Chapter 4: Political Economy

ECONOMIC VALUES

• Economic freedom refers to the degree to which individuals and private firms are free to own property and make decisions about how to use, consume, or invest it without interference from the state.
  • The state still plays a role in economic activity, but the role it plays is primarily in defining and protecting property rights through providing a legal system and law enforcement, and not in determining how resources will be distributed or used.
• Political-economic debates are usually divided between the “right,” who prioritize economic freedom, and the “left,” who prioritize economic equality.
• Those who value economic equality prefer to move more toward a society in which neither poverty nor extreme wealth exists, but rather the resources of the society are collectively used to eliminate the struggles of poverty through redistributive state actions.
• The conflict between these two values often defines the political climate in a state, and from this conflict has emerged a common terminology: right and left.
  • Those who are “on the right,” so to speak, are those who prefer to move the current policy climate more toward economic freedom.
  • Those who are “on the left” want policies that will reduce economic inequality.
  • There are a number of grounds on which the battle between these two sides is fought.

COMPONENTS OF THE POLITICAL ECONOMY

The Market

• A market is the common term used to describe any setting in which supply and demand (sellers and buyers, workers and firms, etc.) interact with one another.
• Markets function to determine the price that must be paid for a good or service, and thus also play a role in the distribution of resources.
• Prices rise or fall based on current supply and demand in the market.
• subsidy, a payment from the state to assist consumers in purchasing the product or a payment directly to the producer to help them keep prices lower.
• black market continues to operate illegally despite the laws of the state.

Property

• Property is, quite simply, ownership of goods and services.
• The state may choose to limit its role to the protection of private property rights, take the full ownership of all property, or much more likely, some balance of options in between, provided that they can maintain the legitimacy of rule while they are doing so.

Public Goods

• Public goods are those goods and services that are provided to citizens, either free of charge or at heavily subsidized rates, by the state.
• Which goods should be provided in this manner, rather than by the market, is a major focus of argument between the left and right sides of the political spectrum.
• At a minimum, states are likely to provide goods for which there is no market profit motive, such as a military for national defense, road systems, and law enforcement, provided that the state has the resources to do so.

Social Expenditures

• Social expenditures are similar to public goods, in that both involve the state providing some kind of economic good or service to their people, but public goods are provided to all people regardless of their status.
• Social expenditures, by contrast, are given to some members of society, but not others, in the name of helping achieve more economic equality.
• Social expenditure programs are commonly referred to as the welfare state, implying that the state is taking the welfare of its poor and most vulnerable people on as a responsibility to correct, or in other cases, the state is providing a universal benefit as a guaranteed right to all of its people.

Taxation

• Taxation is the process of collecting money from individuals, businesses and other entities to fund public services like schools, roads, infrastructure and more.
• Tax is typically collected in the form of income tax (on wages), property taxes (on real estate) or sales tax (applied to purchases).

Money, Inflation, and Unemployment

• Money is an extraordinarily complicated topic that will not be covered in full detail in this course, but for a brief explanation, it is essentially some item that a society has generally agreed upon to be universally accepted as payment for all other goods and services.
• More than likely, prices would rise dramatically to the point that the silver would become essentially worthless.
  • This is how inflation occurs.
• These days, money is usually not a commodity, but rather a currency or legal tender issued by a central bank that manages the money supply, backed by a guarantee from the state that the currency must be accepted as payment by all people within the country.
• Central banks have a core responsibility to ensure that the money supply is growing just fast enough to accommodate an expanding economy and growing population without growing the money supply so much that inflation occurs.
  • However, during times of recession when the economy is declining and less is being produced, there is a great deal of political pressure on the bank to use its powers to help spur a recovery.

Regulation

• Regulations are directives from the government that control the activities of people and firms in the market.
• Regulations can be justified as measures to improve the safety of employees on a job site, protecting consumers from harmful products, protecting the cleanliness of the environment, or preventing fraud and abuse by company insiders, among many other reasons.

