1/3 Political Economy

Friedrich List (German) View of economics

• free trade will bring development where countries are successful in what they make NOT what they buy

• State must be concerned with the process and where money is spent (people are not best)

• concerned with welfare. policies are good or bad by what they do for the nation’s economic interests

• trade is negative sum where nations must be strategic

• all about strong or weak (no morality)

Anglo-American view of economics

• trade is unpredictable

• trade is based on how the game is played (not who wins or loses)

• if you take care of the individual, the economy and nation will take care of themselves

• positive sum

• in true American fashion, if a country does not follow/believe in these rules they are cheaters. (Japan’s protectionist policies made them cheaters to US)

vent for surplus

•  International trade overcomes the narrowness of home markets and provides an outlet for surplus

• underdeveloped countries often have a surplus of labor or natural resources that can be exported with trade

productivity theory and specialization

• specialization makes an economy more productive over time

• the value or income of production factors (labor/capital) is determined by the extra output they generate

• trade is a dynamic process that increases productivity and promotes long-term growth through specialization (skill development and tech innovations)

comparative costs view of specialization

Only reallocates resources or labor already had by a country. Increased exports can only happen when you decrease imports

mercantilism

government controls the economy through the establishment of government corporations. it is a tool of the state

christian corporate ethics

it is unseemly to make profit (too much) because greed is a sin

individualism

each individualism contributes to society as they’re able to

hedonism

burning through money for fun. just spending it on whatever

value of use

ability to satisfy human needs or wants (medicine is high because it heals you)

value of exchange

ratio in which one commodity can be traded for another. Money only has this use

comparative advantage

you sell more than other countries by your quality or because your cost is better than other countries (have lower opportunity cost than others) compared to another country you have an advantage

absolute advantage

using the same resources and being able to create more than another country. impossible for all countries to become rich under mercantilism

invisible hand

a force that drives the prices of goods towards the most efficient price, while individuals practice their own selfish interests

general plenty

division of labor creates more goods

universal opulence

widespread prosperity. even the poorest members of society enjoy abundant goods and comforts due to increased productivity

economic liberalism

interested in personal freedom and social order. free markets, no monopolies, competition, and government’s role is to protect end enforce

protectionism

Protecting domestic industries from foreign ones with taxes/tariffs

colonial trade

trade between underdeveloped and developed nations

periodization

splitting the history of framework of something into phases or distinct sections

petty bourgeoisie

intermediate class between capitalist and proletarian class (small business owners)

proletarian

working/industrial class. no ownership, the best thing they can sell is their labor

popular classes

lower, working class. heavily supervised. often heavily labor focused

Overaccumulation

capital grows faster than profitable opportunities

alienation

Separation of workers from the products or their labor

labor theory of value

The value of a thing produced in capitalist society is worth the labor needed to produce it

Mode of production

technical and social processes by which goods and services are made

historical materialism

emphasizes the role of class struggle in driving historical change

four main Keynesian insights

account for persistence, fluctuations, savings and investments must be distinguished, and disturbances in demand (not supply) underlie the economy

four main of the New Keynesian

Efficiency wage theories, capital market imperfections, credit rationing, and role of monetary policy

shortcomings in Keynes theory

equities and bonds, supply and demand, investment, the monetary mechanism

say’s law

supply creates its own demand

laffer curve

illustrates that there is an optimal tax rate that maximizes government revenue, suggesting that extremely high tax rates actually reduce revenue by disincentivizing work

main ideas of supply side economics

• Increased tax rates deter economic activity, drive it underground, or cause it to switch into legal but untaxable outlets

• Tax incentives reduce productive output and manifest themselves in a number of ways

key premises of Keynesian economics

Unemployment is key (underutilization of resources)

increased cost to government (leads to budget deficits and higher crime and higher health care costs)

circular flow of income

build up production capacity is key to increasing national income

leakages

diverging money from the economy

-households choosing to save

-household purchases foreign products

-households pay taxes

ways to compensate for leakages

• Firms may invest

• Firms export goods

• Government makes purchases

stagflation

rampant inflation and high unemployment

Shirking Model

– Workers exert less effort unless incentivized.

