Notes for Political Economy....

Lesson Four - Political Economy

Economies don't just spring up and function - they need to be created and put in place by institutions, states, banks, etc to work effectively.

Economy DIRECTLY INFLUENCES politics

Economy can determine levels of equality and freedom.

POLITICAL ECONOMY - study of how politics and economies are related, and how their relationship shapes the balance of freedom and equality

COMPONENTS OF POLITICAL ECONOMY

Markets and Property

physical location to buy and sell goods (ex: Iranian bazaar)

markets -----> rise of cities

Turkish Great Bazaar -- bargaining -- Ebay

Markets: the interaction between the forces of supply and demand, and they allocate resources through the process of that interaction

ex: Tickle - Me Elmo craze

Markets are DECENTRALIZED - there doesn't have to be a CENTRIPIDAL force directing how much of a product is made, or what it costs, or who should receive these products

Sellers produce products that buyers need

Buyers buy products that sellers sell

When more than one firm produces a product, then we have COMPETITION and INNOVATION

Markets emerge SPONTANEOUSLY...as soon as more than 2 people are engaging in some form of bartering or trade, then a market will automatically EMERGE

If there is a demand, the product will emerge ---- pornography on the web

REGULATION - states need to determine if they want to impose laws on certain kinds of demands - for instance, don't like sale of drugs, so they outlaw that

Minimum wage - state controls price of labor, determines how much labor is worth

States are not all-powerful however: minimum wage is subverted by illegal immigrants, drug trade continues on the black market

PROPERTY

refers to the OWNERSHIP of goods and services

land, buildings, businesses, etc

PROPERTY RIGHTS - right to buy & sell property, right to not have it taken away by the government or other individuals (without just cause and compensation)

Example: what would happen if property rights didn't exist?

Russia post-communism, mobs ruled the streets and extorted payoffs for security

The state needs to create and enforce these rights in order to have a functioning market

PROPERTY doesn't have to be tangible now - you can own rights to songs, rights to websites, rights to air time on TV/radio

States vary in their approaches to property rights - in many developing countries, property rights aren't protected strongly by the states

PUBLIC GOODS

Ex: roads and military defense

Are not easily created just with the existence of demand

also, if they only belonged to a FEW people in a country, then that would cause a problem with human rights

would hinder economic development

would create gross inequalities

therefore, states provide them as PUBLIC GOODS - goods that are used by most of society and which no private person can own

roads, parks, etc --- generate collective equality

Usually - national defense, roads, and primary education are PUBLIC GOODS

But countries vary to the extent in which they provide public goods - some states only offer military defense and roads, some offer military defense, roads, health care, primary education (differences between US and Canada)

Saudi Arabia and Norway: oil is a public good

Cuba: business is a public good

Benefits and disadvantages of public goods:

Everyone has access to it No one takes too good care of it (example of park) can be abused

SOCIAL EXPENDITURES

- the state's provision of public benefits such as education, health care, transport, etc

"welfare state"

many people think though that freeloaders benefit most from this arrangement

Welfare State is still controversial, although it was the status quo in post-war Europe

now, that is changing

Reasons against welfare state:

A. freeloaders

B. lead to counterproductive behavior - loss of incentive - no economic growth

C. other welfare institutions (family, church, Hezbollah) may be weakened

Social expenditures are EXPENSIVE - hard to fund when the aging population is too large

many countries in post-war Europe depend on income taxes to fund their welfare states - when too many people retire, it becomes more difficult to manage

big problem in Germany - people retire at 55 and go to Florida on state money

So why have them?

Many groups may benefit:

aging, elderly, handicapped, unemployed, the poor

However, some may already be provided for through public goods (health care, education, roads)

So if we loop public goods into social expenditures - we see that it's not really the welfare of the poor that is being financed with public money, but welfare of the middle classes

So the middle class and the rich pay for themselves

Money

-- medium of exchange

-- means of streamlining trade --> universal values

Ex: In Georgia and Oregon, a quarter is always worth 25 cents

opposite of barter: where value of goods changes with every exchange

now, a dollar may change in value too - but it will always change UNIVERSALLY

State CREATES and MANAGES money

mint federal reserve bank

were originally promissory notes

now it's currency - reflects faith in system

ex: Articles of Confederation $, more recently, Argentinian pesos

states have control through CENTRAL BANK

CENTRAL BANK

-- controls most of $ in economy

-- controls cost of borrowing $ (interest rates)

-- lowers interest rates to stimulate economy

-- raises interest rates to check inflation

Federal Reserve Bank: Alan Greenspan/Bernard Bernanke

Lowers interest rate

means banks lower rate

loans less expensive

people will borrow more and spend more

more $ in economy ---> economic growth

Raises interest rate

people borrow less and save more

not so much $ in economy

economic growth slows

done to prevent high inflation - so you don't have to pay 5 dollars for bread

in EU, European Central Bank controls the Euro

HYPERINFLATION

inflation that is more than 50% a month for 2+ months

- occurs when govt doesn't have tax revenue to provide services (budget deficit)

-so govt goes into debt --> has to borrow from public, or int'l lending institutions (World Bank, IMF)

wealthy countries: can borrow from anyone, because of political stability and strong econ

poor countries: more difficult, may have defaulted on previous loans, might be politically volatile

so, they might print more $, flooding economy with bills

just decreases value of money

Russia: price of bread: 1000 rubles

Yugoslavia: citizens had to resort to other means of trade

Are high interest rates better?

not always

can cause economic stagnation

high unemployment, low rates of econ growth

no job creation

no $ in economy

Central Banks VERY important: don't want to change directors too much

insulated from political whims and power

can't just dismiss CB heads

fixed term - 4 yrs. Greenspan: 18 years

REGULATION

public bads - do these exist?

