Samenvatting

Full summary of lectures and readings for Political Economy year 2023/2024

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Universiteit Van Amsterdam (UvA)

A full summary of lectures and readings for Political Economy, year 2023/2024, including key summaries of texts, economic models & graphs. With this summary, I scored 7.9 on the final exam! Good luck studying!

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Geupload op 21 november 2023
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Geschreven in 2023/2024
Type Samenvatting

Lecture 1- Political Economy

 What is political economy?
o Political science-> The scientific study of politics
o Economics-> the study of scarcity, of how people use resources and respond to
incentives
o Classical thinkers-> Adam Smith, David Ricardo, John Stuard Mill
 Candle Makers’ Petition:
o Satire of French economist Frederic Bastiat
o Urged government to pass a law requiring curtains be shut during the day to protect
candlemakers against the unfair competition of the sun
o Discussion tensions between producer protection and consumer prices
o Are economies designed to produce jobs or goods for consumers?
o How do we balance production and reasonable prices? -> politics
o But how if we use politics? Who is more likely to lobby the governments? Producers
o Making fun of producers lobbying the government
 Political Economy today:
o “How politics affects the economy and how the economy shapes politics.” (inequality,
redistribution and taxation, economic development, globalization, energy,
environment and climate change, international trade and finance, special interest
politics, corruption)
 Political economy is inherently interdisciplinary.
 Recognizes that the policy economic analysis indicates is best for the economy
may not be politically feasible, and vice versa.
o “Using the tools of economics to study politics” (he doesn’t agree with that- using Game
theory to explain economy)
 Most commonly, this refers to using game theory to study political competition.
 This definition is somewhat dated because these tools are now common in
political science, but you will still see it.
 “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.” (Frieden 2020)
o But we do research how to reduce clearly harmful phenomena:
 E.g., corruption, negative externalities, climate change, disease, poverty, etc.
 Capitalism:
o “An economic system in which private actors own and control property in accord with
their interests, and demand and supply freely set prices in markets.” International
Monetary Fund
o Some essential features of capitalism:
 Private property –allows people to own tangible and intangible assets (state
makes sure I can’t steal your property)
 Self-interest –people act in pursuit of their own good/profit motive (state must
ensure that my self-interest doesn’t harm others)
 Competition –firms can enter and exit markets at their own will (must be
guaranteed, anti-monopoly rules)

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,  Market mechanism –supply and demand determine prices (government can
inflate prices when negative externalities exist)
 Negative externality- the imposition of a cost on a party as an indirect
effect of the actions of another party (examples: air pollution, water
pollution etc.)
 Consumer choice –customers can choose different products and investments
(government doesn’t allow certain goods to be produced/consumed, and bans
certain investor practices: example insider trade)
 The Game Theory:
o Formal theory of microeconomic theory
o Mathematical models of strategic interactions among (usually) rational agents
o Used to predict theoretical outcomes, which could later be ideally tested empirically
o Boasian voting model- an example
o Oligopolies-> markets that have high barriers to entry and is controlled by a few
competitors
o Non-price competition (example: advertising)-> competing without changing the price
(to distinguish the product from other companies’ goods)
o Oligopolies-> run almost like monopolies, however keeping the few competitors in mind
 The Prisoners Dilemma (part of game
theory):
o Cartel- collusion- a secret
agreement or cooperation
especially for an illegal or
deceitful purpose
o Price leadership- when a
company changes its prices and its
competitors have to decide if
they are going to follow suit
o Payoff matrix-> both companies to
charge the same price (start
with high- both profit a lot
highly, however if one goes low
the other goes low too-> result-
both get low profit)
o Socially optimal outcome-> 1 year each
o Rational best response-> Nash equilibrium- both getting 5 years
o These kinds of simple models can become much more complex and underpin much of
modern-day microeconomic theory.
o These kinds of “games” can be applied to international trade deals, optimal campaign
strategies, and even nuclear war.
o Many theoretical predictions in political economy come from these kinds of models. (For
example, theories of producer dominance in government regulation.)
 Other tools (Jeffrey Freiden):
o Statistical methods and experiments

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,  Often used to attempt to estimate causal effects.
 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:
o Examples from political economy:
 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 else?
 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.
 Association = not a causal argument
 Effect = a causal effect
 Definitions and concepts:
o Theory vs. empirics
 Theory = based on (logical!) theories and hypotheses.
 Empirical = based on observation and data.
o Causality vs. association
 Causation implies association.
 Association does not imply causation.
o Endogeneity – something preventing us from making a causal claim
 Prevents us from making causal claims (i.e., you got the causation wrong).
 The effect of one variable on another variable cannot be casually interpreted
because it includes omitted causes leading to biased estimates. (E.g., the effect
of education on income).
o Institutions: “Rules of the game of a society”
 Informal constraints (sanctions, taboos, customs, traditions, and codes of
conduct).
 Formal rules (constitutions, laws, and property rights).
 Social institutions: the way people organize themselves.
 Political institutions: rules, practices, and regularities that guide and constrain
political choices and activities
 Electoral institutions: type of electoral system (e.g., proportional representation,
single member district, etc.)
o Rationality -Correspondence between the choices that a person makes and the
interests the person holds.
 Important: a rational-choice approach does not require us to assume that people
are always ‘rational’, or that institutions are chosen rationally. Rather, it holds
that a rational-choice perspective enables us to generate a theory with
empirically refutable predictions.
o Special interests - Examples: (usually wealthy) individuals, corporations, labor unions.

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,  Concentrated (business, producer) vs. diffuse interests (probably loose, but much
smaller; consumers)
 International Political Economy (IPE):
o Branch of IR
o Focus on international trade and international finance
 Comparative Political Economy (CPE):
o Branch of comparative politics
o Domestic political economy (anything not international)

Lecture 2- Classical Political Economy. Adam Smith

 Understanding historical texts in political economy: different meanings contextualizing time
o Wealth and Value- wealth (what actually is most important ethically or morally
speaking); value (plays a particular role in explaining change in equilibrium prices and
thereby explaining general operating mechanisms of capitalist political economy)
o Civil Society- the economy
o Rank, order, class
o Middle Class
o Producers – the people who owned the factory
o Invisible Hand- micro actions which combined have a macro effect; the invisible
mechanisms
o States vs. Markets
 Main issues with the text:
 Perennialism-> assuming the questions of concerns and/ or meaning of words
never change
 Parochialism-> assuming local context and/ or meaning and associations are
everyone else’s
 Prolepsis-> anachronistically thinking something existed before it first appeared
 Contextual solution: discursive context (understand the general opinion
arguments of the time of the text)
 Issues: idealism, inability to properly explain the problems new ideas are
responding to; inability to determine shifts in which protentional
solutions make sense to similar problems
 Contextualism 2-> texts are read in their discursive and broader social and
historical context (issues-> reductionism, neglecting general transhistorical
trends)
 Four key debates.
o What is Capitalism? (some ideas provided)
 Private property
 Markets for goods and services
 Markets for land
 Markets for labor
 Capital markets
 Rules and regulations (governance) for the protection of property rights,
contracts

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