POLITICAL ECONOMYPOLITICAL ECONOMY

Economic Development Measurement

Gross national income Purchasing power parity Human development index

Political economy Political system: freedom Economic system: market Legal system: property rights

Steps in economic transformation Deregulation Privatization Improve legal system

Geography and education Coastal vs. landlocked Temperate vs. tropical Local physical geography Education & productivity

Politics and the Economy

“Z-variables”: geography, culture,

etc.

Political institutions& processes

Economic structures& processes

The Cycle of Political EconomyThe Cycle of Political Economy

(B). RepresentationPartisanship

Elections:Electoral LawVoter Participation

Government Formation:FactionalizationPolarization

(A). Interest:Sectoral Structure of

EconomyIncome DistributionAge DistributionTrade Openness

PolicyFiscal PolicyMonetary PolicyInstitutional Adjustment

Government TerminationReplacement Risk

(C). Outcomes:UnemploymentInflationGrowthSectoral ShiftDebtInstitutional Change

Political Systems

INDIVIDUALISM

TOTALITARIANISM

Guaranteeing individual freedom

& self-expression

“Good of society” & “common good”

DEMOCRACY

COLLECTIVISM

Government by the people exercised directly or through elected representatives

One person or political party exercises absolute control over all spheres; opposing parties prohibited

Economically-Relevant Characteristics Economically-Relevant Characteristics of Religious/Spiritual Philosophiesof Religious/Spiritual Philosophies

Protestant Christianity: Work ethic, wealth creation, individual freedom

Islamic fundamentalism: Pro free enterprise, right to private property, keep contractual obligations, avoid deception, sin to collect interest

Hinduism: Spiritual progression (reincarnation), aesthetic (non-material) lifestyle, self-reliance, caste system

Buddhism: Spiritual achievement but lack of support for extreme aesthetic behavior or caste system

Confucianism: High moral/ethical conduct, loyalty, reciprocal obligations, honesty

Economic SystemsEconomic Systems

Market

State-Directed

Mixed

Command

State-Directed Government plays significant role in directing investment via “industrial

policy”

Pure Market

not planned by anyone, no restrictions

Pure Command

products, quantities, price are planned,

most business state-owned

Highly Mixed State-owned health-care, electrical, liquor

Political-Economical Progress

Trend from totalitarian, command toward democratic, free-market systems

Innovation is engine of growth for products, processes, strategies, organizations, management practices, countries

Innovation needs: creativity market economy strong property rights the “right” political system

Economic progress is related to democracy It limits government’s ability to control citizen

access

Keynesian MacroeconomicsKeynesian Macroeconomics Focus on managing short-run fluctuations Focus on “demand side” by manipulating

independent variables such as government spending & taxes

If people demand a product, producers will supply it, hence getting money into people’s hands will rise production

Spending increases more effective than tax cuts: All of spending is consumption but some of tax cuts will be saved by taxpayers instead of being used for consumption

MonetarismMonetarism

Interest rates and money supply affect people’s willingness to buy at a given price

Shift demand curve by manipulating interest rates or money supply (Interest rates actually easier to manipulate! “We don’t know what money is anymore.”)

Increase interest rates (reduce money supply) to cut inflation at expense of increasing unemployment (induce a recession to prevent stagflation). Key is to alter expectations of future inflation.

Cut interest rates to lower unemployment at expense of increasing inflation (economic stimulus)

Supply-side EconomicsSupply-side Economics

Adverse shift in supply curve means BOTH higher prices (inflation) AND lower output (recession and unemployment)

Demand-side shifts cannot simultaneously boost production and lower inflation

Solution: shift supply curve by altering ability and willingness of firms to produce at a given price point

Policy levers: corporate tax cuts, deregulation, increased labor supply (immigration), lower tariffs on raw materials, education and training (increases in per-worker productivity) etc.

Comparison: Keynes, Comparison: Keynes, Monetarists, & Supply-sidersMonetarists, & Supply-siders

Responding to recessionResponding to recession

Theory Recommendations

Keynesian Increase spending & cut taxes to stimulate demand

Monetarism Wait it out, since stimulus would increase inflation

Supply-Side De-regulate, cut taxes on business, increase incentives to produce

Comparison: Keynes, Comparison: Keynes, Monetarists, & Supply-sidersMonetarists, & Supply-siders

Responding to inflationResponding to inflation

Theory Recommendations

Keynesian Cut spending & increase to reduce demand

Monetarism Tighten money supply & convince public it will remain tight

Supply-Side De-regulate, cut taxes on business, increase incentives to produce and save (Inflation = too much money, not enough goods)

SummarySummary

Economics has become political: Few classical economists around anymore, and they don’t get to stay in office!

Political choices (fiscal policy, monetary policy, trade policy, immigration policy, etc) affect economic outcomes

Political Business Cycle: Tendency to stimulate economy before election at expense of slowdown/recession after election

The Macro Political Economy

DETERMINANTSOUTCOMES

MACROECONOMY

Policy levers

Internal marketforces

External shocks

Output

Jobs

Prices

Growth

Internationalbalances

““Capitalism and Democracy”Capitalism and Democracy”

Almond presents four controversial viewpoints on the relationship between capitalism and democracy and concludes that democracy and capitalism both support and subvert each other through their very nature. Democratic capitalism through the welfare state seems to encourage its survival and often even enhancement through these institutions.

1. Capitalism supports democracy Modern democracy exists primarily in economically privately

owned institutions

2. Capitalism subverts democracy Too much ownership is placed in a select few, and

democracies will no longer function as it was intended. Marxism argues that capitalism in its very nature subverted

democracy by creating a somewhat bourgeois democracy rather than a system of equality.

Almond, 1991

““Capitalism and Democracy”Capitalism and Democracy”

3. Democracy subverts capitalism A democracy that accepts the welfare state will be the

real threat to the relationship between democracy and capitalism.

The encroachment on the private sector has been slowly changing our free democracy into a completely chaotic mess.

The formation of dense networks which comes about through capitalism seems to subvert the very idea of democracy.

4. Democracy fosters capitalism Capitalism could hardly survive without any sort of

welfare state.

Almond, 1991