Chapter 4: The Political Economy

• tldr

  • economies are complex and involve the interactions and decisions of millions of individuals and firms, in addition to the government's economic policies
  • "the right" and "the left" economic ideologies battle over how much economic freedom or economic equality to emphasize in an economy's markets, monetary policy, welfare-state policies, trade policies, and regulatory policies
  • an individual's position "on the right" or "on the left" on economic issues is often determined by their place in society or source of income
  • political-economic systems are created reflecting the values of the society's economic ideology
  • no single statistic or data set can give the full picture of an economy's performance, but there are many useful pieces of data for comparison between countries

• economic freedom: degree to which individuals and private firms are free to won property and make decisions about how to use it without interference from state

• economic equality: preference towards society in which neither poverty nor extreme wealth exists, but resources are collectively used to eliminate the struggles of poverty through redistributive state actions

• this results in "right" and "left"

  • right: those who prefer to move towards economic freedom
  • left: those who prefer to reduce economic inequality

Components of the Political Economy#

• the market: setting in which supply and demand interact with one another
  • subsidy: payment from the state to assist consumers in purchasing the product or a payment directly to the producer to help them keep prices lower
  • black market: illegal trade of goods
• property: ownership of goods and services
  • LDCs (Least Developed Countries): significant poverty and lack of resources compared to developed countries => weak states
• public goods: goods and services that are provided to citizens (free or subsidized)
  • UK provides health care as a public good
  • Nigeria has secured its oil under public ownership and subsidizes the cost of gasoline
  • Maoist China has all goods and services as public goods but strictly rationed by the state to guarantee economic equality
• social expenditures: similar to public goods but are give to some and not others in the name of aiding economic equality
  • social expenditure programs are known as the welfare state
  • commonly administered programs include old-age pensions, unemployment insurance, low-income food or housing assistance, reduced school tuition fees for children of low-income parents
• taxation
• money, inflation, and unemployment
• regulations: directives from the government that control the activities of people and firms in the market
  • bans and restrictions on goods (alchohol)
• trade
  • free-trade: allowing people the freedom to buy and sell whatever they please without restriction will result in the highest net economic growth
  • protectionist policies: actions to shield domestic industries and workers from foreign competition
    • tariffs: taxes on foreign goods imported
    • import quotas: restrictions on the amount of foreign good that can enter the country
    • raising regulatory requirements for foreign products above domestic products
• dependency theory: former colonies of the developing world were made depending on their former colonial masters for economic markets and products and that their newly independent societies would never become developed and powerful themselves unless the protected themselves from foreign trade through trade barriers like tariffs and import quotas

Political-Economic Systems#

• liberalism: state lets markets determine what will be produced, who will produce it, an who may consume it while protecting private property rights
  • modern Britain and modern Mexico
• social democracy: value benefits that come from private property ownership and using markets as the mechanism for resource allocation while also correcting for economic inequality
  • pre-Thatcher Britain and pre-Zedillo and Fox administrations in Mexico
• communism: rooted in ideas of Karl Marx (Communist Manifesto) who called for system in which all property is collectively owned by the workers since it was the workers (Proletarians) whose labor created surplus value when they worked to create a finished manufactured product from a set of raw materials
  • Marx believed this can only happen through revolution and not reform (radicalism not liberalism)
  • Russia and China (previously, not modern)
    • Lenin created democratic centralism which centralized decision making into political elites (Bolsheviks)
    • Mao led a proletarian revolution of agrarian (farming) peasants against the Nationalist regime that had governed China since the 1920s
• mercantilism: more exports than imports, gold reserves correlate to world power

Measuring Economic Performance#

• Gross Domestic Product (GDP): total value of all goods and services produced within a country for a given period of time
• GDP per Capita: GDP/total population which shows standard of living
  • while it gives a better picture of life, it does not take into account economic inequality or poor vs rich cleavage
• The Gini Index (Gini Coefficient): measures income distribution
  • higher the coefficient, the greater the inequality
• Extreme Poverty Rate: living below the the equivalent of $2 a day
  • conquering this is a top policy consideration for developing countries
• States of Development:
  • subsistence agriculture: make food for your family and not for the market