Transcript Political economy

POLITICAL ECONOMY
Measurement
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Gross national income
Purchasing power parity
Human development index
Political economy
Political system: freedom
Economic system: market
Legal system: property rights
Steps in economic transformation
Deregulation
Privatization
Improve legal system
Geography and education
Coastal vs. landlocked
Temperate vs. tropical
Local physical geography
Education & productivity
“Z-variables”:
geography, culture,
etc.
Political institutions
& processes
Economic structures
& processes
The Cycle of Political Economy
(A). Interest:
Sectoral Structure of Economy
Income Distribution
Age Distribution
Trade Openness
Elections:
Electoral Law
Voter Participation
Government Formation:
Factionalization
Polarization
(B). Representation
Partisanship
Policy
Fiscal Policy
Monetary Policy
Institutional Adjustment
Government Termination
Replacement Risk
(C). Outcomes:
Unemployment
Inflation
Growth
Sectoral Shift
Debt
Institutional Change
Guaranteeing
individual freedom &
self-expression
INDIVIDUALISM
COLLECTIVISM
“Good of society” &
“common good”
Government by the people exercised
directly or through elected
representatives
DEMOCRACY
TOTALITARIANISM
One person or political party exercises
absolute control over all spheres;
opposing parties prohibited
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Protestant Christianity: Work ethic, wealth creation,
individual freedom
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Islamic fundamentalism: Pro free enterprise, right to private
property, keep contractual obligations, avoid deception, sin
to collect interest
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Hinduism: Spiritual progression (reincarnation), aesthetic
(non-material) lifestyle, self-reliance, caste system
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Buddhism: Spiritual achievement but lack of support for
extreme aesthetic behavior or caste system
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Confucianism: High moral/ethical conduct, loyalty,
reciprocal obligations, honesty
Highly Mixed
State-owned health-care, electrical, liquor
Pure Market
not planned by
anyone, no
restrictions
Pure Command
Market
Mixed
Command
products, quantities,
price are planned, most
business state-owned
State-Directed
Government plays significant role in directing
investment via “industrial policy”
State-Directed
Trend from totalitarian, command toward
democratic, free-market systems
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Innovation is engine of growth for products,
processes, strategies, organizations, management
practices, countries
Innovation needs:
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creativity
market economy
strong property rights
the “right” political system
Economic progress is related to democracy
It limits government’s ability to control citizen
access
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Focus on managing short-run fluctuations
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Focus on “demand side” by manipulating
independent variables such as government
spending & taxes
If people demand a product, producers will supply
it, hence getting money into people’s hands will
rise production
Spending increases more effective than tax cuts: All
of spending is consumption but some of tax cuts
will be saved by taxpayers instead of being used for
consumption
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Interest rates and money supply affect people’s
willingness to buy at a given price
Shift demand curve by manipulating interest rates
or money supply (Interest rates actually easier to
manipulate! “We don’t know what money is
anymore.”)
Increase interest rates (reduce money supply) to cut
inflation at expense of increasing unemployment
(induce a recession to prevent stagflation). Key is
to alter expectations of future inflation.
Cut interest rates to lower unemployment at
expense of increasing inflation (economic stimulus)
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Adverse shift in supply curve means BOTH higher
prices (inflation) AND lower output (recession and
unemployment)
Demand-side shifts cannot simultaneously boost
production and lower inflation
Solution: shift supply curve by altering ability and
willingness of firms to produce at a given price
point
Policy levers: corporate tax cuts, deregulation,
increased labor supply (immigration), lower tariffs
on raw materials, education and training (increases
in per-worker productivity) etc.
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Responding to recession
Theory
Recommendations
Keynesian
Increase spending & cut taxes to stimulate demand
Monetarism
Wait it out, since stimulus would increase inflation
Supply-Side
De-regulate, cut taxes on business, increase
incentives to produce
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Responding to inflation
Theory
Recommendations
Keynesian
Cut spending & increase to reduce demand
Monetarism
Tighten money supply & convince public it will remain
tight
Supply-Side
De-regulate, cut taxes on business, increase
incentives to produce and save (Inflation = too much
money, not enough goods)
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Economics has become political: Few classical
economists around anymore, and they don’t get
to stay in office!
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Political choices (fiscal policy, monetary policy,
trade policy, immigration policy, etc) affect
economic outcomes
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Political Business Cycle: Tendency to stimulate
economy before election at expense of
slowdown/recession after election
The Macro Political Economy
OUTCOMES
DETERMINANTS
Jobs
Internal market
forces
External shocks
Prices
MACRO
ECONOMY
Growth
Output
Policy levers
International
balances
Almond, 1991
Almond presents four controversial viewpoints on the
relationship between capitalism and democracy and concludes
that democracy and capitalism both support and subvert each
other through their very nature. Democratic capitalism through
the welfare state seems to encourage its survival and often even
enhancement through these institutions.
1. Capitalism supports democracy
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Modern democracy exists primarily in economically privately
owned institutions
2. Capitalism subverts democracy
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Too much ownership is placed in a select few, and
democracies will no longer function as it was intended.
Marxism argues that capitalism in its very nature subverted
democracy by creating a somewhat bourgeois democracy
rather than a system of equality.
Almond, 1991
3. Democracy subverts capitalism
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A democracy that accepts the welfare state will be the
real threat to the relationship between democracy and
capitalism.
The encroachment on the private sector has been slowly
changing our free democracy into a completely chaotic
mess.
The formation of dense networks which comes about
through capitalism seems to subvert the very idea of
democracy.
4. Democracy fosters capitalism
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Capitalism could hardly survive without any sort of
welfare state.