1. Political economy Lecture 1 An introduction Jan Fałkowski Faculty of Economic Sciences, University of Warsaw February-June 2010

2. 2 Outline Basic information about the course General overview – Salient questions – Some historical background – Political economy nowadays

3. Basic information about the course Jan Fałkowski jfalkowski@wne.uw.edu.pl Office hours: fridays 13:30-14:30, room 401 Written examination You have to recieve positive mark for tutorials – Dr Katarzyna Metelska-Szaniawska, kmetelska@wne.uw.edu.pl kmetelska@wne.uw.edu.pl – Fridays, 11:30-13:05, room 104

4. General overview – aims of the course In general: Provide a broad introduction to current research in political economy More specifically: Try to highlight – the impact of politics on economic processes and outcomes, – and the reciprocal influence of economic conditions on political life Overview of the syllabus

5. General overview – salient questions Why do we observe such a variation in economic policies around the world/over time? Why and how institutional reform can be undertaken? What if we adopt the view that state has its own objective function/represent the interests of some groups in the society (landlords, workers, etc.)? What if we accept the notion that constitutions & democratic rules are themselves equilibrium outcomes?

6. General overview – historical background Precursor: Antoine de Montchretien 1615, Traite de l’economie politique Starting from late XVII th century (Adam Smith, David Ricardo) political economy synonymous with economics Closely related to philosophy Still influential in the beginning of XX th century – Fathers of neoclassical economics still writing books with ‘political economy’ in the title and teaching political economy (Menger, Marschall, Jevons, Pareto)

7. General overview – historical background Economics organising itself into fields in early XX th century – Political economy defined a separate field in 1950s – Anthony Downs (1957) „An Economic Theory of Democracy” – Kenneth Arrow (1951) „Social Choice and Individual Values” – Discussion of comparative economic systems (1930s and 1940s) O. Lange, F. A. von Hayek, J. Schumpeter – The Marxist project of social analysis ask your parents to name the most difficult/boring subject during their studies…

8. General overview – political economy nowadays What is political economy now? – Interesting mixture things that have too much politics to be economics, too much history to be politics, too much sociology to be history, and too much economics to be sociology – One of the most exciting and most lively field in economics (observe the future nobel prize winners in economics)

9. General overview – political economy nowadays In general: – Complementing the focus of welfare economics (optimal policies) with institution design and policy implementation – Strong microfoundations – Interdisciplinary approach – Number of assumptions from neoclassical economics rejected (fully rational agent, perfect information, etc.) – Importantly drawing from „insitutional approach”

10. General overview – political economy nowadays, theory Three separate pillars (Persson & Tabellini) – theory of macroeconomic policy rationality, micro-foundations, but naive politics – public choice agency, constitutions, interest groups, but naive methods – rational choice (political science) collective choice procedures, but naive approach to policy Gradual improvements on theoretical front: combining best of three approaches

11. General overview – political economy nowadays, empirics Early work suffered from two problems (P&T) – tests of theory not very precise – lack of institutional detail Gradual improvements on empirical front – more solid theoretical foundations – better data – concern with identifying causal effects: micro- econometrics – appreciation of findings in empirical political science

12. General overview – main actors Voters – Why do they vote/abstain? How do they vote? Politicians – Who chooses to become politicians? What motivation do they have to run for office? Parties – What is political market structure? What policy platforms do they offer? Who do they appeal to? Governments – How is it formed? What actions it undertakes?

13. General overview – main research fields Actions of governments as consequences of political forces enabling acquiring and maintaining power General equilibrium theory of political economy – All political variables endogenous, being outcomes of decisions of individuals political vars. – legislature, politicians (candidates), interest groups, governments, policies, constitutions

14. General overview – tutorials Broad overview of the political economy literature Discussing number of issues related to development economics, macroeconomics, welfare economics, public economics, international economics

15. Thank you for your attention & see you next week