Political Economy

1. Political Economy The Relationship between States and Markets

2. Political Economy • Three different types of political economies - Market economy - Command economy - Mixed economy How are these related to major “isms,” especially capitalism, communism, and socialism? • Political order depends on the economic system to generate income, goods and services for the survival and prosperity of its citizens

3. Key Concepts • Three major factors of production: 1) land - ground plus raw materials on or in ground 2) labor - human productive input 3) capital- nonhuman productive input, such as financial resources, machinery and technology Each factor controlled by owner (household) • Some actor (firm or producer) acquires a combination of above to produce a good or service

4. The State: A static concept • Based on juridical and administrative unity • Territorial integrity • Territorially based national identity and loyalty • Internal sovereignty: Legitimate authority in relations with subjects within its jurisdiction • External sovereignty: legal equality among states

5. The Market: A fluid/dynamic concept • Involves production and commercial activities • Transactions, exchanges transcend national boundaries, identities, and loyalties • Operates within and across the confines of individual states • Is an intricate web of interdependent transactions that reflect and shape • Prices • Technological advances • Consumer tastes

6. Power in the Political Economy • Relational Power: A makes B do something that B otherwise would not do • Structural Power: the power to shape and determine the rules of the game under which political and economic institutions have to operate—domestically and/or internationally. • 4 Major Structures: domestic/global • security: individual and national • Production: private and state enterprises, MNCs • Finance : credit and money • Structure of knowledge: information, education, science, technology

7. Political-Economic Framework • Interaction between state and market (economy) results in processes called political economy • Imports and exports • Balance of Trade: ratio of imports to exports 1. Trade Deficit: A state imports more than it exports f.ex. the U.S. 2. Trade Surplus: A state exports more than it imports f.ex. China

8. Purchasing Power Parity (PPP) GDP or GNI (GNP) is usually expressed in a single currency; often the U.S. dollar. The value of all goods and services produced by a state or nation respectively. PPP—Purchasing Power Parity corrects monetary indicators to reflect the amount of local currency required in that country to buy certain standard goods.

9. Shortcomings of GDP/GNP • Does not reveal how wealth is distributed among the country’s economic actors • Only goods that actually enter the societies monetary sector are actually measured • Many states do not have the bureaucratic infrastructure to adequately measure GDP • GDP and GNP/GNP are often used to compare the prosperity of one country with another—even though there are huge between-country disparities in the exchange value of money.

10. Example • India has only $654 of GDP per capita but it compares with $2,892 per capita in purchasing power. • The purchasing power of Japan’s $33,713 is actually only 27,976. • In purchasing power dollars, the economic gap between the wealthier and poorer countries usually decreases. • For many of the poorer countries, the purchasing power dollars are 5 to 8 times greater than GDP per capita dollars. • In terms of global trade, the purchasing power of a countries’ currency is directly tied to international exchange rates, not the price of bread at home and thus its relative wealth or poverty remains

11. Political-Economic Framework • Two ideal-type political economies: - Market economy - Command economy • Mixed economy is real world compromise

12. Comparing Political-Economic Frameworks: Five Major Questions

13. Market Economy • Market economy: total private control • Actors have direct, personal control over factors of production and what goods are produced • Actors are motivated to maximize value associated with goods and resources they control • Invisible hand of market determines value and distribution of goods and services • State role and intervention are minimal

14. Command Economy • Command economy: Total state control • State owns all factors of production • State determines what goods are produced according to state plan, their value, and how they are distributed • Competition is eliminated since the state established payments for every factor • State has dominant role, and surplus value (profit) is accumulated by the state

15. Mixed Economy • Mixed economy - hybrid compromise • Means of production ownership shared between state and private actors. State usually owns major factors such as transportation or communications • Primarily demand-oriented, but public sector under state control. State intervenes on behalf of national priorities. • Private actors maximize profits, but state taxes to purchase goods or transfer payments to redistribute to certain actors in social order

16. The Politics of Political Economy • The three “isms”: capitalism, communism, and socialism • Related to market, command, and mixed • Capitalism is based on Adam Smith’s laissez-faire economics • Communism is based on the idea that the state must control land, labor and capital to serve the best interests of all the population

17. The Politics of Political Economy • Socialism, a confusing term in practice, tries to balance state involvement and private control to reduce inequalities • No country is an ideal-type; every state engages in some forms of redistribution of resources and regulation of actors • Economic “isms” usually tied to broader sociopolitical order • Every state engages in some regulation

18. Capitalist Example • Switzerland • 6th wealthiest (GDP per capita) • Weak central government • Private control, little regulation • Government spending among lowest of all developed countries • 1990s saw a rise in welfare spending

19. Mixed and Capitalist • South Korea • Government expenditures lowest among developed countries (goods/services) • Government greatly promotes economic development • 29th in the world (GDP per capita) • Export-oriented • 35th in measure of economic freedom

20. Mixed and Socialist • Denmark • 3rd among major countries (GDP per capita) • 13th ranking in economic freedom • Strong regulation in working conditions and environmental quality • Government provides extensive welfare benefits • High taxes

21. Command and Communist • Cuba • Although lessened in recent years, state control of economy, owning means of production • Ranked 149th among the 154 countries in economic freedom • Government commitment to fund education, health care, and control of land and income guarantee equality between genders, race, urban and rural citizens • Ranks in the top 50 countries for quality of life (UN)

22. Discussion Questions • What is the attraction of command economies to market economies when they are generally inferior in productivity? • What would be the greatest benefits if the state played virtually no role? What would be the problems? • Is capitalism so individualistic that it can’t protect the collective good?