences.
The New Political Economy is about expanding the domain of economic policy analysis and hence
enhancing its relevance. We have made good progress in finding ways to integrate politics and
economics to help us think about important problems.
, 2. The politics of economic policy
Political economy, varieties of capitalism, policy mobility
Lecture:
Some describe the political economy as a multi sided field of study rather than a discipline that
foregrounds power relations and is a contested and contestable process.
What makes economic policy political?
The differences in parties constitute one aspect that makes economic policy making political.
Different parties usually get involved in different areas and want to tackle different issues. And even
areas that require action from any kind of party do not need to get tackled in the same depth.
Policies can be redistributive, for example, and to which extent they are so is determined by parties’
ideologies and interests. Policies are implemented by politicians and parties and represent interests,
ideological biases, lobbies, and others. They target specific interest groups. Policies need to be
considered in a political environment and economic policy effectiveness needs to be analysed
depending on the underlying structural environment. Economic policy depends on power relations
within and beyond the state, it is distributive and normative.
Economic policy making can be politicised by looking at the distributional consequences arising from
certain policies.
Liberal vs coordinated market economies:
Liberal market economies and coordinated market economies differ in their structures of
institutions, their labour market and also in the opportunities they supply for different kinds of
people. Generally, liberal market economies are more competition based and have deregulated, free
markets such as the United States. They focus more on supply side interventions, for example
general retraining opportunities for redundant workers or tax breaks for firms that invest in
depressed areas. In coordinated market economies on the other hand one can usually find more
labour unions, increased government spending and the provision of social securities, pension and
unemployment benefits. They emphasise government subsidies and distressed industries or try to
engage firms directly or through institutions to actively reemploy, such as in Germany for example.
Gamble new political economy:
Reoccurring themes, good for comparison at start/end of essay
As Gamble (1995) notes, the Methodenstreit, which took place during the marginalist revolution,
marked the separation between economics and politics as a science. The new political economy
builds around different areas of critique from fields such as international political economy (IPE)
related to the power of global financial markets, the question of how to discipline governments and
how to discipline labour within multinational corporations, and the consequences of globalisation as
a whole. It also builds around structuration in state theory which compares a structural perspective
of actors merely responding to their surrounding institutional environment to an agent centric
,approach of actors choosing freely what to do regardless of the context they are in and investigates
how agents and structures were coevolved and coproduced over time. And it builds around varieties
of capitalism and comparative government-industry relations, investigate the complex rationality in
public choice and try to understand agent behaviour and public policy making in a positivist social
scientific approach. Gamble argues that these critiques are not divergent but convergent in their
concerns and can complement each other in their methodologies regardless of their intellectually
disparate origins. They all try to rethink the basic concepts of markets and state since they are
dissatisfied with existing state-economy relations.
Gamble defines three kinds of discourses in political economy: a practical one that concerns that
aims to promote and regulate wealth and to maximise households revenue, a normative one about
the ideal relationship of economy and state and a scientific one about how a political economy
actually operates in what is conceived as a social system.
One attempt to bridge the divide, which has relevance to the project for a new political economy,
was made by Joseph Schumpeter. He developed Weber’s conception of Sozialokonomik, which
assumed that economics should be a political science, and that it was impossible to develop proper
economic theories without considering the social, political and cultural conditions for economic
activity. He argued that many of the fundamental errors committed in economic analysis were most
often due to lack of historical knowledge and insisted that a good economist needed a command of
historical facts and historical method.
Can refer to this within other topics when thinking critical about policies
Best et al. (2021) reflect on the New political economy as it is known today and recognises gaps in
the analysis such as ignoring race as a reason for economic inequality or neglecting households as a
place of work. It is argued that an ontological precautionary principle of political economy is adopted
and expanded without taking new reflections into account. An example of this could be the “four
worlds of student finance” which illustrates how funding of education differs across countries on the
basis of particular policies.
https://www.tandfonline.com/doi/full/10.1080/13563467.2020.1841143
Varieties of capitalism:
Hall and Soskice (2001) engage with comparative political economy by studying political economy
across nation states. The aim is to understand institutional variation, the variety of capitalism and
how these evolved amongst nations. The importance of institutions is stressed, and liberal market
economies are distinguished to coordinated market economies. They inspect the behaviour of
economic actors, coordination problems in relation to firms, education and corporate governance
and institutional structures and how they depend on the presence of regulatory regimes. It is argued
that varieties of capitalism affect the effectiveness of economic policy making since not all policies
are suited for different forms of capitalism with varying norms, rules, habits and customs. The state
takes a critical role in setting the parameters for particular functions and institutions to arise and
economic policy making is inspected not just on the basis of firm coordination and compliance but
, also on the basis of institutional protection. The authors point out that union wide European
legislation has proven to be difficult due to the varieties of capitalism that exist within its constituent
member states. For example, the UK wanted more flexible labour markets than Brussel objected the
EU to have.
Another example is liberal market economies typically tending to focus on general retaining
opportunities for redundant workers or tax breaks for firms to invest in depressed areas which
leaves the decisions to hire and fire to firms. Conversely, in coordinated market economies an
emphasis on government subsidies in distressed industries and engagement to firms directly or
through institutions is aimed for to actively reemploy.
Varieties of capitalism, provincialized:
Tilley (2015) stresses the importance to decolonise the study of the developmental state through the
search for historic development of capitalism with non-western influence to understand certain
developments today without drawing conclusions from western experience to the rest of the world.
Furthermore metropolitan-rural fault lines are mentioned that disaggregate the nation state through
differing implications of economic policies depending on geographic location within the state.
Finally, the territorial space produced by capitalism is mentioned that arguably disrupts the
ontological status of a nation by allowing for independent interests and struggles to influence
territories. It is therefore indicated that economic policy making should not be generalised through
western models of national capitalism. Economic policy making can easily be misunderstood through
the generalisation of western models of national capitalism. An example of this would be the
international spread of conditional cash transfers which are a welfare provision common amongst
national governments in the South of America and Africa. The uptake of these cash transfers has
risen significantly within 15 years of its introduction which shows the international spread of this
policy which can be understood through this policy mobility approach.
https://link.springer.com/chapter/10.1057/9781137444615_13
Policy mobility:
Peck (2011) investigates how policy making crosses over jurisdictional boundaries. The objects of
political transfer are for example innovations, technologies, models or policy ideas. He distinguishes
a horizontal spread between national and local entities and a vertical spread between institutions
and domains. Furthermore, two concepts are established. Policy transfer, which is defined as “the
steady and sequential diffusion of best practice solutions abstracted from their institutional and
social context” and policy mobility which refers to the connection, exchange and adoption of
“mutating experiments situated in ongoing forms of institutional-ideological restructuring”. An
example would be the spread of conditional cash transfers throughout countries. He analyses how
the adoption of neoliberal policies changes the institutional configurations of policymakers who are
implementing such policies. Peck (2011) argues that the take off of particular policies and how they
are being picked up can be influenced by varying time periods and reactions but also ideological
