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• Political Economy = balance between
political and market forces
• What balance between states and
markets most enhances capabilities?
• Balance that promotes best qualities of
markets (innovation and productivity) and
avoids worst effects (instability and
inequality)
Political Economy
• States determine how extensive markets
are
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Taxes on imports
Border control on currency
Treaties and/or international organizations
Foreign investment
• States determine how intensive markets
are
• Restrict what can be sold
Political Economy
• Market systems = private ownership over the
means of production; production coordinated
through interactions of buyers and sellers
• Markets require states to function; CANNOT exist
without them
• States create common currency to facilitate trade and
exchange; enforce contracts; supply public goods
(transportation networks, police protection) markets
cannot provide
• State “intervention” = fiscal, monetary, regulatory, and
nationalization policy
States & Markets
Advantages
Disadvantages
• Extraordinarily dynamic,
promoting development
of new products and
more efficient methods
of production and
technology
• Enormously productive
• Enhances the prospects
of democracy and
political rights
• Highly volatile (boom
and bust)
• Tend to generate
extraordinary inequality
• Create harmful spillover
effects (externalities)
• Global warming
• Pollution
Market Systems
• States steer economies to counteract
disadvantages of market systems
• Welfare systems to counteract inequality; regulations to
minimize harmful spillover effects; budgets and money
supply steady swings in business cycle
• Rise of market fundamentalism/neoliberalism
(1970s-present; Washington Consensus)
• Welfare state undermined work ethic; regulations
constrain entrepreneurialism; taxes divert too much
income; public enterprises inefficient
Shifting Balance of Power
• Revenues and expenditures
• Budget deficits: put money into circulation, increase
demand for goods, encourage businesses to invest, put
people to work
• Budget surpluses: withdraw money from circulation,
depress spending and discourage investment, reduce
inflationary pressures
• States differ greatly in size of state sector
(proportion of economy devoted to taxes and state
expenditures)
• U.S. = lighter tax burden than other rich democracies;
smaller public sector
• Sweden = state revenues and spending amount to more
than half of GDP
Fiscal Policy
• Manipulation of interest rates; how much
it costs to borrow money
• High interest rates discourage borrowing and
spending; counteract tendencies toward inflation
• Low interest rates encourage borrowing and
spending
• Interest rates largely determined by Central
Banks who issue currency and manage its
value in foreign exchange
• States have little control over them (Federal
Reserve in U.S.; European Central Bank)
• Controlled by the state (China’s People’s Bank)
Monetary Policy
• States set rules of behavior firms must follow
• States vary in terms of degree/amount of
regulations
• Number of procedures and days it takes to start a
new business is standard measure used to compare
thickness of regulatory environment
• Germany: 45 days, 9 separate interactions to obtain
licenses and permits to start a business
• Brazil: 152 days, 17 steps
• U.S.: 5 days, 5 steps (U.S. economy one of the least
regulated in the world)
Regulatory Policy
• States own and control public enterprises
• Permits state to control strategic assets and
influence economy (e.g., oil industries in Mexico,
Venezuela, and Saudi Arabia)
• Help inject social criteria into economy
• China: subsidize inefficient industries because they
provide jobs and services to millions who would be
poor and jobless without them
• States differ in degree of nationalization
• State Socialist countries (Cuba, North Korea) own and
control all means of production
• Extreme market systems have little to no state-owned
enterprises
Nationalization
• Do market-based systems do a better job enhancing
people’s capability than countries with state-based
political economies?
• Safety: lower homicide rates (but significant
variation); political economy not strongly related to
risk of war
• Physical well-being: lower infant mortality rates;
other physical needs
• Informed Decision-making: higher literacy rates
• Rights/Democracy: do not guarantee democracy,
but no democracies without market-based political
economies
Good Society