STUDY GUIDE (thru Wks 4-5)

1. Principles of Political Economy

• Historicity

  • Definition: Historicity indicates that social classes and economic systems are products of historical paths and shape the needs of individuals within that system.

  • Characteristics:

    • Reflective process, defined by and defining the surrounding system.

    • Influences economic and political actions.

    • Notable Quote: Karl Marx: "[people] make their own history, but not under the circumstances of their own choosing.”

  • Importance:

    • Reveals that today's systems are products of historical evolution.

• Realism

  • Definition: Realism states that social analysis should incorporate both internal and external validity.

  • Characteristics:

    • Externally valid: Theories should align with historical trends; invalid theories should be discarded.

    • Internally valid: Elements of a theory should not contradict each other.

  • Importance:

    • Aims for straightforward, applicable explanations following the principle of parsimony (Ockham’s razor).

• Systemicity

  • Definition: Systemicity highlights the need to understand systems (like capitalism) based on their intrinsic structures and rules.

  • Characteristics:

    • Systems consist of various classes that interact under defined rules.

    • Example: In capitalism, capitalists provide capital while workers use it to produce goods for profit.

  • Importance:

    • Aids in discerning inherent aspects of a system from its exceptions.

• Emergence/Complexity

  • Definition: Emergence refers to outcomes produced by the interplay between system parts that cannot be understood by examining each part.

  • Characteristics:

    • Example from nature: Fish schools moving cohesively for safety; their grouping produces emergent behavior.

    • In social systems, class interactions produce emergent economic variables like employment rates.

  • Importance:

    • Highlights interdependencies in social behaviors and complex system dynamics.

2. Definitions

• Supply-Side

  • Definition: The supply-side encompasses markets and firms that produce consumable goods.

  • Characteristics:

    • Labor Market: Market for human labor as a commodity; prices are called wages.

    • Product Markets: Markets for non-labor commodities; prices are known as market prices.

• Demand-Side

  • Definition: The demand-side consists of overall consumption desires from workers and capitalists.

  • Interrelation: Production generates demand, e.g., producing coffee requires beans and labor.

• Aggregate Variables

  • Labor Force Participation Rate (LP):

    • Equation: LP = employed + unemployed persons working-age population.

  • Unemployment Rate (u):

    • Equation: u = unemployed persons/labor force.

  • Employment Rate (e):

    • Equation: e = employed persons/working age population.

  • Nominal Wage (W): Money earned for work performed.

  • Real Wage (w): Goods purchasable given W, defined as W/P (where P is the price level).

  • General Price Level (P): Average price index of consumer products in a year, derived from indexed pricing relative to a base year.

  • Total Output (Y): Total economic goods/services produced; e.g., number of coffee cups.

    • GDP: Dollar value of final goods/services produced excluding intermediate goods.

  • Total Employment (N): Total employed individuals in the economy during a period.

3. Wages and Employment Levels

• Why Low Wages at Low Employment?

  • Mainstream/Neoclassical Perspective:

    • Workers must be persuaded to work; wages (RW) must outweigh leisure benefits.

    • Reservation Wage (RW): Minimum acceptable wage for individuals to work.

    • No-Shirking Wage (NSW): Extra wage to motivate consistent effort.

    • In low employment situations, workers have less job market leverage, thus RW and NSW remain lower.

• Political Economy Perspective:

  • The labor market functions like any commodity market; when demand is high (low unemployment) wages tend to increase, and vice versa.

• Critique of Neoclassical Story:

  • Oversimplifies labor as a voluntary choice in necessity-driven environments, such as in underdeveloped regions.

  • Fails to meet external validity standards and violates parsimony.

4. Lorenz Curve and Gini Coefficient

• Lorenz Curve:

  • Illustrates income distribution; plots population percentage against income share.

  • Plotting points:

    • (0,0)

    • (20, 3)

    • (40, 6.9)

    • (60, 11.8)

    • (80, 58.7)

    • (100, 100)

  • Gini Coefficient:

    • Calculated as area A (above the curve) divided by the total area (A + B).

    • Closer to perfect equality (the 45-degree line) indicates a lower Gini coefficient (more equal income distribution).

  • Income Share Data for Brazil:

    • 20% population earns 3% of income

    • 40% population earns 6.9% of income

    • 60% population earns 11.8% of income

    • 80% population earns 58.7% of income

    • 100% population earns 100% of income.