Trade

• The final component involves the degree to which trade will be allowed under certain geographic constraints, especially regarding the importation and exportation of goods to and from foreign states.
• Those on the right tend to prefer a free-trade agenda, believing that allowing people the freedom to buy and sell whatever they please without restriction will result in the highest net economic growth, as individuals are better suited to decide what they want, or where they can sell at a high profit on their own, without constraints from the government.
• Those on the left are more likely to support protectionist policies by the state, meaning actions to shield domestic industries and workers from foreign competition, because they fear free trade will result in losing jobs to cheaper labor abroad.

POLITICAL-ECONOMIC SYSTEMS

• Every society must establish the rules under which the political system regulates and interacts with economic forces, and no two states answer the questions that emerge the same way.
• Who and how much the state will tax, whether the state will own or even regulate firms providing goods and services, and the regulation of the money supply are just a few of the decisions that must be made, necessarily picking some to “win” and some to “lose” economically as a direct result of each policy change.

Liberalism

• Liberal systems are liberalized, essentially meaning “freed,” in the degree to which the state might otherwise attempt to regulate the behavior of economic actors.
• The state takes a minimal role in economic regulation, preferring to let markets determine what will be produced, who will produce it, and who may consume it.
• The state defines and protects private property rights and allows for a wide degree of free exchange.

Social Democracy

• Social democratic systems similarly value the benefits that come from private property ownership and using markets as the mechanism for resource allocation, but they also attempt to correct for the economic inequality, which by necessity accompanies a liberal capitalist system.
• They are often referred to colloquially as socialist systems, but the term social democracy should be distinguished from authoritarian socialism, in which the state uses political force and coercion in order to achieve more economic equality.

Communism

• Communism is rooted in the ideology of Karl Marx, the author of the Communist Manifesto, who decried what he saw as the oppression of the working-class laborer by the industrial capitalist during the Industrial Revolution in the nineteenth century.
• Marx called for a system in which all property would be collectively owned by the workers, since it was the workers (called the proletariat by Marx) whose labor created surplus value when they worked to create a finished manufactured product from a set of raw materials.
• Marx’s opposition to liberal capitalism was that the profits created by the workers, in his view, was being unjustly accrued by the business owners (called the bourgeoisie by Marx), who were not responsible for the actual labor.
• Vladimir Lenin developed a Marxist–Leninist ideology of democratic centralism, which would centralize political decision making into a small revolutionary elite who would make all decisions on the basis of benefiting the common man as much as possible (thus making it theoretically “democratic,” in his view).

Mercantilism

• Mercantilism emerged in the seventeenth century in association with the rise of absolute monarchies in Europe, establishing state-owned manufacturing and trading companies with the aim of bringing gold, prestige, and power to the kingdom.
• While most of the assumptions underlying mercantilism are absent from modern world economic systems, there are still key elements visible in some.
• Mexico developed massive industrial parastatal companies in the era of PRI dominance (1911 to the 1980s), some of which are still state-owned today.

Gross Domestic Product (GDP)

• The gross domestic product (or GDP) is the total value of all goods and services produced within a country for a given period of time (usually measured per year).
• It can be calculated either by adding together the value of all final prices paid by consumers for goods and services (without including the price of intermediate goods, such as raw materials), or by adding together the annual incomes of all people in the country (since people are theoretically paid for the productive work they do).

GDP per Capita

• Dividing the GDP total by the population of the country can show the average income and standard of living for the average person.
• Whereas GDP shows the production of the aggregate economy, GDP per capita is a measure of the standard of living of the average person in the economy.

The Gini Index (Gini Coefficient)

• The Gini index is a coefficient that attempts to measure the degree to which income is distributed from the top to bottom of a society.

Extreme Poverty Rate

• “Extreme poverty” may seem like a subjective term, but it is often defined as living below the equivalent of two dollars per day, which can be a good indicator of the degree to which daily survival is difficult for a number of people in a country.
• Conquering extreme poverty is often a top policy consideration for developing countries.

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