POLITICAL ECONOMY IN PREPARATION FOR EXAMS
Lecture 1 Readings: “ What is Political Economy?”
Barry R. Weingast, Donald A. Wittman, “The Reach of Political Economy” in The Oxford
Handbook of Political Economy:
➔ the phrase “political economy” has had many different meanings.
➔ Adam Smith → political economy was the science of managing a nation’s resources
so as to generate wealth.
➔ Marx → it was how the ownership of the means of production influenced historical
processes.
➔ Sometimes it was viewed as an area of study (the interrelationship between
economics and politics) while at other times it was viewed as a methodological
approach.
➔ Even the methodological approach was divided into two parts—the economic
approach (often called public choice) emphasizing individual rationality and the
sociological approach where the level of analysis tended to be institutional
➔ In this Handbook, we view political economy as a grand (if imperfect) synthesis of
these various strands. In our view, political economy is the methodology of
economics applied to the analysis of political behaviour and institutions. As such, it
is not a single, unified approach, but a family of approaches.
➔ The unit of analysis is typically the individual. The individual is motivated to achieve
goals (usually preference maximization but in evolutionary games, maximization of
surviving offspring), the theory is based in mathematics(often game theoretic), and
the empirics either use sophisticated statistical techniques or involve experiments
where money is used as a motivating force in the experiment
➔ The research agenda on institutions follows a natural progression.
➔ The first step is to determine how institutions affect behavior. Indeed, this step
seems a necessary condition for a theory of endogenous institutions. Having built
up a large literature on the effects of institutions, students of political economy have
begun to treat institutions as endogenous (thereby incorporating some of the
subject matter of sociology and anthropology).
➔ We focus our attention on legislative institutions because this is where much of the
work has been done.
➔ One of the technically most challenging but at the same time one of the most exciting
areas of research in political economy concerns the revelation and aggregation of
information. This work is exciting because many of the results contradict earlier
beliefs based on decision-theoretic models and because this research answers many
puzzles.
➔ Political economy is now at the confluence of two related paradigms: utility
maximization and evolutionary fitness. Both employ survival arguments in the
context of competitive forces—for example candidates need to win elections to
survive. And both employ the concept of equilibrium. These two concepts of survival
and equilibrium distinguish political economy from other approaches to political
behavior. However, these two approaches at times provide contradictory insights
➔ Furthermore, while political economy has traditionally been based on self-regarding
behavior, a considerable body of research in evolutionary politics tries to explain
other-regarding behavior, such as altruism and vengeance.
➔ authoritarians may not face elections, but they too need political
,➔ support to remain in power (see Bueno de Mesquita, this volume). Second, more
information is being collected so that cross-country comparisons can now be done.
➔ Finally, the political phenomena in non-democratic countries raise a host of
questions typically ignored in democratic countries that demand answers: why is
there ethnic conflict? When is democracy a stable political system? What if any is the
relationship between democracy and capitalism? And why are so many nations
underdeveloped?
➔ Institutions can be studied at three different levels. First, the most basic and
common level takes institutions as given and studies their effects.
➔ second, the first method can be used as a form of comparative institutional analysis
to study the implications of different forms of institutions.
➔ Third, the deepest level of institutional analysis is to take the institutions
themselves as endogenous; and to explain how and why institutions are structured
in particular ways, and why some types of institutions survive but not others.
Frieden, Jeffrey (2020). “The political economy of economic policy”, in Finance &
Development, vol 57:2.:
➔ At the international level, government responses to the pandemic illustrate the
difficult politics of worldwide cooperation. A global pandemic requires a global
response: microbes do not respect borders. A coordinated international response is
clearly the best way to confront an international public health emergency. Yet
policymakers under pressure from their constituents have diverted resources away
from other countries, banned the export of food and drugs, and hoarded essential
supplies. Each of these measures—popular as they may be to national publics—
imposes costs on other countries. In the final analysis, the lack of cooperation makes
everyone worse off. Such international institutions as the World Health
Organization attempt to coordinate a cooperative global response to the global
crisis—but they can be powerless in the face of potent nationalist political
pressures.
➔ This hotly contested policy response to a universal threat is no surprise to political
economists. It happens all the time. For example, just about every economist
believes that small countries would be better off if they removed all barriers to
trade. Yet unilateral free trade is practically unheard of, and no country in the world
today pursues it. Why not? More generally, why do governments have so much
trouble getting economic policies right? Why does the advice of independent
observers, analysts, and scholars go so often unheeded?
➔ 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 the past 100 years of US presidential elections
➔ Two trends divided the political from the economic analysis. First, governments
began to reduce their direct control over the economy. Second, different political
forms emerged: Europe went from almost exclusively monarchical to increasingly
representative, and highly varied, forms of government. By the early 20th century
economics and political science were established as separate disciplines.
➔ For much of the 20th century this division reigned. With the Great Depression and
problems of development, the purely economic issues were daunting enough to
occupy economists. By the same token, the political problems of the era—two world
wars, the rise of fascism and communism—were so serious as to require separate
attention.
,➔ By the 1970s, however, it was clear that the separation between the economic and
political spheres was misleading. That decade saw the collapse of the Bretton Woods
monetary order, two oil price shocks, and stagflation—all highlighting the fact that
economic and political matters are intertwined. The economy was now high politics,
and much of politics was about the economy.
