Political Economy

What is Political Economy Economy is one arena where the struggle for freedom and equality is a reality Interactions between political and economic institutions in any country has an impact on the prosperity of citizens. The study of how politics and economcs are related and how their relationship shapes the balance between freedom and equality is known as political economy.

Components of Political Economy Markets and Property Public Goods Social Expenditures Taxation Money, Inflation, and Economic Growth Regulation Trade

Markets Markets - interactions between the forces of supply and demand. Resources are allocated through the process This interaction enables values placed on goods and services. Millions of individuals making decisions about what they buy and sell dictate value Markets are communities of buyers and sellers interacting through the economic choices the make.

Property Generally refers to the ownership of the goods and services exchanged through markets. In terms of physical property, the state has the task of regulation. State regulations may vary depending upon the role they play in constructing and enforcing property rights.

Public Goods Defined as those goods, provided or secured by the state, that are available for society and indivisible. For example - roads, defense, education and health care.

Social Expenditures Social expenditures - public benefits such as education, health care, transportation. Also known as welfare of the welfare state. Set up for those who require greater care - elderly, poor, and the disabled.

Taxation Is used to pay for social expenditures Taxes can consume a high percentage of a country's GDP (gross domestic product). GDP represents total market value of goods and services produced in one year.

Money, Inflation, and Economic Growth States manage money via a central bank Can set national interest rates Lower rates - stimulate borrowing and spending Higher rates - foster saving and allow people to take advantage of earning off of their saved income. Inflation - an overal increase in prices Hyperinflation - inflation which is 50% higher for more than two months in a row. Deflation - reduction of the general level of prices in an economy.

Regulation Regulations - rules or orders that set boundaries of a given procedure. Can be economic - for example Solar industry Can be social - licensing occupational and professional certification.

Trade Tariffs - taxes on imported goods Quotas - limit the quantity of goods coming into a country Nontariff regulatory barriers - rules enacted to protect citizens and make it difficult for foreign goods to be sold within the state. Regulate - Generate state revenue - Foster local industry - Protect local jobs - Keep wealth in the country Deregulate - Promotes competition - Keep costs of goods low - Stimulate domestic innovation in areas of comparative advantage

Political-Economic Systems Is used to describe the relationship between political and economic institutions in a particular country as well as its policies and outcomes. Liberalism Social Democracy Communism Mercantilism

Liberalism Seeks to limit state power with an emphasis on individual politics and economic freedom The best state is a weak one Focus is on the public good of defense and education Enjoys minimal taxation Promotes light economic regulation Favors trade stimulus to encourage competition and innovation Believes in "laissez-faire" capitalism The power of market trumps that of the state

Social Democracy Capitalism is a "runaway" train and if left unchecked will foster income inequality. State must be involved with the market and economy State must regulate trade Public goods should include healthcare, pensions and higher education Believes in higher taxes to allow for equality. Neocorporatism - guilds or associations work with the state to insure equity. State can own firms within the economy Common in Europe

Communism Eliminate individual freedom to reach equality Economic competition creates exploitation and the development of social classes in which a small group of the wealthy dominate and benefit from the labor of the poor majority. Private property is nationalized Economic decisions are made by the state for the public good. They have fixed prices and wages All profits go to the state Labor is allocated by the state Have extensive social expenditures - all basic services are state run. Trade is highly restricted State controls the people's fate

Mercantilism Closely resembles the British colonial system. Colonies would supply the mother country with imports and thus exclusively consume exports from the home country. Active industrial policy via the state State directs economy to take advantage of certain segments State trade regulations in the form of tariffs are used to shield domestic industries. Less emphasis on social expenditures Pros: Ability to direct an economy to areas of industrial development Good for developing countries Countries such as Japan, S. Korea and Brazil have this type of economy.

Comparing Outcomes of Political-Economic Systems GDP - average per capita income of one year PPP - Purchasing-power parity: estimated buying power of income Gini Index: 0=equality, 100=inequality (see table 4.1) HDI - Human Development Index: Assess health, education and wealth of the population. (High income = high education = high life expectancy)