environmental concerns

Regulations: rules that set boundaries of a given procedure (could be safety, could be environmental)

Modes of competition -

Monopoly: when a single producer of a good/service dominates market

ex: Con Ed

large corporations --> could charge whatever they want, don't have to produce quality because NO competition

CARTEL

a grouping of producers that try to control a market in collaboration with a small # of other firms

ex: Microsoft

OPEC - 40% of world oil supply

DeBeers - 60% of diamond sales

Monopolies and Cartels ----> stifle competition, increase prices, limit innovation

some states don't like monopolies and will try to break them up:

US: Sherman Anti-Trust Act - divided Standard Oil

but other states are more reluctant to regulate economies

feel they will self-destruct eventually, will get lazy, fail to innovate, and a new firm will emerge

Cartels will fail because:

internal disagreement

temptation to make individual profits by making more - ex: OPEC

Dangers: Nokia in Finland, discuss

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Trade:

states must manage both domestic and international trade

states can influence degree of competition and access to goods by determining what can enter country

Tariffs: taxes on imported goods

Quota: limit number of goods coming into the country (ex: textile goods from Bangladesh)

Nontariff barriers: health, packing restrictions

ostensibly: protect citizens. really: make difficult for foreign powers to benefit

ex: health: avian flu --> limit chicken from Asia

mad cow --> EU banned American beef

Why regulate trade?

generate state revenue (tariff, taxes, etc)

foster local industry (PROTECTIONISM - discuss farm subsidies)

Protect local jobs

keep wealth in the country

Why not? (Trade liberalisation)

promote competition --> lowest price wins --> more people can afford it

stimulate domestic innovation --> forceful industrialisation

COMPARATIVE ADVANTAGE - ability to produce a good/service more efficiently relative to other countries' efficiency in producing same good

POLITICAL ECONOMIC SYSTEMS

actual relationship between political and economic institutions in a country, as well as the policies and outcomes they create

difference between theory and practice -- USSR was NOT pure communism

LIBERALISM

individual freedom, limit on state power

individuals can make economic decisions for themselves

Adam Smith: invisible hand guides market, free from state control

individuals can create economic growth better than state

wants a WEAK state

very little regulation

CAPITALISM - system of production based on private ownership and free markets

State should only produce basic public goods (education, health)

make sure it's restricted, to prevent free loaders

Contrast educational system of US and Germany

Keep regulation and taxes to minimum

Central Banks limited in power

Accept unemployment to be NECESSARY EVIL

Free trade is promoted (no tariffs or quotas), will encourage competition

States should only step in when crises occur --> Great Depression, for instance (changing point in US economic policy)

LAISSEZ FAIRE - "leave alone" don't interrupt natural economic processes

Argument that democracies REQUIRE free market -- can't flourish with an overly strong state

Ex: US, UK, Canada, Oz, NZ exception: Singapore. So democracy and liberalism doesn't HAVE to go hand in hand

Neoliberalism: free markets, greater individualism, tolerance for inequality

- resurgence around the globe

- Washington Consensus to stimulate growth in Latin America

SOCIAL DEMOCRACY

combines liberalism and communism

has private property and open markets - but EVOLVED towards this

SDs broke with communism because they rejected the idea of a violent revolution, and didn't want the state to have the power to redistribute wealth

Edward Bernstein:

rejected revolution

democracy can evolve into socialism through ballot box

SDs do NOT like the gross inequalities they claim exist in liberal economies

Polarizes society: workers v. owners, city v. farm, poor v. rich, loss of cohesion, leads to instability of state

So say, economy MUST be regulated

In socialism, state is NOT seen as a threat to liberty

POSITIVE rights

Difference between positive and negative

Negative - to be protected FROM something (bill of rights)

Positive - to be provided WITH something (welfare state, contemporary human rights in Europe)

So state will provide both negative and positive rights in SD system

UNEMPLOYMENT and economic injustice: cannot be tolerated

Several ways:

Encourage property/markets but control so it benefits society as a whole

ex: oil in Norway vs oil in US

Expand public goods

Strong CB

Promote trade, but in a way that doesn't threaten jobs (France, farm subsidies)

High level of SOCIAL EXPENDITURE

NEOCORPORATISM: uses policy to build consensus over competiton, by creating a limited # of associations that represent large segment of business and labor

Business owners, union leaders, state

ex: Germany - German Federation of Trade Unions

- less prone to conflict (no labor disruption or strikes)

-very difficult to hire/fire

-- hinders flexibility of business, can't do necessary restructuring

ex: Germany - stagnating economy - can't do necessary restructuring - some optimism with election of Angela Merkel as chancellor

STATE OWNERSHIP

public goods extended to include lumber, oil, steel, autos (Renault - France)

Benefits/advantages

COMMUNISM

- eliminate political question in quest for economic equality

Marx:

- private property and free market is FAILING society

- gross disparities in wealth and opportunity

- Dickensian conditions

- say property becomes POWER TO OPPRESS

Economic competition ----> EXPLOITATION

Small rich dominate large poor

Marx: will lead to revolution

Communist solutions:

ELIMINATE PRIVATE PROPERTY - if property is owned by ALL, no one can

be oppressed

Market is therefore eliminated

States make all economic decisions, decide supply/demand

So taxation comes in the form of fixed prices and fixed wages

Profits go directly to state (for benefit of all)

No competition between firms - no real regulation (state self-regulates)

CRITICISM:

states don't have ability to DECREE economic decisions - leads to inefficiency and waste

state has too much power --> authoritarianism, no distinction between public and private

No freedom