Lecture 1: What is Political Economy?
Political Economy = different from Economics
It is very much related, but definitely not the same. Understand especially the relationship between states and markets,
what kind of political choices are under different economic policies.
An important takeaway: The economic (perspective on the world, economic policies, markets, trade) is inherently
political. What we decide politically determines the economic trends, systems. So, it is also inherently normative:
different choices, values, underlying economic systems.
Political Economy
Studies the fundamental interconnection between states and markets:
o States and markets are not disconnected, but rather very much connected. One cannot exist without the
other.
o Understand economic policies as the means for states to achieve their objectives:
One objective is to have more prosperity, to improve well-being and this is done through
different economic policies.
Considers today and tomorrows political economic relations and battles from a historic perspective:
o See cycles, patterns to economic development and see why certain states are in a better position to
develop than others and so understand why, for example, the US is so keen on protecting its intellectual
rights.
o Almost every topic we study in pol science has a political economic story to it.
To understand what is going on in the present day and be able to act to make the world a better place, political
economy gives the capability to look at all issues from a more thorough perspective.
Example: The Trade War
Trade war between China and the United States
A few pointers:
o Tariffs: when goods are imported into a country, states can levy taxes on these goods. These are
called tariffs. And make trade more costly:
E.g. Iphones produced in China and shipped to US. US produces cars and ships to another
country. When you produce and exports goods (e.g. iPhone parts to US), the country says
“ok, at the border we will put a tariff on this goods, at the gov we levy a tax”. This is very
common, it is a sort of revenue, but it also makes trade more costly.
o There are more goods coming from China to the US than the other way around.
So, money flows from US to China (=trade deficit), the US has to pay to China. So, US owes
money to China. Thus, US has a debt to pay to China. And this is how the US trade war
started with China.
This means there are different financial relations, international trade flows, countries are
indebted to each other.
o International trade flows influences the value of currencies (exchange rates):
Each state has its own perspective.
o Central banks are responsible for monetary policy (in US: federal reserve)
Wireless Arms Race: Global 5G Rollout and Huawei Bans:
Who control the main infrastructure in the next evolutionary steps for technology. Huawei is the leader
now, and it is a premier as until this point always American companies were in the front.
There is also a strategic, political element to all economic decisions.
, Different governments fight because they have different perspectives. Underlying these fights there is a
fundamental questions of political economy about balances and imbalances. But it is also a question of American
hegemony, with the US seeing China on the rise. Thus, Trump is questions whether it is worth being a hegemon
power.
These are the question that political economy cares about.
Economy = politics and politics = economy:
The economy is inherently political. And much of what is political, is directly related to the economy.
PE is everywhere, and everything is PE.
o But if that is true…. How can you study this?
What is Political Economy? There are at least four flavors of PE.
1. POLITICAL ECONOMY I: The classic thinkers on state and market, and their followers
The classic thinkers on state and market, and their followers. They considered both states and markets, integrated in
one academic debate.
The roots of PE can be traced at least 250 years ago to thinkers like Adam Smith and Marx. These were people
who were very much interested in how societies could and should be organized. It is about understanding from
an academic perspective the courses of wealth and prosperity, what makes the wealth of nations, but also what
determines inequality and how we can reduce poverty.
These thinkers though a lot about the vices and virtues of mankind.
o How government should also be organized so we balance these and improve wealth and society.
o They thought about both state and markets, integrated in one economic debate.
To what extent should the socio-economic order be the outcome of coordination either by the market or by
state:
o This is the most important and fundamental question, can we organize it top-down through hierarchy,
or horizontal through market relations.
o This used to be the fundamental divide in left-right dichotomy of the political spectrum and still remains
an important issue.
Early 20th century (late 19th): The Academic Divide
Political Economy split into Politics and Economics (trying to make it more scientific). Nevertheless, some still remain the
footsteps of the classics.
If you ask how we can decrease poverty and increase wealth it is always about the choice of how to organize society.
Economists need to add a little history to their tool kit – Noah Smith, Bloomberg
“If those in the field spent more time studying the past there would be fewer surprises in the present.”
Economists learn a lot of mathematical models and empirical facts about the present, but not much history. But
there are several reasons why history is extremely useful for understanding not just economics, but society
itself:
o One reason is that economic history focuses economists on real events rather than allowing them to live
in theoretical fantasy worlds of their own creation.
o But economic history functions as more than just the history of the economy. Because it uses economic
theory to analyze past events, it can help generate plausible explanations for some of the biggest and
hardest questions:
, How poor countries develop into rich ones is, in general, a question that economic history is
uniquely suited to address. Because most Western countries industrialized before good data
was widely recorded, economic historians poring through old archives are often able to shed
light on the mystery. Studies like these bring economists a bit closer to solving the ultimate
mystery of how to eliminate global poverty once and for all.
o Economic history can also serve as a check on the more dramatic claims of mainstream historians.
o Economic history’s power is more than simply theoretical and explanatory, however -sometimes, it can
be used to predict the future.
o Finally, economic history can often help us understand broader social phenomena.
