Define and discuss the significance of political economic systems.
Compare and contrast four political economic systems.
Introduction
A political economic system describes the relationship between political and economic institutions within a given state. A major variable determining this system is the role the state plays in its economy. Does the government intervene in the economy? Or does the government let the market run free?
At one extreme, a government can take a laissez-faire ("let it be") approach. A laissez-faire approach is one in which the government chooses not to interfere in its economy (or to interfere only minimally); it instead relies on free market forces. At the other extreme, a government can take near complete control of its economy. A command and control approach to the economy is one in which the government owns most, if not all, means of production; it does not rely on the free market, and instead the state (or some agent representing the state, such as a political party) makes all economic decisions.
Almost all contemporary political economic systems fall somewhere between these two extremes, and they tend to cluster at particular points along the continuum of no state interference to full state interference in the economy. As examples, states that inherited their political economic systems from England, such as Australia, New Zealand, South Africa, and the United States, trend more toward less government interference. Other states, including states in Latin America and Europe, trend toward more government interference in the form of higher taxes and more regulations. There are also states in which state interference in the economy takes the form of coordination, such as when or where to invest, as it does in China, Singapore, and Vietnam.
In what follows, we will review four major types of political economic systems: mercantilism, capitalism, Marxism (socialism and communism), and social democracy.
Mercantilism
The oldest political economic system is mercantilism. Mercantilism is a political economic system that seeks to maximize a state's wealth through increasing exports and limiting imports. Use of the mercantilist system was most prevalent between the 16th and 18th centuries. Hallmarks of the mercantilist system at this time included the complete control of production and trade by state-led companies, high inflation, and taxes. Mercantilism also allowed for the expansion of the slave trade, as slaves were seen as necessary to an empire's economic well-being and power.
A good example of mercantilism is the British Empire. To achieve imperial economic growth, the empire strongly discouraged its colonies from importing competitive foreign products, encouraging only the importation of British products. This was often accomplished through taxation, as imperial authorities imposed tariffs on sugar and molasses imported from other states in order to promote its own monopoly on sugar from the West Indies. The British also put forth trade policies that promoted a favorable balance of trade for themselves, again in an effort to maximize power through wealth creation. Inevitably, as other empires enacted similar policies, this system led to open military conflict. The Dutch, Spanish, and Portuguese Empires tried to promote their own economic interests and to protect their own colonial markets from British encroachment.
In theory, mercantilism created a strong relationship between the British Empire and its colonies. The empire protected the colonies from the threat of foreign nations, and money from the colonies fueled the imperial engine. In practice, however, mercantilism created conflict for the colonies, especially in the Americas, where the cost of imported goods from Britain was substantially higher than imports from other regions.
Although mercantilism is the oldest of the four types of political economic systems, it is not a relic of the past. Today, we refer to mercantilist policies as "economic nationalism." Economic nationalism is attempts by a state to protect or bolster its economy for nationalist goals. Economic nationalists tend to favor protectionism. Protectionism is a set of policies aimed at protecting a state's domestic industry, such as by imposing tariffs; by implementing quotas; or by instituting non-tariff regulatory barriers, such as offering tax breaks or providing government subsidies for specific domestic industries. Tariffs are taxes imposed on imported foreign products with the purpose of making those products more expensive and, thus, making the domestically produced products more competitive. Quotas are limits on the number of foreign goods coming into a state. The idea is to ensure that domestic companies have a guaranteed share of the market for certain products.
As these examples of protectionist policies demonstrate, economic nationalists do not want the state to be dependent on other states for key resources. They prefer policies that lead to diversification of domestic production. While this is understandable in key sectors like agriculture, it is more controversial in sectors such as consumer products purchased with disposable income. For economic nationalists, some degree of free trade is fine if it furthers the goal of strengthening the power of the state. The common feature of political platforms espousing economic nationalism is a combination of "conservative economic proposals with nationalist stances on international trade and cooperation, as well as on immigration" (Colantone and Stanig, 2019).
A competing approach to mercantilism is capitalism. Capitalism, also referred to as "free market capitalism," is a political-economic system in which individuals and private entities are able to own land and capital needed to produce goods and services. The forces of supply and demand are determined freely by the market, ideally with little to no interference from the state (in its purest form, capitalism is laissez-faire). Capitalism centers on self-interest, competition, private property, and the limited role of government control in the market. In economics, self-interest is the means through which individuals can act on their own behalf to make choices that benefit themselves. Within capitalism, the self-interest of uncoordinated individuals is thought to contribute to better outcomes for society at large. Competition occurs when industries, economic firms, and individuals vie to obtain goods, products, and services at the lowest prices. By allowing competition and self-interest of consumers, market outcomes are thought to improve for all involved.
One concern about capitalism is at the international level, particularly when it comes to trade in goods, services, and activities. Trade imbalances may lead to the exploitation of poorer states by richer states. For example, imagine an underdeveloped state that wants to build up its tourism industry. If that state follows a wholly capitalist model and allows for trade and foreign investment, it runs the risk of large corporate hotel chains taking over its fledgling domestic tourism industry.
