The International Political System

Political Systems

Lecture Outline

The lecture covers the following topics:

• Political Systems

• Role of the State

• Keynesian Welfare State

• Neoliberalism and Washington Consensus

Political Systems

• Democracy: A system where all citizens have an equal chance of expressing their opinion on policy, the laws, and the actions of their state.

• Anarchy: A system based on a set of informal rules.

• Dictatorship: Absolute rule by a small group of people with varying degrees of restriction by legal, social, or political factors.

• Theocracy: A system of power that derives from immediate divine rule.

• Plutocracy: A system where power is held by a small minority of society’s wealthiest citizens.

Role of the State

• Pervasive role of the state.

• The state as a dynamic process rather than as an object (intervention rather than size).

• Distinction between state and nation: legal authority/identification.

The State and the Economy

The state plays different roles in the economy:

• Accumulation function

• Legitimation function

• Regulatory activities

Economic Role of the State

• Maintenance of property rights.

• Management of territorial boundaries.

• Control of macroeconomic trends.

• Governance of product markets.

• Governance of financial markets.

• Provision of basic infrastructure.

• Selection and development of economic growth strategy.

• Production and reproduction of labor.

• Other legitimation activities.

Government Expenditure

Central government expenditure as a share of GDP (2023) is presented, showing total central government expenditures as payments for operating activities of the government in providing goods and services.

Military Spending

Military spending (2023) includes military and civil personnel, operation and maintenance, procurement, military research and development, infrastructure, and aid. The data is expressed in constant 2022 US dollars and adjusted for inflation.

Education Spending

Education spending as a share of total government expenditure (2023) is shown as the total general government expenditure on education as a percentage of total government expenditure on all sectors.

Healthcare Expenditure

Total healthcare expenditure as a share of GDP (2021) is presented as the share of national gross domestic product (GDP).

Keynesian Welfare State

• Keynesian policies and the welfare state are distinct.

• Keynesian policies support full employment and mass consumption.

• Mass consumption supports mass production.

• Mass production supports tax revenues.

• Tax revenues fund welfare payments.

• Social spending funds labor reproduction (Health, Education, Housing).

• Keynesian multiplier.

Aggregate Domestic Demand

$Y_d = C + I + G + X – M$

Where:

• $Y_d$ = aggregate demand

• $C$ = private consumption spending

• $I$ = private investment spending

• $G$ = government spending

• $X$ = Exports

• $M$ = Imports

• $X – M$ = Net exports

• C accounts for nearly 2/3rds of Aggregate Demand

Consumption Function

The relationship between consumption spending and its determinants, such as disposable (after-tax) income is:

$C = \overline{C} + c \cdot (Y - T)$

Where:

• $\overline{C}$ is a constant term capturing factors other than disposable income: autonomous consumer expenditure.

• $c$ is the MPC (Marginal Propensity to Consume).

• The amount by which consumption rises when disposable income rises by £1.

• We assume that 0 < c < 1

Aggregate Demand and Output

$Y_d=C+I+G+NX$
$C = \overline{C} + c \cdot (Y-T)$
$Y^d = \overline{C} + c \cdot (Y − T)+I+G+NX$

Equilibrium Level of Output

$<br>Y^d = \overline{C} +c \cdot (Y−T)+I+G+NX$
$Y = Y^d$
$Y = \overline{C} + c \cdot (Y − T)+I+G+NX$
$Y=\overline{C}+c \cdot Y−c \cdot T+I+G+NX$
$Y(1−c) = \overline{C} −c \cdot T +I+G+NX$
$Y = \frac{1}{1-c} [\overline{C}-c \cdot T+I+G+NX]$

The Expenditure Multiplier

• If $c=0.5$ an increase in investment by £200bn increases output by $\frac{1}{1-0.5} * 200 = 400$ bn

• If $c=0.8$ an increase in investment by £200bn increases output by $\frac{1}{1-0.8} * 200 = 1000$ bn

• If $c=0.4$ an increase in taxes by £200bn changes output by $\frac{-0.4}{1-0.4} * 200 = -133.33$ bn

Neoliberalism

• Removal of unnecessary constraints and controls in the market for final goods and services.

• Removal of distorting influences from the labor market.

• Removal or reduction of a wide range of social security benefits.

• Reform of the taxation system to provide greater incentive.

• Privatization of activities.

Removal of Unnecessary Market Constraints and Controls

• Also known as deregulation.

• Objective: competition, efficiency, and growth (natural adjustment).

• Barriers to Entry, non-competitive behavior.

• Financial Markets, exchange controls.

Removal of Distorting Influences from the Labour Market

• Rising production costs, cost-push effect on inflation.

• Trade union power, wage bargaining.

Removal or Reduction of Wide Range of Social Security Benefits

• Choice between work and no-work too ‘soft edged’.

• Sluggishness and inefficiency of the labor market, in response to competition.

• Frictional unemployment.

Reform of Taxation System

• Insufficient incentives to work and invest.

• Laffer curve.

The Laffer Curve

The Laffer Curve illustrates the relationship between tax rates and tax revenue. It suggests there is a tax rate that maximizes government revenue. Increasing tax rates beyond this point could lead to decreased tax revenue. The curve plots tax revenue on the y-axis and tax rate on the x-axis. There's a point Rmax, beyond which increasing tax rates results in a decrease in Tax Revenue.

Privatisation of Activities

• Public-sector run activities inherently inefficient.

• Resources used more quickly and effectively.

Reference

• McKinnon, D. and Cumbers, A. (2011), Introduction to Economic Geography, Chapter 5