Lectures (Introduction to) Political Economy
Lecture 1: What is Political Economy?
The economy is inherently political and, thus, the economy is also inherently normative.
Intertwined! There are often mental normative assumptions underlying policies about how to
structure society or how to structure markets which is the basis of politics. Economics is not value
free due to these strong normative assumptions/perspectives.
What is political economy then? Two examples:
1. Corporations/firms function in a highly globalized world nowadays in which they can choose
where they locate themselves based on functionalities, benefits, tax rules etc. compared to
business being done within one territory. States and corporations/market actors are fighting
each other as states want taxes whilst corporations do not want to pay many taxes.
Corporations/firms also include music bands etc. who employ their legal entity to put their
intellectual property rights into a corporation or firm. An example is the band The Rolling
Stones, of American origin but based in The Netherlands in terms of their intellectual
property rights.
2. Expansive housing costs because of a large demand and a short supply but that economics
explanation would be too simplistic. Money is relatively cheap currently (the price of money
is cheap due to low interest rates) which is the reason for capital to be pumped into the
housing market but why are the interest rates so low? This largely has to do with the policy
of central banks: they set interest rates and can pump money into the economy/to create
money. But states have different coordination’s in their central banks and these banks make
choices/preferences (normative/politics underlying the choices) which will benefit one but
detriment another (study of political economy). What is the best strategy for societal and
national wealth?
Political economy:
1. Studies the fundamental interconnection between states and markets
2. Understands economic politics as a means for states to achieve their objectives
3. Considers today and tomorrows political economic relations and battles from a historic
perspective
What is political economy? (Political economy III least studied in this course)
1. Political economy I: The classic thinkers on state and market, and their followers .
Considering societal and fundamental issues about two hundred fifty years already that led
to questions of human behaviour and natural inclinations. How can and should society be
organized to create wealth and prosperity? How can we organize public administration?
They (called themselves political economists) considered both states and markets,
integrated in one academic debate. In the early 20th century, the domains separated/divided
into a domain of politics and a separate domain of economics that developed in their own
department/right (still nowadays).
2. Political economy II: The political science of economic policy fields. The governance of
economic institutions such as central banks and the world bank: decision-making and
regulation in financial institutions in economic fields (power relations and migration issues as
well). Policy fields that are inherently economic in nature but part of politics as well.
3. Political economy III: Political phenomena considered from an economics perspective.
Economics is the way we organize society to provide for our needs (literally: oikos =
family/family property/territoriality + nomos = law). However, economics has multiple
definitions. What, then, is economics? Economics is a domain of knowledge and a
perspective and approach to study social interaction (demand/supply, individualism etc.).
Political economy III studies the interactions between (economic) actors who are at the
, basis of economic action who have certain preferences. Certain presumptions follow to build
models for optimal behaviour. How much afford/investment do I need to graduate?
Optimal behaviour/solution.
4. Political economy IV: Markets and business considered from a political science perspective .
Studies business conduct, corporate governance, lobbying practises to influence regulations.
The EU unification/expansion/policies tied to corporations/business/competition.
Lecture 2: Capitalism and classical thinkers in Political Economy
Capitalism is central in Political Economy because of its dominance in the world today. Capitalism
first became dominant in North-Western Europe when the post-feudal British society transformed in
the 1700s which coincided with growing trade and markets. Capitalism is a concept/model/ideal
type (of what the world should look like) that describes the dominant political-economic activities
with the aim to create wealth and relations in a social scientific manner. An ideal type means that it
might never fully exist in practise. Capitalism is a concept that invites a debate on the positive and
negative aspects of economic actions and activities. Capitalism is difficult to precisely define but it
encompasses the following elements to describe a society as ‘’capitalist’’: private property
(rule/convention and not self-evident), labour market (private property leads to ownership and
markets: productive activities in corporations by labour workers in exchange for money), capital
market (surplus value = extra value after payments/profit and interests in exchange for loans to
again buy more products), market for land (no longer common good due to private property and
ownership and the state has the ability to ask taxes from the owner of land), market for goods and
services, rules and regulations (governance) are necessary for the protection of property rights or
enforce contracts because of possible conflicts of interests/theft of property and focus on growth
and expansion. Capitalism developed gradually with old societies/systems having certain elements of
capitalism but not all (serfdom: serfdom but no wages) (feudalism: position determines economic
function but again no labour market). In the past, many countries actually declared themselves
socialist (especially in the 20th century) and in the end the communist model failed and the capitalist
model in most countries won.