➔ Over the past 50 years, political economy has become increasingly prominent in
both economics and political science, in three ways:
➔ It analyzes how political forces affect the economy. Voters and interest groups have
a powerful impact on virtually every possible economic policy. Political economists
strive to identify the relevant groups and their interests, and how political
institutions affect their impact on policy.
➔ It assesses how the economy affects politics. Macroeconomic trends can boost or
ruin an incumbent’s chances. At the more microeconomic level, features of the
economic organization or activities of particular firms or industries can have an
impact on the nature and direction of their political activity.
➔ It uses the tools of economics to study politics. Politicians can be thought of as
analogous to firms, with voters as consumers, or governments as monopoly
providers of goods and services to constituent customers.
➔ A basic political economy principle is that the winners don’t like being taxed to
compensate losers. And the battle is joined, not over what is best for society but
rather over who will be the winners and losers. What is best for the country may not
be best for my region, or group, or industry, or class—and so I will fight it.
➔ A commonplace of political economy is that concentrated interests usually win over
diffuse interests. The sugar producers are well organized and work hard to influence
politicians. If they didn’t get favorable government treatment they’d go out of
business, so it’s important for them to organize to lobby and fund politicians. The
cost to consumers is estimated at $2 billion to $3 billion a year. That’s a lot of
money—but it comes to a couple of cents a day for the average American. No
consumer is going to talk to an elected representative or threaten to vote for an
opponent over a couple of cents a day.
➔ Political economists don’t usually take stands on complicated moral and ethical
issues of this sort. They try to understand why societies choose to do what they do.
The fact that sugar or car producers have much more at stake and are much better
organized than sugar or car consumers helps explain why government policies favor
sugar and car producers over consumers.
➔ In fact, there are plenty of powerful interests in favor 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. A typical
international corporation today produces parts and components in dozens of
countries, assembles them in dozens more, and sells the final products everywhere.
Trade barriers interfere with these supply chains, which is why most of the world’s
biggest companies are also some of the biggest supporters of freer trade.
➔ 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. The
way a political economy is organized affects who wins the battle over policy.
➔ A logical starting point is elections, at least in democracies. Governments that don’t
satisfy their constituents don’t remain governments very long. So we might expect
democracies to choose policies that benefit the economy as a whole. However, the
economy as a whole doesn’t vote.
➔ Politicians need votes from the people who decide elections. The decisive or pivotal
voters vary with a country’s electoral institutions and social divisions. In most
political systems, the best targets are swing voters, who might change their vote in
response to the policies of an incumbent or the promises of a challenger. If the poor
, vote for the left and the rich vote for the right, for example, the middle class could be
decisive. In recent American presidential elections, the most important swing voters
have been in distressed industrial regions of the Midwest. Many voters in these areas
believe that foreign competition contributed to manufacturing decline. This helps
explain why presidential candidates have become increasingly protectionist, even
though most Americans support openness to trade.
➔ In democracies, the variety of electoral institutions affects how policymakers feel
constituent pressures. Organized political parties can help extend the time horizons
of politicians: while an individual politician may worry only about the next election,
a party has to be concerned about its longer-term reputation. On another dimension,
where politicians are elected by the country as a whole, as in Israel or the
Netherlands, the focus is on national policy. Where politicians represent narrower
geographic locations, as in the US House of Representatives, the general view is that
“all politics is local”. These different electoral systems can drive politics toward more
national or more local concerns.
➔ All this matters to policymakers or observers or even just people who care about the
economy because it can profoundly change the way we think about policy and policy
advice.
➔ The policy that economic analysis indicates is best for the economy may not be
politically feasible. To go back to free trade, virtually all economists would
recommend that a small country’s best bet is to remove all trade barriers
unilaterally. Yet it is almost certain that a government that attempted to move to
unilateral free trade would face massive opposition from special interests and from
many in the public who would regard such a move as dangerous. The result might
well be the collapse of the government and its replacement with one that could be
relied on to maintain and even expand trade barriers. In this case, pursuit of the first-
best policy could lead to a much worse outcome.
Stilwell, 2012. Political Economy. The Contest of Economy Ideas. 3th edition. Sydney:
Oxford University Press. pp. 2-9.:
➔ Modern political economy provides an accessible approach to the study of economic
issues.
➔ It seeks to 'illuminate the world in which we live so that we may act in it intelligently
and effectively' .This introductory chapter explains how this ambition can be
achieved. It suggests three ways of defining political economy:
➔ • in terms of the real-world problems on which it focuses
➔ • in terms of how these problems are analysed
➔ • in terms of the currents of economic thought from which it draws
➔ It also indicates how political economy can generate more interest than is usual in
the study of economics.
➔ Neoclassical economics, which emerged in the late nineteenth century and is still
the dominant economic orthodoxy today. This theory stresses the beneficial effects
of competitive markets as a means of allocating economic resources. From the
neoclassical viewpoint, the role of government is, at most, that of an adjunct to the
free-market economy. The underlying view is that the capitalist economy is a stable,
self-equilibrating system.
➔ Orthodox economic reasoning has given rise to particular policy prescriptions, such
as the liberalisation of trade, the deregulation of financial markets, and the
privatisation of public enterprises. It is as if the real world is being reconstructed in
the image of a particular economic theory. Major political economic problems have
resulted, most obviously the dramatic worldwide economic crash that began in
2007-08. The resulting global economic crisis has made necessary a fundamental
reconsideration of orthodox economic theory and policies.
