Political Economy
September 4, 2023
Lecture 1: What is PE?
History
- Political Science
o Analysis of political ideas, norms, behaviours, and institutions to inform public
choices about government, governance, and public policy.
- Economics
o The study of scarcity. Of how people use resources.
- Adam smith, John Stuart Mill, David Ricardo – classical thinkers that considered the
economy and politics inseparable.
What is PE today?
Studied by both economics and political scientists.
1. How politics affect the economy and how the economy shapes politics
o Political economy is inherently interdisciplinary.
o Recognizes that the policy economics analysis indicates is best for the economy
may not be politically feasible and vise versa.
o Common topics to study
Inequality
Redistribution and taxation
Economic development
Globalization
International trade and finance
Ex., Protectionism, trade agreemnts, capital controls
Energy, environment, and climate change
Special interest politics
Ex., Lobbying, campaign finance
Corruption
2. Using the tools of economics to study politics
o Most commonly, this refers to using game theory to study political competition.
o Somewhat dated because these tools are now common in political science.
o What are these "tools of economics?"
o Most commonly refers to game theory (aka formal theory or microeconomic
theory):
o Mathematical models of strategic interactions among (usually) rational agents.
o Used to predict theoretical outcomes.
Theoretical and empirical discipline
- Normative vs. Empirical questions
o Normative: which should society value more, lower consumer prices or protecting
jobs from foreign competition?
o Empirical: why can 1000 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.”
- But we do research how to reduce clearly harmful phenomena:
o Ex., corruption, negative externalities, climate change
Capitalism
- Political economy approach to capitalism:
o Markets and competition do indeed set prices.
o But governments provide public goods that market forces will not create, create
the institutional foundations and laws that underpin markets, and enforces the
rules.
o Government must also use its power to modernize the rules of the game as
circumstances, societal priorities, or knowledge change.
- Some essential features of capitalism:
o Private property (state must ensure that I can't steal your property)
o Self-interest (state must ensure that my self-interest doesn't harm others)
o Competition (must be guaranteed by e.g., anti-monopoly laws)
o Market mechanism (government can inflate prices when negative externalities
exist)
o Consumer choice (government doesn't allow certain goods to be
produced/consumed, and bans certain investor practices)
Game theory
- The Prisoner’s Dilemma
- Many theoretical predictions in political economy come from these kinds of models.
o Ex., theories of producer dominance in government regulation.
Other tools
- Statistical methods and experiments
o Often used to attempt to estimate causal effects.
o 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
- Examples from political economy:
o Does providing development aid reduce corruption?
Even if corruption is reduced, how do we know it was the effect of the aid
and not something.
o 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!
Observing a high correlation between donations and meetings does not tell
us the answer.
o Association = not a causal argument