Four debates regarding capitalism:
1. What is capitalism? The consensus is that capitalism encompasses markets and institutions
which require the facilitation of markets and the focus on growth and expansion primarily.
Contested elements/debates within capitalism are: Is ideology a necessary element in
capitalism? Can a society with a socialist ideology be capitalist? Are norms and values
fundamental to a capitalist system?
2. Capitalism or capitalisms? Historically, there are different types of capitalism such as
merchant capitalism, industrial capitalism, and financial capitalism in which different
elements are most important (trade, industry, and finance). There is also a clear geographical
and cultural element: Western Europe is different compared to Asia and thus capitalist
systems diverse as well. There is, indeed, a wide variety of capitalist societies and institutions
with different institutions, goals, and challenges. Also, liberal markets/economies versus
coordinated markets/economies.
3. Capitalism: love it or hate it? What are the benefits and what are the threats that come
about from a capitalist society? Can capitalism based on profit be combined with people and
planet based on equality and less use of natural resources? Perhaps because capitalism
raised the standards of living for a lot of people in the world but at the expense of what?
How much inequality is permissible? Also, groups are more productive when people
specialise in these capitalist society, but it can occur at the expense of exploitation of
workers. There is, furthermore, a more general political debate concerning capitalism, for
example regarding monopolies (when to step in when firms are too big/have a monopoly?).
, 4. What will capitalism bring for the future? Francis Fukuyama famously declared the end of
history when capitalism overpowered (solely survived) all other possible socio-political and
economic concepts. But nowadays, people are questioning capitalism combined with
sustainability, climate change etc. Will there be a form of state capitalism? New forms of
capitalism? Capitalism is developing/changing over time and is not static/set in stone!
Classical (thinkers in) Political Economy developed as a school of thought/as a branch of knowledge
together with the development and growth of the market economy itself in the 1700s. The dominant
school of thought/organizing principle in the 1700s (context) was mercantilism in which the state
stimulated the export in the uncertain times of the 1700s to gain wealth/to gain bullion (gold and
silver) predominantly, which provided power in the global economy. For exporting products others
had to pay a lot of bullion which resulted in favourable or unequal trade relations for the other
parties. Governments regulated the national economy, through high tariffs which made importing
goods much less favourable and which, then, led to money being spend in your own country and not
in another country whilst keeping export high. Regulation also through state sponsored monopolies.
Classical thinkers in PE responded/reacted negatively to mercantilism and argued that a better way
of organizing society/economic relations is through free trade/low tariffs, a division of labour
(production in other countries and not production in your own country solely: specialisation and
efficiency), market forces (coordination of specialised products through the market) and the
necessary market protection.
Adam Smith (1723-1790) (Classical thinker) was a proponent of free trade and the division of labour,
and he argued that individual personal interests contributed to the collective good. But Smith’s ideas
are much greater and richer which also include him being a criticaster of the power of big business,
being pessimistic on the moral consequences of markets and arguing that actors in markets often
deliberately undermine those markets (philosophical influence: importance of morals and practises).
Smith’s ideas not about markets and invisible hand predominantly!
- Smith was a Scottish citizen who studied philosophy at Edinburgh and Oxford later. He
thought he was smarter than everyone else and he wrote many books, including the
bestseller The Wealth of Nations (1776) which he wrote in London.
- Smith argued against mercantilism for free trade. “Do not produce yourself what you can
buy cheaper elsewhere” both individual and national specialization. Thus, the division of
labour is limited by the size of the market which requires us to create a bigger market with
more individuals and a higher level of specialization and efficiency/international division of
labour. The larger the market, the higher the gains because increase in productivity is a
source of wealth which will result in a better society with less poor people. Some concerns
raised by Smith by the implications raised by the division of labour: very few alternative
sources for productivity increase and business were small or family-oriented business (before
industrial revolution). Smith, thus, already recognized the problems of specialization
when it is limited to a few small operations (similar idea to the alienation of
labourers/workers what Marx holds central!).
- Smith was concerned with the problem of (social) order and the best way to organize
society/order is the market because the market is a mechanism for resolving the basic
economic problems and for producing order in society without an elaborate central direction
as a means of creating social order coinciding with pursuing self-interests. Social rather
than a-social manner in pursuing self-interests through the market! None of the economic
actors should be able to manipulate the prices of products in the markets: markets require
competition/trade to work (against monopolies!). Effective competition goes through an
invisible hand, which leads to an efficient use of labour and capital. The market is a means
to stimulate people to work towards the best interest of society as a whole: align own
interests with the interest of the common good. Thus, Smith praises the business as a
system but not the businessman/great business! Smith was concerned with power and