Fiscal Conservatism

– Emphasis on low deficits and limited government.

what do tax incentives do from a supply side perspective

Tax incentives reduce productive output and manifest themselves in a number of ways

• Tax rates increase

• These increased tax rates cause people to reduce the amount of productive market exchanges

• An individual may be induced to substitute tax deductibles for preferred non-deductible goods

populism (mostly french slide ideas)

• Defined as an ideology that divides society into two antagonistic camps: virtuous people versus corrupt elites and establishments or virtuous people versus threatening outsiders

• Populists reject restraint on the conduct of economic policy

• Often lead by charismatic or dominant person who champions themselves as “the voice of the people”

• Mostly used by the media for any movement that seeks to challenge the current power structure of a government

• have to have a villain to rally against

• Considered a thin ideology

  • Pick someone to be pissed off and get everyone else mad at them

  • Won’t provide societal change

• Attaches itself to a thick ideology by populist politicians

• Requires binary view of the world

  • Us v them

  • Foes are fundamentally evil

Causes for increase in populism

Great Recession of 2008 and 2014 Immigration Crisis

populism aligns with left and/or right wing why

economic insecurity (left wing) and cultural anxiety (right wing)

political populism

Populism that undercuts liberal or democratic norms

three ways to mobilize populism

leaders, political parties, social movements

two most recent examples of populism in U.S.

• Left-wing Occupy Wall Street Movement

• Right-wing Tea Party

key tenets of monetarism

• Long run monetary neutrality

• Short-run monetary nonneutrality

• Constant money growth rule

• Interest rate flexibility

monetarism

• The money supply is the chief determinant of current dollar GDP in the short run and the price level over longer periods

• Objectives of monetary policy are best met by targeting the growth rate of the money supply

• Argued that markets naturally move toward a stable center, an incorrectly set money supply caused markets to behave erratically

• Focuses on Fed’s role in controlling the money supply and using it to control and stabilize the economy

• What went wrong - only fixes inflation and VELOCITY is NOT STABLE

Quantity theory of money

• Accounting identity - must be true

• the money supply multiplied by velocity (the rate at which money changes hands) equals nominal expenditures in the economy (the number of goods and services sold multiplied by the average price paid for them)

• View velocity as generally stable

Old Chicago monetarism

Classic monetarism

Political monetarism

1. - stressed the variability of velocity

2. - the program for monetary stability

3. - argued not that velocity could be made stable if monetary shocks were avoided, but that velocity was stable

two hypotheses of monetarism

• Price level is a monetary phenomenon (its behavior depends upon the institution for controlling money creation)

• the market price system efficiently allocates resources and stabilizes the economy against cycles

Salaries are sticky (viewpoint in monetarism)

• there is a delay effect, they do not instantly take effect and are delayed (stimulants for example)

creative destruction

innovation replaces old industries

three principles of a socialist challenge to capitalism

• Strengthening the power of labor relative to capital

• Decommodifying labor power

• Strengthening the power of civil society over economic

democratic socialism

• Want to end capitalism by pursuing a reform agenda in an effort to revive a politics focused on class hierarchy and inequality

• Pooling society’s resources to meet basic needs

• Socializing that industry could lead to others

democratic socialism french

The economy is socialist while the government is democratic

Requires active participation of citizens, in particular working classes, to maintain economic system through democratic governance

The entire population controlling the economy through some type of democratic system

• The idea that the means of production are owned and managed by the working class as a whole

concerned for community and solidarity over individualism

democratic planning

a system where the significant economic and societal decisions are made by the people it effects (usually the working class)

calculation in kind

based only on value of use (capitalism=value of exchange)

attempts to get rid of money

market socialism

supports liberal ideas of self ownership and free markets and aims to eliminate capitalist inequalities

how democratic socialism works

property held by public (limited to productive property) not personal homes or small businesses

Keynesian economics on steroids

limit on accumulation of private property

government regulation of the economy

public welfare programs are extensive (free, universal healthcare, free education, Social Security, etc.)

the swedish model

balances capitalism and a generous welfare state (high taxes, strong labor unions, aimed to create a “people’s home”) based off of Sweden