Readings (Introduction to) Political Economy
States and Markets (Prologue). Susan Strange.
An explosion on a passenger ship and clumsily handled lifeboats resulted in only three lifeboats filled
with passengers that stayed alive and went to a desert island without means of communication. All
three groups are on the same island but think they are the sole survivors. One group is autocratic,
characterised by protection/order and security (threats). One group, consisting of students, is
characterised by equality and justice, same rules for everyone and a commune is organized in which
everyone uses their skills the best. One group, consisting of parents and crew members, is
characterized by individuality and market value. Nails found on the ship are employed as money so
everyone has a job and is paid if others want to use their services. The desert-island stories are an
allegory of political economy: all three groups are dominated by a different social value (realist,
idealist, and economist) and they prioritize different values. What will or should happen when the
groups encounter each other tells something about other people's perceptions of reality, of their
own experience of the real world, their interpretation of history and human nature. The answer to
those questions is influenced by people’s own ideas, perceptions, experiences etc.
Economists Need to Add a Little History to Their Tool Kit. Noah Smith.
Economists learn a lot of mathematical models and empirical facts about the present, but not about
economic history which is highly underemphasized. If graduate programs taught more economic
history, the US, for example, wouldn't have been so blindsided by the financial crisis or the long,
grinding recession that followed. History is extremely useful in understanding economics and society
as well because (1) economic history focuses economists on real events rather than allowing them to
live in theoretical fantasy worlds of their own creation, (2) economic history can help generate
plausible explanations for some of the biggest and hardest questions, (3) economic history can serve
as a check on the more dramatic claims of mainstream historians, (4) economic history can be used
to predict the future and (5) economic history can often help us understand broader social
phenomena.
The Political Economy of Economic Policy. Jeffrey Frieden.
National policy responses to the COVID-19 pandemic vary for health, economic, and political reasons
as these national policy responses are favoured over international cooperation (whilst international
cooperation is the best way for everyone in the pandemic) due to political pressure etc. Political
economy is about how politics affects the economy and the economy affects politics (intertwined!).
Governments try to pump up the economy before elections, so that so-called political business cycles
create ebbs and flows of economic activity around elections. By the same token, economic conditions
have a powerful impact on elections. Political economists have uncovered the simple (perhaps
disturbing) fact that the rates of economic growth and inflation are all the information we need to
predict quite accurately the results of elections. A commonplace of political economy is that
concentrated interests (companies) usually win over diffuse interests (the people) as companies
influence and support politicians whilst the politicians keep supporting the companies which results
in higher prices that consumers/the people must pay for the product = trade protection. Companies
are better organized and supportive of government policies and want to be protected from foreign
companies and prices. Trade policy is not just a battle between big corporations and disunited
households; it’s also a battle among big corporations. Otherwise, we’d expect every industry to be
protected and trade to be tightly limited everywhere. In fact, there are plenty of powerful interests in
favour of international trade and investment. The world’s multinational corporations and
international banks depend on an open flow of goods and capital. This is especially the case today,
when many of the world’s largest companies depend on complex global supply chains.
,Special interests as well as voters on different sides of every issue fight their battles in the political
arena. But the rules of politics vary a lot from country to country. In democracies, elections are
decisive, and politicians play to the needs of the majority of the voters: either protectionist or free
trade, depending on the upcoming election. In addition, policymakers in democratic societies must
always pay attention to the next election— otherwise they are likely to cease being policymakers.
This helps explain why it can be difficult for governments to pay money now for policies whose
benefits will be realized only in the long run—such as pandemic prevention and preparedness. Also,
what is more important varies: local, national or international policies and outcomes.
CONCLUSION. Political economy is the integration of political and economic factors in modern
society. Inasmuch as just about everyone would agree that politics and economics are intricately and
irretrievably interwoven—politics affects the economy, and the economy affects politics—this
approach seems natural. It has proved itself powerful in understanding governments and societies; it
can also be a powerful tool for those interested in changing governments and societies.
What is political economy? Frank Stilwell.