2. POLITICAL ECONOMY II: The political science of economic policy fields
Within the domain of Pol Science, you can focus exclusively on the economic areas, e.g. the regulation of banks, or
financial institutions and insurance companies. Here there is also a lot of private regulation. Also, for example, climate
change can be studied from a scientific, or economic perspective, but also from a political perspective. How less-
industrialized countries can now catch up, or pensions – there are political economic questions.
3. POLITICAL ECONOMY III: Political phenomena considered from an economics perspective
What is economics?
The world itself:
o Oikos = the family, the family’s property; a large estate or even a village
o Nomos = Greek term for law.
o The way we organize society to provide for our needs
What is economics? Several definitions:
1) “The branch of knowledge concerned with the production, consumption and transfer of wealth.”
(Google definition)
2) “A branch of the science of a statesman or legislator with the twofold objective of providing a plentiful
revenue or subsistence for the people.” (Adam Smith)
3) “Combining the assumptions of maximizing behavior, stable preferences, and market equilibrium, used
relentlessly and unflinchingly” (Gary Becker):
He makes it an approach, a particular way to study this branch of knowledge.
What is economics? Where this perspective differs most from the other perspective is through the fact that you study
the interactions between individuals.
1) A domain
2) A perspective and approach to study social interaction
demand/supply, competition; rational behaviour; homo economicus; individualism
4. POLITICAL ECONOMY IV: Markets and business considered from a political science perspective
Study of corporations, corporate power, think about the role of these in our societies by asking question about
the consequences of wealth development, inequality, and so on.
Includes studying lobbying
It is also about better understating how the economy works, economic development, the role of firms in our
society. It relates back to socio-economics in the works of Mills (The Power Elite).
All these regard question about equality and inequality, or how to regulate the market, the rise of new public
management, how to organize political institutions. It is also very much about negotiating strategies between
countries.
,Stilwell Introduction Article – What is PE:
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'. PE is the study of the economy from a social
science perspective.
Three ways of defining political economy:
a) In terms of the real-world problems on which it focuses (relevance to real economic problems):
Economic concerns beset us individually in our everyday lives-earning a living, managing our incomes,
and making decisions about spending and saving. They also beset us collectively, generating different
political choices.
How these issues have been addressed in economic analysis and policy has been strongly influenced by
one particular economic theory, neoclassical economics, which emerged in the late nineteenth century
and is still the dominant economic orthodoxy today.
o 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:
However, 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.
Modern political economy provides an alternative that seeks to deal directly with the current political
economic problems and policy issues:
o In addition to the lessons from the global financial crisis, there are many other contemporary
concerns: the challenge posed by the power of multinational corporations, the tension between
economic growth and ecological sustainability, the economic insecurity and inequality, etc.
The immediate appeal of the political economic approach is its direct engagement with these big issues.
Simultaneously, links are created with other areas of study, and this interdisciplinary character is one of
the main strengths of PE.
b) In terms of how these problems are analyzed (the political economic questions):
Major explorations require an orderly procedure. In the case of political economy, this means
interrogating each issue systematically by posing basic political economic questions such as:
o What is happening?
, o Why?
o Who gains and who loses?
o Does it matter?
o If so, what can be done and by whom?
c) In terms of the currents of economic thought from which it draws (contributory conceptual currents)
The contest of economic ideas then enters the story, when we recognize that for any economic issue
there are competing explanations. Among the different schools of economic thought that have
developed during the last two and a half centuries, the following have most obvious relevance in the
construction of modern political economy:
o Classical political economy:
Scholars such as Adam Smith and David Ricardo wrote about economic affairs when
capitalism was emerging from feudalism to become the dominant economic system in
Western Europe. -Smith's and Ricardo's insights into economic interests and political
processes are of enduring relevance
The notion of an economic system producing goods and services surplus to what is
required for social reproduction remains valuable. Understanding how that surplus may
be expanded-whether through trade and an increasingly complex division of labour, for
example-is central to the analysis of economic growth.
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.
o Marxist economics:
Its roots are in the tradition of classical political economy, but it provides a quite
different, more critical, interpretation of capitalism. It emphasizes the basis of the
capitalist economy, in particular property relations, class structures, and the relentless
drive for amassing wealth class identity:
Proletariat: don’t have the means for production
Bourgeoisie: have the means for production
Latifundia system
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.
o Institutional economics:
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.
The focus is on economic evolution. Distinctive themes are the growth of big business,
transnational corporations, the varied governmental economic activities that occur in
different nations, and the influence of trade unions
o Keynesian economics:
John Maynard Keynes was probably the most significant economist of the twentieth
century.
He 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 would
recur.
