Lecture 1: approaches to IPE

Economics

the study of the production, distribution and consumption of scarce resources

Political economy

the study of the role of the state and politics in the production, distribution and consumption of scarce resources

Comparative political economy

Focuses on differences in domestic economic policies:

• Industrial policies

• Different types of capitalist systems

  • Coordinated systems —> japan, Germany

  • Liberal systems —> US, UK

• Drivers of economic growth and development

• Variation in institutions —> variation in domestic economic policy

International Political economy

IPE studies the politics of the flows of production, distribution, and consumption across national borders.

• International Trade

• International Financial Flows (e.g.
  Currencies, Investments)

• Sovereign Debt

• Migration: movement of the labor force

• International Aid

What do we mean by the Politics of International Economic Flows?

How...

• Domestic institutions

• International institutions

• Domestic and foreign businesses

• Distributional interests of voters

• Ideas and norms

influence international economic policy. AND

• Trade rules, rules of exchange rates, etc

How international economic flows influence domestic politics.

• Trade shocks, financial crisis 2008

Why should we care about IPE

1. IPE is everywhere in your daily lives

2. IPE can help you understand the big news stories of today

3. Understanding IPE is helpful for a lot of careers

Old approaches

• Mercantilist school (mercantilism)

• Liberal school (liberalism)

• Marxist school (marxism)

Mercantilism

• Oldest school

• Similar to IR's Realism

  • Focuses on the state rather than subnational interests

  • Assumption: states use economic policy to increase power.

    • The bigger economy —>  the bigger military you can have —> production to produce what you need —> more national power

• National power comes from economic power

  • Exports bring money in and increase power, imports send money out and decrease power by strengthening other states

    • Was once partly true when the state was the economy.

    • Their view is not really the world we live in anymore

• Exports vary in their importance

  • Manufactured goods are superior

Mercantilism implication

the economy should be controlled to gain power  —> interventionist state

Liberalism

• Countries and individuals gain from trade by exploiting comparative advantage

  • Focuses mainly on individual welfare

• No harm in engaging in trade

  • "A rising tide lifts all boats"

  • All trade is good, not just a positive balance (i.e. exports>imports)

Liberalism implication

the role of the state should be limited

Marxism

• Not the policy prescriptions but the theory underlying them

• Two central factors (players)

  • Capital (means of production, owned by the bourgeoisie) and Wage Labor (the proletariat)

• Subsistence wages for laborers, capitalists keep the surplus

  • Subsistence wage: enough to keep the laborer alive

• Capital becomes more concentrated and less profitable over time

  • Less profitable over time: You keep everyone poor, who is going to buy your products?

• Increasing inequality and eventual workers' revolution that abolishes private property

• The state exists to protect capital (not labor)

• Internationally: Imperial exploitation of the South by the North

Marxism implication

Capitalism and governments that support it are bad for the distribution of wealth

Three approaches

• Each offers a way to view the politics and the world economy

  • The important actors

  • The relationship between them

  • And each proposes distinct economic policy recommendations

• Each is limited because of their rigid frameworks & dependence on questionable assumptions

• We will not debate whether any of the three old-school approaches are "correct" in this class, but...

• They still find their way into how some people understand the economy (e.g. Trump and mercantilism) - we will see some of this again when we look at the role of ideas in shaping policy

A modern approach

interests, ideas and institutions

• The interaction between societal interests, how people interpret them, and the political institutions that aggregate them into policy.

• We use assumptions about interests, ideas and institutions to build models that help us explain an outcome

What drives political behavior?

• Material (Societal Interests)

  • Qui bono: Whose welfare increases/decreases with different policy options?

• Ideational

  • How do people/decision makers interpret their material interests/the state of the economy?

• Political (Institutional)

  • What will keep leaders in political office, and what checks and balances are they subjected to?

Interests

• Do you win or lose from a certain policy or proposed policy?

• Material interests can be shaped by endowments:

  • Factor of production

    • Land, Labor (skilled & unskilled), Capital

  • Industry

    • What kind of industries employs you (Sector)

      • Ex. Import-competing, export-oriented, unemployed

• “Tell me where you work, and I’ll tell you your political preferences”

Interests: use

• The interests that matter differ depending on the question we are trying to answer

• Sometime interests are hard to identify..

  • We have to make assumptions and simplify (just like all theory)

• Economic policy interests of most university students:

  • Plentiful student aid

  • Lower interest rates if you took out loans (loose monetary policy)

  • Hopefully, you'll hold skilled-labor upon graduation and you'd like to sell that labor to the rest of the world (pro-free trade)

Ideas

• IPE scholars often start with the assumption of "objective" economic (and political) interests - often quite accurate/a useful simplification of messy reality

• But ideas and ideology can also matter

How ideas matter/make a difference

1. Interpreting the facts

2. Whose ‘interests’?

3. People act irrationally at times

How ideas matter/make a difference: interpreting the facts

• Even among macro-economists, there is no one agreed-upon economic theory

• What economic theory decision makers believe in informs policy choices

• Individuals often use simplified mental models to understand the economy (e.g. private vs. government household)

How ideas matter/make a difference: whose interests

• Do you care about:

  • Just yourself

  • Your family

  • Your village

  • Your region

  • Your country

  • Your ethnic group

  • …

• How long is your time horizon?

  • do you care about yourself now, 20 years, 40 years in the future

    • Wellbeing today vs tomorrow

    • Future generations?

How ideas matter/make a difference: irrational

Sometimes people simply act against their objective economic self-interest for ideological reasons

What is an institution?

• A set of rules that governs behavior

• Both enforced and unenforced

  • Driving on the right side of the road

  • QWERTY Keyboard

  • Dutch Constitution

Political institutions

• Domestic:

  • Democracy, Dictatorship, In between

    • kind of country you live in

  • Presidential, Parliamentary

    • Electoral systems

  • # of Parties, Electoral Rules

• International:

  • World Trade Organization

  • United Nations

  • IMF and World Bank

  • EU

interests, ideas and institutions

• Societal = voters, individuals

• Elite = companies, rich

• Societies interest sometimes directly affect international institution

  • Ex. EU

• This image shows how our class will work and try to connect things

Approaches: most important actor

Mercantilism: state

Liberalism: individuals

Marxism: capitalist class

III: winners and losers

Approaches: role of the state

mercantilism: intervene to allocate resources

Liberalism: property rights

Marxism: protect/sustain the capitalist system

III: survive in office (politicians)

Approaches: image of the IPE

Mercantilism: conflict - between states over trade

Liberalism: harmony

Marxism: Exploitation of labor

III: mix of conflict and cooperation

Approaches: proper objective (what economic policy should do)

Mercantilism: enhance national power

Liberalism: enhance aggregate social welfare

Marxism: promote equal income distribution

III: politically constrained efficiency: Make more people better off within the confines of what we can do politically