Modern political economy seeks to illuminate the world in which we live so that we may act in it
intelligently and effectively. The neoclassical economic theory emerged in the late 19th century
(dominant orthodoxy) and stresses the beneficial effects of competitive markets as a means of
allocating economic resources in which the role of the government is solely that of an adjunct to the
free-market economy. Even though the problem with this economic orthodoxy is that the theoretical
model of market exchange under competitive conditions fails to illuminate the world in which we live
today, the theory has had a strong influence on economic policies and is, thus, highly relevant. The
global economic crisis that resulted from the worldwide economic crash that began in 2007-2008 had
made necessary a fundamental reconsideration of orthodox economic theory and policies in modern
political economy. The immediate appeal of the political economic approach is its direct
engagement with big issues such as economic stability. A link is thereby established between studies
in economics and what is reported in the daily newspapers and on radio and television current affairs
programs. Simultaneously, links are created with other areas of study, such as geography, history,
social studies, political science, and industrial relations. Interdisciplinary character of modern
political economy to impede a full understanding of the world and in which real-world phenomena
do not fit neatly into boxes labelled 'economic', 'social', 'political', or 'cultural'.
Political economy is a means to understanding a changing world. Different schools of economic
thought, all with different ideas and explanations, have influenced the construction of political
economy of which these are the most important:
1. Classical political economy (Adam Smith and David Ricardo). The notion of an economic
system producing goods and services surplus to what is required for social reproduction
remains valuable. Classical political economy is generally held to have conservative political
implications, but the underlying conceptions of economic production, distribution, and
economic growth can be given a progressive, modern twist. The emphasis on the
troublesome issue of land and land ownership, ignored by much economic theorising over
the last century, is particularly important.
2. Marxist economics (Karl Marx). It emphasises the basis of the capitalist economy, in
particular property relations, class structures, and the relentless drive for amassing wealth.
Marxist analysis asserts that the source of the economic surplus is the exploitation of labour.
The resulting class conflict creates the potential for radical political economic change.
Marxist economic analysis can help to understand dramatic shocks to the economic system,
such as financial crises, and the persistence of poverty in affluent societies. However, like all
economic theories, Marxist analysis needs to be critically re-evaluated to test its applicability
to the modern economy.
, 3. Institutional economics (Thorstein Veblen and J.K. Galbraith). It emerged from the German
historical school of the nineteenth century and flourished in the twentieth century, partly as
a reaction to the abstract character of much orthodox economic theory. Its leading
exponents have persistently emphasised the need to come to terms with the changes in
institutional form associated with the ongoing development of capitalist economies. The
focus is on economic evolution. A particular focus is the potential for more extensive
interventions by the state to reduce the inequality and instability of free-market capitalism.
4. Keynesian economics (John Maynard Keynes). Keynes explained why capitalism cannot
guarantee full employment and identified the necessary remedial policies at a time when
more conventional economic prescriptions had failed. He showed that the economy did not
function simply as the aggregation of economic markets and that, without enlightened
government intervention, unemployment and inflation would occur.
5. Neoclassical economics. Most problematic economic theory (it was the dominant economic
orthodoxy) because the problem is that neoclassical theory also embodies a distinctive
ideology-presenting a particular image of a free-market capitalist economy serving societal
preferences. It is this ideological character of neoclassical theory that makes it difficult to
'mix and match' with other currents of economic analysis that present a more critical view of
capitalism. Some elements, however, can be salvaged for modern approaches to political
economy.
6. Modern political economy. It is not a return to the economic ideas that prevailed before
neoclassical economics became dominant. Focusing on the conditions for the broad progress
of the economy and society is certainly more in tune with the classical tradition than with the
narrower, neoclassical focus on market equilibrium. There is a rich heritage of economic
thought from which modern political economy draws, including classical political economy,
Marxist economics, institutional economics, and Keynesian economics. Continuity from
building on the existing knowledge is required but so is change which comes through
adapting and extending it to deal with the evolving political economic problems and new
challenges. The need for creative political economic thinking is evident and urgent. Modern
political economy has a great desire for a down-to-earth approach that addresses real
political economic problems and makes values explicit.
The Contest of Economy Ideas. Frank Stilwell.
