Learning Objectives
By the end of this section, you will be able to:
- Describe political economy as a field of study.
- Define key terms associated with political economy.
Introduction
Political economy, as defined in Chapter 1, is a subfield of political science that considers various economic theories (e.g., capitalism, socialism, communism, fascism), practices, and outcomes either within a country, or among and between countries in the global system. In its simplest form, political economy is the study of the relationship between the market and powerful actors like a state's government. The market is the exchange of goods and services within a given territory. This almost always involves the forces of supply and demand and the allocation of resources through private economic decision-making. The interaction between the state and the market through political, economic, and societal institutions can frame deliverable outcomes, such as public goods. This can occur not only within a country, but also between them. Public goods are goods and services provided by the state that are available for everyone in society. They are non-excludable and non-rival in nature. Examples include public roads, public hospitals, and libraries. Clearly, political economy involves the mixing of political and economic policy goals. Finally, political economy also studies how individuals interact with the market and society (Britannica, n.d.)
Political economy overlaps with other fields and subfields in the social sciences, most notably economics. Political economists aim to understand how the state affects the market. A good example is the concept of wealth distribution within a state. Wealth distribution is how a state's goods, investments, properties, and resources--collectively known as "wealth"--are divided amongst its population. The wealth distribution in some states is quite even, whereas the wealth distribution in other states is quite uneven. States with uneven wealth distribution are more susceptible to political tension, as some groups may feel that they have been denied their "fair share of the pie." Political economists look not only at how the state affects the market, but also at how the market affects the state. For example, market forces can force elected politicians to change their perspectives or tactics. A downturn in the market tends to correlate with a decrease in the election chances of incumbent politicians. Just ask George H.W. Bush, former President of the United States, who won a decisive victory in the 1991 Gulf War, but suffered a loss to Bill Clinton in the 1992 Presidential Election after an economic downturn. In describing President Clinton's victory, political strategist James Carville famously coined the phrase, "It's the economy, stupid!"
Given the expansive scope, areas of research within political economy are quite diverse. Broadly speaking, political scientists study both how the economy affects politics and how political forces affect the economy. For the purposes of this chapter, we will focus on foundations, key terms, and political economic systems.
Foundations
Scholars have been thinking about the interaction between society and the economy for centuries. Ancient Greek philosophers, such as Plato and Aristotle, wrote about the oikos, which is the Ancient Greek word for house. Aristotle saw the oikos as the basic unit within the polis, or city. From oikos is derived the English word econ-omy, or the study of household accounts, which over time translated into the study of a state's wealth and assets.
Formal study of political economy began in the mid-1700s. Adam Smith's 1776 work, The Wealth of Nations, is often considered the starting point, as it discusses concepts like free markets, division of labor, wealth, and trade. Smith's work was followed by David Ricardo, who wrote about comparative advantage. Comparative advantage refers to the goods, services, or activities that one state can produce or provide more cheaply or easily than other states. Because states have different allocations of resources--such as land, labor, and capital--each state enjoys a comparative advantage in producing those goods that rely on its abundant resources. Complementing Smith's thoughts on the "invisible hand" of the free market, Ricardo's contributions pointed to the mutual benefits that states can gain from specialization, cooperation, and voluntary trade. A few decades after Ricardo came the writings of Karl Marx, whose reactions to the free market and capitalism still provide much of the basis for contemporary criticism. Over time, the field garnered more widespread attention. As early as 1891, political economy’s growth as a discipline in universities was apparent. As Charles F. Dunbar (1891) states in an article in The Quarterly Journal of Economics:
It is the perception of the scope and importance of the questions with which political economy deals that turns the popular current so strongly towards it today. It is keenly felt that on the right answer of these questions must depend not only the future progress of society, but also the preservation of much that has been gained by mankind in the past.
