political economy political economy = balance between political and market forces what balance...
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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)
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
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
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
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
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
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)
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)
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
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