Different means of economic organisation: (1) primitive communalism in which tasks will be shared
and production distributed over the commune (not viable with large-scale societies), (2) slavery in
which one class (slave owners) uses explicit force over another (slaves) with violence being
normalised, (3) feudalism which is characterised economically by mutual obligation, (4) capitalism
which is completely different than all other forms of economic organisation because financial
considerations dominate and (5) socialism in which socioeconomic collectivist principles are the first
priority (based on planning). However, capitalism, despite its flaws, remains the dominant system of
economic organisation on a world scale in the twenty first century.
Capitalism is based on eight distinctive features: (1) private ownership of the means of production:
economic activities in the hands of private businesses for the purposes of making profit, (2) labour
market in which the buyers of labour negotiate with the sellers of labour regarding wages etc.
usually through trade unions, employer associations and regulatory institutions, (3) capital market in
which banks are key capitalist institutions and in which the most characteristic capital market
institution is the stock exchange, (4) land market in which land is largely privately owned and land is
bought and sold on the market, (5) market for goods and services in which items are produced to be
sold, (6) distinctive ideology: consumerism and competitiveness , (7) distinctive role of the state in
which the state has the important role of regulating and enforcing the property rights and the market
and class relationships on which capitalism is based (state determines the rules) and (8)
, expansionary tendency as capitalism is a system driven by the quest for profit. Despite these
characteristics, each capitalist system in the world is different which predominantly has to do with
the historical evolution of the countries.
Theory is essential in understanding the economic system because it enables us to identity key
elements and patterns in otherwise intractably complex circumstances.
In economics, the presence of competing thoughts/competing schools of thought regarding the
most important aspects of the economy are highly problematic because the economy and both
politics and government decisions are interconnected. Economic theories and ideas are also
continuously changing as the object of enquiry is constantly changing, the interdependence of
theories about social phenomena and the behaviour resulting from the application of those theories
is another complication and the development of economics
is permeated by the influence of material interests. Each of
these competing schools of thought can be understood in
terms of the changing economic conditions of the time, the
influence of particular economic interests, the influence of
prevailing intellectual fashions, and the innovative ideas of
great economic thinkers.
In the late eighteenth century, capitalism emerged from
feudalism in the classical political economy which came
with the emergence of a specific capitalist economics. They
studied the economic character of society to increase
productivity and national wealth. Neoclassical economists built from classical political economics
and founded the scientific method to study the economy and created the equilibrium of competitive
markets. Marxist economics, however, regards radical economic change and great criticism on
capitalism, which was responsible for injustices, inequality etc. Reformist perspectives, such as from
Keynes, are based on the intervention of states in the economy. Institutional economics was also
critical of capitalism but not of class conflict but of the social manifestations of business and
consumer behaviour. Neoclassical synthesis after the Second World War was the uneasy blend of
Keynesian macroeconomics and neoclassical microeconomics which took a blow with the 1970s
collapse of the economies. Western capitalism saw the impact of a resurgent pre-Keynesianism,
known as monetarism, which contended that capitalism would work best when government
interfered least. Monetarism led to a general revival in the last three decades of various forms of
free-market economics. Modern political economists express profound reservations about this
neoliberal free-market economics. They argue that it fails to provide a coherent means of
understanding contemporary capitalism, and that, in practice, its policy prescriptions accentuate
economic inequality, instability, and insecurity.
The Great Thinkers. Adam Smith (not written by Smith).
Adam Smith is widely regarded as the founder of modern economics and free-market capitalism
whilst he never referred to his ideas as capitalism and his ideas encompass much more than free-
market capitalism. Smith advocated capitalism because it makes freedom possible, not because
it is freedom. The primary idea of Smith is that a commercial society with the right institutions aimed
at enriching ordinary consumers and producers does more than make a nation wealthy. Free
commerce, for Smith, is a means to promoting a polity that successfully maintains liberty by giving
individuals incentives to restrain their behaviour. A market economy and the democratic prosperity
it engenders is valuable because it promotes the virtues—moderation, honesty, reliability,
discipline, and civility—on which liberal society depends. Smith may be the founder of modern
economics, but he was foremost a moral philosopher.
