Political economy full notes
Lecture 1:
Political science:
● Scientific study of politics
● Analysis of political ideas, norms behaviors and institutions to inform publix choices
about government governance and public policy.
Economics:
● The study of scarcity, of how people use resources and respond to incentives
Classical thinkers considered the economy and politics inseparable:
● Adam Smith, David Ricardo, and John Stuart Mill called themselves political
economists
○ Adam Smith: An inquiry into the nature and causes of the wealth of nations
○ David Sicardo On the principles of political economy and taxation
○ John Stuart Mill: The principle of political economy
Candle makers’ petition (1845)
● Satire of protectionists tariffs by French economist Frederic Bastiat
● Urged government to pass a law requiring curtains be shut during the day to protect
candlemakers against unfair competition from the sun
○ We candlemakers are suffering from the unfair competition of a foreign rival
○ Frieden discusses the tensions between producer protection and consumer
prices, these arguments are not new
What is political economy today?
Studied by both economist and political scientists
1. How politics affects the economy and how the economy shapes politics:
a. Political economy is inherently interdisciplinary
b. Recognizes that the policy economic analysis indicates is best for the
economy may not be politically feasible and vice versa
2. Using the tools of economics to study politics
a. Most commonly, this refers to using game theory to study political competition
b. This definition is somewhat dates because these tools are now common in
political science, nonetheless this is a common definition
,Common topics of study in PE
● Inequality
○ Across class, gender, race etc.
● Redistribution and taxes
● Economic development
● Globalization
● Energy, environment and climate change
● International trade and finance
○ Protectionism, trade agreements, capital controls
● Social interest politics
○ Lobbying, campaign finance
● Corruption
A theoretical and empirical discipline
● Normative vs. empirical questions:
○ Normative: Which should society value more, lower consumer prices or
protect jobs from foreign competition?
○ Empirical: Why can 1000 workers in one industry exert more political pressure
than 20 million consumers?
● Political economist 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
○ E.g. corruption, negative externalities, climate change, poverty etc.
Capitalism
● Capitalism:
○ 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
● Some essential features of capitalism:
○ Private property: allows people to own tangible and intangible assets
○ Self interests: people act in pursuit of their own good/profit motive
○ Competition: firms can enter and exit markets at their own will
○ Market mechanism: supply and demand determine prices
○ Consumer choice: consumers freedom of purchases
● Political economy approaches to capitalism:
○ Markets and competition do indeed set prices
○ But governments provide public goods that market forces will not create,
create the institutional foundations and laws that underpin markets and
enforces the rules
○ Government must also use its power to modernize the rules of the game as
circumstances, societal priorities or knowledge change
,What are the tools of economics:?
● Most commonly refers to game theory (aka formal theory of micro economics theory)
○ Mathematical models of strategic interactions among (usually) rational agents
○ Used to predict theoretical outcomes
○ Example of game theory: the prisoners’ dilemma
1. Game theory
● These kinds of simple models can become much more complex and underpin much
of modern day microeconomic theory
● These kinds of games can be applied to international trade deals, optimal campaign
strategies and even nuclear war
● Many theoretical predictions in political economy come from these kinds of models
○ For example, theories of producer dominance in government regulation
2. Statistical methods and experiments
● 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 its a causal argument
● Correlation vs. causation, why do we care?
Correlation vs causation
● 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
Problems with tools
1. These tools were not common in political science when this definition was devised,
they are today
a. Many theories in political science were devised by applying rational-choice
economic theory to political questions (e.g. voter behavior)
2. This definition implies that analyses that are 100% on the topic of the political are
political economy if certain tools are used and assumptions are made
, Some key definitions
● Theory and empirics
○ Theory = based on logical theories and hypotheses
○ Empirical = based on observation and data
● Causality vs association
○ Association = not a causal argument
○ Effect = a causal effect
● Endogeneity
○ Prevents us from making causal claims (i.e. you got the causation wrong)
○ The effect of one variable on another cannot be causally interpreted because
it includes omitted causes leading to biased estimates (e.g. the effect of
education on income)
● Institutions
○ Rules of the game of a society
■ Informal constraints (sanctions, customs etc.)
■ Formal rules (constitutions, laws)
○ Social institutions: The way people organize themselves
○ Political institutions: Rules, practices, regularities that constrain political
choices and activities
○ Electoral institutions: Type of electoral system (proportional, FPTP etc.)
● 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 theory perspective enables us to generate a
theory with empirically refutable predictions
● Special interests
○ Examples: (wealthy) individuals, corporation, labor unions
○ Concentrated vs diffuse interests
International political economy
● Branch of international relations
○ Primary focus is international trade and international finance
○ Example of topics:
■ Exchange rate regimes
■ The role of i.e. IMF, World Bank
■ Protectionism and trade barriers (not domestically)
■ International financial crises
■ Liberal/capitalist peace theory
