1. Political Economy Political Economy = balance between political and market forces What balance between states and markets most enhances capabilities? Balance that promotes best qualities of markets (innovation and productivity) and avoids worst effects (instability and inequality)

2. Political Economy States determine how extensive markets are Taxes on imports Border control on currency Treaties and/or international organizations Foreign investment States determine how intensive markets are Restrict what can be sold

3. States & Markets Market systems = private ownership over the means of production; production coordinated through interactions of buyers and sellers Markets require states to function; CANNOT exist without them States create common currency to facilitate trade and exchange; enforce contracts; supply public goods (transportation networks, police protection) markets cannot provide State “intervention” = fiscal, monetary, regulatory, and nationalization policy

4. Market Systems Advantages Extraordinarily dynamic, promoting development of new products and more efficient methods of production and technology Enormously productive Enhances the prospects of democracy and political rights Extraordinarily dynamic, promoting development of new products and more efficient methods of production and technology Enormously productive Enhances the prospects of democracy and political rights Disadvantages Highly volatile (boom and bust) Tend to generate extraordinary inequality Create harmful spillover effects (externalities) Global warming Pollution Highly volatile (boom and bust) Tend to generate extraordinary inequality Create harmful spillover effects (externalities) Global warming Pollution

5. Shifting Balance of Power States steer economies to counteract disadvantages of market systems Welfare systems to counteract inequality; regulations to minimize harmful spillover effects; budgets and money supply steady swings in business cycle Rise of market fundamentalism/neoliberalism (1970s-present; Washington Consensus) Welfare state undermined work ethic; regulations constrain entrepreneurialism; taxes divert too much income; public enterprises inefficient

6. Fiscal Policy Revenues and expenditures Budget deficits: put money into circulation, increase demand for goods, encourage businesses to invest, put people to work Budget surpluses: withdraw money from circulation, depress spending and discourage investment, reduce inflationary pressures States differ greatly in size of state sector (proportion of economy devoted to taxes and state expenditures) U.S. = lighter tax burden than other rich democracies; smaller public sector Sweden = state revenues and spending amount to more than half of GDP

7. Monetary Policy Manipulation of interest rates; how much it costs to borrow money High interest rates discourage borrowing and spending; counteract tendencies toward inflation Low interest rates encourage borrowing and spending Interest rates largely determined by Central Banks who issue currency and manage its value in foreign exchange States have little control over them (Federal Reserve in U.S.; European Central Bank) Controlled by the state (China’s People’s Bank)

8. Regulatory Policy States set rules of behavior firms must follow States vary in terms of degree/amount of regulations Number of procedures and days it takes to start a new business is standard measure used to compare thickness of regulatory environment Germany: 45 days, 9 separate interactions to obtain licenses and permits to start a business Brazil: 152 days, 17 steps U.S.: 5 days, 5 steps (U.S. economy one of the least regulated in the world)

9. Nationalization States own and control public enterprises Permits state to control strategic assets and influence economy (e.g., oil industries in Mexico, Venezuela, and Saudi Arabia) Help inject social criteria into economy China: subsidize inefficient industries because they provide jobs and services to millions who would be poor and jobless without them States differ in degree of nationalization State Socialist countries (Cuba, North Korea) own and control all means of production Extreme market systems have little to no state-owned enterprises

10. Good Society Do market-based systems do a better job enhancing people’s capability than countries with state-based political economies? Safety: lower homicide rates (but significant variation); political economy not strongly related to risk of war Physical well-being: lower infant mortality rates; other physical needs Informed Decision-making: higher literacy rates Rights/Democracy: do not guarantee democracy, but no democracies without market-based political economies