Political EconomyThe Relationship between States

and Markets

Political EconomyThree different types of political

economies- Market economy- Command economy- Mixed economyHow are these related to major “isms,” especially capitalism, communism, and socialism?

Political order depends on the economic system to generate income, goods and services for the survival and prosperity of its citizens

Key ConceptsThree major factors of production:

1) land - ground plus raw materials on or in ground

2) labor - human productive input3) capital- nonhuman productive input,

such as financial resources, machinery and technologyEach factor controlled by owner (household)

Some actor (firm or producer) acquires a combination of above to produce a good or service

The State: A static conceptBased on juridical and

administrative unityTerritorial integrityTerritorially based national identity

and loyaltyInternal sovereignty: Legitimate

authority in relations with subjects within its jurisdiction

External sovereignty: legal equality among states

The Market: A fluid/dynamic conceptInvolves production and commercial

activitiesTransactions, exchanges transcend national

boundaries, identities, and loyaltiesOperates within and across the confines of

individual statesIs an intricate web of interdependent

transactions that reflect and shape Prices Technological advances Consumer tastes

Power in the Political EconomyRelational Power: A makes B do something that

B otherwise would not doStructural Power: the power to shape and

determine the rules of the game under which political and economic institutions have to operate—domestically and/or internationally.

4 Major Structures: domestic/global1. security: individual and national 2. Production: private and state

enterprises, MNCs3. Finance : credit and money4. Structure of knowledge: information,

education, science, technology

Political-Economic FrameworkInteraction between state and market

(economy) results in processes called political economy

Imports and exportsBalance of Trade: ratio of imports to exports

1. Trade Deficit: A state imports more than it exports f.ex. the U.S.2. Trade Surplus: A state exports more than it importsf.ex. China

Purchasing Power Parity (PPP)GDP or GNI (GNP) is usually expressed in a single currency; often the U.S. dollar. The value of all goods and services produced by a state or nation respectively.

PPP—Purchasing Power Parity corrects monetary indicators to reflect the amount of local currency required in that country to buy certain standard goods.

Shortcomings of GDP/GNP1. Does not reveal how wealth is distributed

among the country’s economic actors2. Only goods that actually enter the societies

monetary sector are actually measured3. Many states do not have the bureaucratic

infrastructure to adequately measure GDP4. GDP and GNP/GNP are often used to

compare the prosperity of one country with another—even though there are huge between-country disparities in the exchange value of money.

ExampleIndia has only $654 of GDP per capita but it

compares with $2,892 per capita in purchasing power.

The purchasing power of Japan’s $33,713 is actually only 27,976.

In purchasing power dollars, the economic gap between the wealthier and poorer countries usually decreases.

For many of the poorer countries, the purchasing power dollars are 5 to 8 times greater than GDP per capita dollars.

In terms of global trade, the purchasing power of a countries’ currency is directly tied to international exchange rates, not the price of bread at home and thus its relative wealth or poverty remains

Political-Economic FrameworkTwo ideal-type political economies:

- Market economy - Command economy

Mixed economy is real world compromise

ComparingPolitical-Economic Frameworks:

Five Major Questions

Market EconomyMarket economy: total private control

Actors have direct, personal control over factors of production and what goods are produced

Actors are motivated to maximize value associated with goods and resources they control

Invisible hand of market determines value and distribution of goods and services

State role and intervention are minimal

Command EconomyCommand economy: Total state control

State owns all factors of productionState determines what goods are produced according to state plan, their value, and how they are distributed

Competition is eliminated since the state established payments for every factor

State has dominant role, and surplus value (profit) is accumulated by the state

Mixed EconomyMixed economy - hybrid compromise

Means of production ownership shared between state and private actors. State usually owns major factors such as transportation or communications

Primarily demand-oriented, but public sector under state control. State intervenes on behalf of national priorities.

Private actors maximize profits, but state taxes to purchase goods or transfer payments to redistribute to certain actors in social order

The Politics of Political EconomyThe three “isms”: capitalism,

communism, and socialism Related to market, command, and mixedCapitalism is based on Adam Smith’s

laissez-faire economicsCommunism is based on the idea that the

state must control land, labor and capital to serve the best interests of all the population

The Politics of Political EconomySocialism, a confusing term in practice, tries

to balance state involvement and private control to reduce inequalities

No country is an ideal-type; every state engages in some forms of redistribution of resources and regulation of actors

Economic “isms” usually tied to broader sociopolitical order

Every state engages in some regulation

Capitalist ExampleSwitzerland

6th wealthiest (GDP per capita)Weak central governmentPrivate control, little regulationGovernment spending among lowest of

all developed countries1990s saw a rise in welfare spending

Mixed and CapitalistSouth Korea

Government expenditures lowest among developed countries (goods/services)

Government greatly promotes economic development

29th in the world (GDP per capita)Export-oriented35th in measure of economic freedom

Mixed and SocialistDenmark

3rd among major countries (GDP per capita)

13th ranking in economic freedomStrong regulation in working conditions

and environmental qualityGovernment provides extensive welfare

benefitsHigh taxes

Command and CommunistCuba

Although lessened in recent years, state control of economy, owning means of production

Ranked 149th among the 154 countries in economic freedom

Government commitment to fund education, health care, and control of land and income guarantee equality between genders, race, urban and rural citizens

Ranks in the top 50 countries for quality of life (UN)

Discussion QuestionsWhat is the attraction of command

economies to market economies when they are generally inferior in productivity?

What would be the greatest benefits if the state played virtually no role? What would be the problems?

Is capitalism so individualistic that it can’t protect the collective good?