Still, even with the existence of major trade imbalances, economists demonstrate that international trade is not a "zero-sum game." A zero-sum game is a situation in which one person, or entity, gains at the equal cost of another; a loss must accompany each win. Modern international trade is not a zero-sum game, as there are gains to be made, even small ones. Still, there are so-called "winners" and "losers" in trade. Winners include consumers who have more choice at competitive prices. Businesses also are winners, as they can sell products to consumers. Specialization through comparative advantage can lead to what is referred to as economies of scale, or the ability to "produce goods at a lower average cost" (Wolla and Esenther, 2017). States can benefit with an improved standard of living. Two examples are China and India. Both "have experienced growth and development that might not have happened without access to markets" (Wolla and Esenther, 2017).
In practice today, we often refer to capitalist states as "economically liberal." Economic liberalism relies on a set of policies to promote free market capitalism, namely through deregulation, privatization, and liberalization. Deregulation involves the removal of government power in a particular industry or economic area. An example includes former U.S. President Ronald Reagan’s decision to deregulate the phone industry, over which AT&T had monopolistic control, in an effort to create competition, provide more choices, and lower prices for consumers. Privatization is the selling of government-owned assets. A good example includes the sale of a state-owned airport or harbor to a private company. Greece, a country in the European Union, was forced to do so under a deal to save its economy in 2012. Liberalization is the loosening of government controls (allowing for more free market-oriented policies).
Marxism (Socialism and Communism)
As free market capitalism was a critical response to mercantilism, Marxism became a critical response to free market capitalism. Developed by Karl Marx, this critique argues that capitalism is destructive, corrupt, and unable to survive as an economic system. According to Marx, capitalist systems inevitably lead to conflict between the working class (proletariat) and business owners (bourgeoisie), wherein the workers will eventually rise up against those who own the means of production. In considering more specifically its economic applications, Marxism is a philosophy in which the means of production are collectively owned by workers, not privately owned by individuals. This philosophy lends itself politically and economically to systems of socialism or communism.
Socialism is where property and the means of production are collectively owned. In most cases, production is owned and controlled by the state. Socialist theory does allow for individual ownership of property, such as one’s house. The emphasis of a socialist system is to secure more equal outcomes and distribution of wealth through the collective ownership of resources and the means of production by the state. Few socialist countries exist today. The closest example we have is Venezuela.
Communism is where the state, usually dominated by one party, is in complete control of the political economic system, including all property. Communist theory suggests that, over time, the state will wither away, politics will become a relic of the past, and there will be equal distribution of resources. While Marx suggested that the communist struggle would begin in industrialized societies practicing capitalism, the first country to embrace communism was Russia, an imperial power that was largely agrarian and still used a serf political economy. In the Russian Revolution, communist forces loyal to Vladimir Lenin seized control, imposed communist rule through the state party apparatus, and renamed the country the Union of Soviet Socialist Republics (USSR). Joseph Stalin, the successor to Lenin, forcibly industrialized the country and led it through World War II. The egalitarian utopia that Marx predicted never occurred, and the USSR eventually collapsed in 1991.
Despite the decline of communism, Marxist thought still plays a prominent role in today's economic discourse, namely through policies of "economic structuralism." Economic structuralism describes a set of policies that aims to protect the working class from exploitation of the capital-owning class due to economic structures--domestically and internationally--such as inequality, uneven development, property rights and ownership, specialization, and trade. These policies played a significant role in the developing world, particularly in Africa and Latin America.
As one example, we can examine import-substitution industrialization (ISI) policies, which refer to state policies that attempt to reduce the state's dependence on foreign companies through increased domestic production. Grabowski (1994) describes ISI strategies as "utilizing a variety of policy instruments (tariffs, quotas, and subsidies) to protect the domestic market for many types of manufactured goods." Protectionism is therefore a major component of ISI strategies.
Social Democracy
A final political economic system to consider is social democracy. Social democracy is a system that favors heavy market regulation to achieve a more equal society. This approach argues that capitalism can lead to a highly uneven distribution of wealth, which is viewed as inconsistent with democratic principles (i.e., an individual is unable to have true freedom if they lack the means to survive). Another term for this is "democratic socialism," an ideology that seeks democracy not just in the political sphere but also in the economic sphere.
In social democracies, governments levy high taxes on corporations and wealthy individuals and redistribute the collected funds to poorer members of society through social welfare programs. While social democracies have a capitalist system as their base, that system is overlaid with a heavy system of regulation to protect society from the potential harm that a free market capitalist system can yield. At times, some social democratic countries will take over the means of production in a particular industry. A good example is Norway where the oil company is state-owned and the revenues from the sale of oil go to pay for social expenditures, such as education and health.
Social democracy became popular in Europe, where such policies were initially put in place to blunt the ability of communist movements to rally workers to their cause. These policies proved to be quite popular, and they have become an important feature in social democracies. Sweden, for example, has developed a political economy where its citizens enjoy quite a few benefits, including access to free health care, free education, and generous pensions. These benefits are paid for through higher taxes and societal expectations of corporate behavior. A state, such as Sweden, that has this type of a mixed economy is also often referred to as a "social market economy," meaning one that combines principles of capitalism with domestic social welfare considerations.
