International Political Economy

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

2. What is Political Economy? • VariousApproaches: • Interaction of politicsandeconomics, • Howdoespoliticsaffecteconomicoutcomes? • Explainingpoliticaltheorieswitheconomicmodels.. • FirstPoliticalEconomists: • Adam Smith, DavidRicardo.. J. S. Mill • Politicalfactorsarecrucial in determiningeconomicoutcomes

3. 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..

4. PoliticalEconomySomeDefinitions • Economics is thesciencewhichstudieshumanbehaviour as a relationshipbtw. endsandscarcemeansthathavealternativeuses (Robbins, 1932) • Politicalnature of decisionmaking: Howpoliticsaffecteconomicchoices? • Politics: power (abilitytoachieveoutcomes) & authority (existswheneverone, severalormanypeoplepermitsomeone else tomakedecisionsforthem in somecategory of acts).

5. Heterogeneity of Interests • Whenthere is conflict of interests, howdoes a societymakecollectivedecision, • Severalmechanismsforcollectiveaction, • Oncethe optimal policy is found it is implemented, • Optimal vs. Actualpolicy, • Howpoliticalconstraintsmayexplainthechoice of policiesthatdifferfrom optimal policies?

6. Some Examples • Opportunistic political business cycle => pre-election 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..?

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

8. 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

9. 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

10. 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.

11. 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

12. 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

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

14. 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,

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

16. 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,

17. 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..

18. 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..

19. 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.

20. 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.

21. 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

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

23. 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

24. 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

25. 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.

26. 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.