International Political Economy Assist Prof Dr B Müge

International Political Economy Assist. Prof. Dr. B. Müge TUNAER VURAL http: //kisi. deu. edu. tr/muge. tunaer Room #: 217

What is Political Economy? • Various Approaches: – Interaction of politics and economics, – How does politics affect economic outcomes? – Explaining political theories with economic models. . • First Political Economists: – Adam Smith, David Ricardo. . J. S. Mill – Political factors are crucial in determining economic outcomes

Division of Politics & Economics • Economic models are abstracted from political and institutional factors, • For the sake of methodological progress, • Neo-classical school, • Optimisation unders constraint. .

Political Economy Some Definitions • Economics is the science which studies human behaviour as a relationship btw. ends and scarce means that have alternative uses (Robbins, 1932) • Political nature of decision making: How politics affect economic choices? • Politics: power (ability to achieve outcomes) & authority (exists whenever one, several or many people permit someone else to make decisions for them in some category of acts).

Heterogeneity of Interests • When there is conflict of interests, how does a society make collective decision, • Several mechanisms for collective action, • Once the optimal policy is found it is implemented, • Optimal vs. Actual policy, • How political constraints may explain the choice of policies that differ from optimal policies?

Some Examples • Opportunistic political business cycle => preelection economic policies and outcomes influenced by the desire of the incumbent to manipulate the economy in order to improve his reelection prospects. • If on the other hand, policies are made by an infinitely lived social welfare maximising planner, who was sure to retain his job. . ?

Some Examples -2 • An economy experiences hyperinflation, reduction in budget deficit is needed. . How to cut the budget? • Transition of the formerly socialist CEEs,

Main Theories of Political Economy • Social Choice Theory: nature of choice in economic and political context • Game Theory => Game theoretic models of political institutions • Collective Action Theory: Cooperation & coordination

How does politics affect economic outcomes? • Montchrétien (1615) – Free trade for agriculture, – Gov’t control on industry, – Population should grow: • Labour force ↑ w↓ profits↑ => cost of wars would be met rather easy! • Merchantilism => Capitalism • Feudalism => Nation State

The Mercantilists’ Views on Trade -1 • The more gold and silver and a nation had, the richer and more powerful it was. • Thus the way for a nation to become rich is to export more than it imported. • The resulting export surplus would then be settled by an inflow of bullion or precious metals such as gold and silver. • Thus the mercantilists advocated restrictions on imports and incentives for exports.

The Mercantilists’ Views on Trade -2 • A nation can gain in international trade only at the expense of other nations. • i. e. , “Trade is a zero-sum game. ” § Criticism: (1) The measure of the wealth of a nation? (2) Rulers vs. common people • Mercantilism is Alive and Well in the Twenty. First Century

Physiocrats: Liberal Ideas against Merchantilism -1 • François Quesnay: 1694 – 1774 • Rule of nature: natural order against to artificial systems, • Tableau Economique: depicted the circulation between the three main classes of the economy: – Productive class – Proprietor class – Sterile class

Physiocrats: Liberal Ideas against Merchantilism -2 • Productive Class: Capitalist entrepreneurs who rent land hire workers, – Agriculture constructed under capitalistic methods, – They produce the net product /surplus above what is consumed in production.

Physiocrats: Liberal Ideas against Merchantilism -3 • Class of Proprietors: landowners, lords. . Obtaining profit created by the productive class, rather than engaging in productive endeavours. • Sterile Class: Unproductive class. . only add to the value of raw materials, that are supplied by the productive class,

Physiocrat Theories • Theory of Production • Theory of Distribution • Theory on Taxation

Contradictions of Physiocracy and the Emergence of Classical School • Divide between productive and sterile, • The pivot of the capitalist economy: surplus value, • But what constitutes value? • Farmers consume agricultural products to produce more agricultural products,

Classical Views -1 • Adam Smith: “Political Economy” = science of legislation (statesman) has two purposes: – Enable people to provide revenue for themselves, – Supply the state with a revenue sufficient for public services. .

Classical Views -2 • Enrich people , but how? • System of commerce and agriculture. . – It’s consumable g&s what feeds the army, not money itself => It is not the amount of money in circulation, but the quantity of g&s what matters. . – Even if exports of gold and silver (import of g&s) are prohibited, smuggling is still possible. When there is smuggling, g&s imported becomes more and more expensive => t. o. t. Deteriorates => loose even more gold and silver. .

Arguments addressed by Merchants to Parliaments • How beneficial can be free trade for the country and people? – Merchants pursue their own interests – Foreign trade brings money into the country • Re-exporting: Mun’s Example=> “actions of the husbandman in the seedtime”, • Smuggling: money remains in the country, in the hand of bankers who carry the risk.

David Ricardo • Comparative Advantage: Division of labour on a global scale, • Portugal – United Kingdom, • Atlantic Triangle: England sells cotton and weapons to buy sugar and tobacco, West Africa sells slaves to buy cotton and weapons, the Carribean sells sugar and tobacco to buy slaves.

• 1776 – American Revolution • 1789 – French Revolution • Friedrich List: – Free trade is British rule over the global economy. – Political independence requires economic independence. – Protectionism and state regulation

Development of Neo-Classical Economics • • • Stress on optimisation under constraint, Constraint: Limited resources, Consumer optimum Producer optimum Ignores political factors and institutions

New Political Economy • Much recent work on income distribution, education, public services, etc. • New vs. Old: still focus on how politics affect economic outcomes. • Different Approach: use tools of modern economic analysis to look at the importance of politics for economics

Political Economy • Interaction of politics and economics: all inclusive but no real sense, • Economics: study of optimal use of resources, • Political Economy: deals with the political nature of decision making and concerned with how politics will affect economic choices in a society – Social groups, firms, other organisations

What are the mechanisms for collective action? • How power and authority are attained and exercised? • Remember heterogeneity of interests: conflict in interests of economic actors in a society, i. e. agricultural vs. industrial producers, producers vs. consumers.

Positive vs. Normative Economics • Positive Economics: policy choice is a technical / computational thing! • Normative Economics: under the existing political constraints, how can the societies achieve specific economic objectives? – How to overcome political constraints? – Design of political institutions to better achieve economic objectives.