The scope and importance of political economy extends to concepts including private goods, property, and property rights. In contrast to public goods, private goods are economic resources that are acquired or owned exclusively by a person or group. Public and private goods can vary greatly between states. For instance, healthcare is a public good in most states, but examples exist in which it is a private good. A defining feature of private goods is their potential scarcity and the competition that can arise from this scarcity. Property is a resource or commodity that a person or group legally owns. Property can include tangible items, like cars and houses, or intangible items, like patents, copyrights, or trademarks. Property rights are the legal authority to dictate how property, whether tangible or intangible, is used or managed. These concepts help form the foundation for many studies in political economy.
Key Terms
States can affect the market through a variety of measures. First, they can pass laws that regulate the market. Regulations are rules imposed by a government on society. Various types of regulations exist, including rules to protect public interests, such as environmental policy. Regulation that affects the market is often referred to as regulatory policy, economic regulation, or fiscal regulation. For example, an effective form of regulation occurs through taxation. Taxation is the process of a government collecting money from its citizens, corporations, and other entities. A state can impose taxes on income, capital gains, and estates. Taxes are an important part of a functioning society, as governments use tax revenue to pay for public goods. A state can also use taxes to regulate economic activity. A state can impose higher taxes on a product, driving up the price, to dissuade people from using it. A good example is the tax imposed on cigarettes. Sometimes referred to as "sin taxes," these are taxes levied on products or activities that the state deems harmful to society. In the United States, for example, "sin taxes" exist on tobacco, alcohol, and gambling in almost every state. Taken together, taxation, spending, and regulation are referred to as fiscal policy.
In addition to fiscal policy, governments exercise monetary policy. Monetary policy includes all actions taken by a state’s central bank to affect the money supply. Money is simply a medium of exchange. It is a way to store value and provide a unit of account in economic transactions. Printed money has no intrinsic value; its value is determined by the government that prints it. After European states began adopting the common currency of the Euro in 1999, for example, the states' former currencies no longer retained any value; the German mark, the French franc, and the Greek drachma (among others) no longer had use in economic transactions.
A central bank can choose to expand the money supply in an aim to grow the economy and maximize employment. Economic growth is the process by which a state's wealth increases over time. A central bank can also choose to contract the money supply in an attempt to slow the economy and moderate inflation. An economic slowdown can be the result, which can take the form of a recession. A recession is two consecutive quarters of declining economic activity. Whether expanding or contracting, a central bank will manipulate the money supply through changes in interest rates. The interest rate is the percentage of a loan amount charged by a lender. When a central bank reduces interest rates, it hopes to stimulate economic growth. Lower interest rates make it easier for businesses to borrow money to expand production, increase hiring, or invest in research and development. Similarly, lower interest rates allow consumers to borrow money more easily to buy homes or other goods. If economic demand is growing too fast, however, a central bank can raise interest rates to "cool off" the economy. The higher interest rate aims to reduce spending and, in turn, to control inflation. Inflation is a general increase in prices, usually within a given period of time. Inflation may occur for numerous reasons, including higher consumer demand for products and services, higher labor costs, or increased costs of inputs (e.g., fuel).
Beyond domestic actions by a central bank, international trade can additionally affect a state's economy. International trade is the exchange of goods, services, and activities between states. Generally, international trade is a topic that falls within the specialization of international political economy (IPE). IPE, a specialization within the subfield of international relations, is the study of political economy from a global perspective that focuses on topics like trade, finance, and international financial and monetary institutions. Because this textbook focuses on comparative politics, we will instead focus on the specialization of comparative political economy (CPE). CPE is the comparison across and between countries of the ways in which politics and economics interact. Often, this comparison lends to observations of similar economic policies resulting in different political outcomes, or observations of similar political policies resulting in different economic outcomes. CPE generally focuses on the politics of economic development, the domestic effects and implications of globalization, general economic and social policies across states, and the analysis of different political economic systems. In the next section, we will look closely at this final topic: political economic systems.
