8.1: What is Political Economy?

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 is a subfield of political science that considers various economic theories, such as capitalism, socialism, communism, and fascism, as well as practices and outcomes either within a state or among and between states in the global system. Within a given territory is a market, the exchange of goods and service, that can involve 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 or public goods that are nonexcludable and nonrival in nature. Examples include public roads, public hospitals, and libraries. Finally, political economy studies how individuals interact with the market and society (Britannica, n.d.)

Political economists are tasked with understanding how the state affects the market. A good example is the concept of wealth distribution within a country. Wealth distribution is defined as how a country’s goods, investments, properties, and resources, or wealth, are divided amongst its population. In some countries, wealth is distributed quite evenly. In other countries, wealth is distributed unevenly. Countries with uneven wealth distribution are more susceptible to political tension as some groups often feel they have been denied their ‘fair share of the pie’.

Similarly, political economists look at how the market affects the state and its society. For example, market forces can force elected politicians to change their perspectives. A downturn in the market is often correlated with the election chances of sitting politicians. Just ask U.S. President George H.W. Bush, who won a decisive victory in the 1991 Gulf War, but the economic downturn a year later overshadowed his accomplishments. It led Clinton’s campaign manager to coin his now-famous phrase, “it’s the economy, stupid!”

Generally, political economy is engaged in three ways:

1. Studying how the economy (and/or economic systems) affects politics.
2. How political forces affect the economy. (i.e. How do institutions, voters, and interest groups affect economic outcomes? How does this influence public policy?)
3. How economic foundations and tools can be applied to study politics.

Political Economy: Foundation and Key Terms

Scholars have been thinking about the interaction between society and the economy for centuries. Ancient philosophers 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 has translated into the study of a country’s wealth and assets.

Written in 1776, Adam Smith’s work, the Wealth of Nations, is often considered the first formal study of political economy. David Ricardo followed up on his ideas, writing about comparative advantage and the free market. Still later 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 as a specific discipline in universities was recognized. Published in The Quarterly Journal of Economics by Oxford University Press, an article attributes public interest in the subject as a significant cause in its expanded role in academia:

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. (Dunbar, 1891)

Political economists consider various concepts including public gods, private goods, property, and property rights. In contrast to public goods, private goods are defined as economic resources that are acquired or owned exclusively by a person or group. Public and private goods can vary greatly between countries. For instance, healthcare is considered a public good in most countries. However, a few nations think of it as a private good. A defining feature of private goods is their potential scarcity, and the competition that arises 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. Although that lines, a property right is a legal authority to dictate how property, whether tangible or intangible, is used or managed. These concepts help form the foundation for the vast majority of political economy studies.

States can affect the market through a variety of measures.

• First, they can simply pass laws that regulate the market. Regulations are rules imposed by a government on society. These rules cover a broad range of social issues from protecting public interests to social cohesion. Market regulation is often referred to as regulatory policy, economic regulation, or fiscal regulation.
• Taxation is the process of a government collecting money from its citizens, corporations, and other entities. These taxes can be imposed on income, capital gains, and on estates. Taxes can be used to pay for public goods, and help regulate economic activity. A country can impose higher taxes on a product, driving up the price, to dissuade people from using it. In addition, a government may impose sin taxes, which are levied on a product or activity deemed harmful to society. Sin taxes exist on tobacco, alcohol, and gambling in almost every state in the United States. Taxation, spending, and regulation are referred to as fiscal policy.

Monetary policy is the action 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 is used as a unit of account in economic transactions. Printed money has no intrinsic value. Rather, its value is determined by the government that prints it. A five-dollar bill is worth five dollars because that is what the U.S. government says it is. If the public does not believe it, then the money can be worthless. The German mark, the French franc, and the Greek drachma no longer have any value since those countries' governments have adopted the Euro.

Economic growth is the process by which a country’s wealth increases over time. Eventually, a country will experience a recession, when there are two consecutive quarters (six months total) of declining economic activity. Overall, a country can use two different monetary approaches to influence the business cycle.

• A central bank will manipulate the money supply through interest rates. If a central bank reduces interest rates to stimulate economic growth, businesses will find it easier to borrow money to expand production, increase hiring, or invest in research & development. Similarly, consumers can borrow at lower interest rates to buy homes or consumer goods.
• If, however, economic demand is growing too fast, a central bank raises interest rates to cool off the economy. Some may ask what is wrong with a hot economy? Is that not a good thing? Not necessarily, a major consequence of higher spending is inflation, a general increase in prices, usually within a given time. If the public has access to excess cash or credit and decides to spend, it becomes a simple matter of supply and demand. More demand for products and services leads to higher prices. Prices can also rise for other reasons, including higher labor costs, or an increased cost of inputs, such as fuel for transportation. Regardless of the reason, inflation simply means your dollar will not go as far tomorrow as it did today.

Finally, a country’s economy can be affected by international trade between countries. States never trade equally. In every trading relationship, one country benefits more than the other. The trade surplus or trade deficit can be small and inconsequential or large with important consequences.

• If a country is experiencing large trade deficits, then that country is importing more than it is exporting.
  • A positive effect--likely that the goods, services, and activities being imported are less expensive, which can help lower costs for consumers in that country.
  • A negative effect--hard money leaves the country, which affects the country's money supply.

Conversely, a large surplus usually means that prices of goods, services, and activities are generally higher in that country. However, the country is bringing in quite a bit of money, which can be used by the government to fund numerous development projects.

A foundational principle in international trade is comparative advantage, the goods, services, or activities that one state can produce or provide more cheaply or easily than other states. No nation is entirely self-sufficient and therefore must trade. Even when states can produce the same goods and services, they often have to trade with other states to overcome their different allocation of resources. This scenario is especially true for states with certain natural resources, such as oil or minerals. Over time, the ability of one business or entity to engage in production at a lower opportunity cost than another business or entity will lead to specialization. Then, goods will be less expensive, and production will be more efficient for states that engage in trade.

Political Economy as a Modern Discipline

Economics is focused on the analysis of the economy, both at the national, or macro level, and at the firm, or micro, level. Principles of economics include calculating market equilibrium given supply and demand, the projection of various outcomes based on finite resources, and observations regarding the distribution of wealth. Thus, political economy is an extension of economics, but with a focus on how politics and public policy affect economics.

While political economy is less well-known than economics, “the assumed separation of politics and economics is very much a 20th-century phenomenon” (Robbins, 2017). In our 21st century, economists have increasingly accepted and have, in most analyses, incorporated politics and policy decisions. For example, the economics of owning a house is highly political. The market does not always mean fairness and “many issues of political economy are bread-and-butter issues that are important to scholars as well as the public at large.” (Robbins, 2017). Economic decisions are not made in a vacuum by “rational” actors always maximizing their economic self-interest. If that were the case, we would not spend more money on a pair of sneakers just because of the brand or color.

The field of political economy can be extended into two more specific subgroups: comparative political economy and international political economy.

• Comparative political economy (CPE) has generally focused on the politics of economic development, the analysis of different economic systems, the effects and implications of globalization, as well as general economic and social policies.
• International political economy (IPE) is the study of political economy from a global perspective or through international institutions. Conversations over the distribution of wealth take place at a higher level than individual or cross-national studies. The focus is on international trade, economic development, international monetary bodies, as well as the influence of multinational corporations and non-governmental organizations.