POLITICS & ECONOMIC POLICY
POSC 182: POLITICS & ECONOMIC POLICY
Analytical Frameworks in IPE
Prof. Steven Liao January 10, 2024
Agenda
• Review • Political Economy vs. Economics • Three theoretical traditions • Our analytical framework • Summing up and Looking Ahead
Politics Global economy
What are we studying here?
Agenda
• Review • Political Economy vs. Economics • Three theoretical traditions • Our analytical framework • Summing up and Looking Ahead
Political Economy vs. Economics • Economics: How to increase the pie overall?
– Prescriptive – “Countries ought to do X economic policy.” – “X economic policy is efficient.” – Welfare
• Political Economics: How does the pie get divided? – Empirical – “If countries ought to do X why do some do Y?” – “X economic policy raises some incomes but lowers others.” – Explanatory
We must understand economics to get the politics right!
Questions?
Agenda
• Review • Political Economy vs. Economics • Three theoretical traditions • Our analytical framework • Summing up and Looking Ahead
IPE’s Three Theoretical Traditions
1. Mercantilism
2. Liberalism
3. Marxism
Mercantilism
Mercantilism’s Core Principles
• Economic wealth is a critical component of state power – Wealth, is required to accumulate power
• Trade should be valued for exports, but imports should be limited as much as possible – The goal is to run a positive trade balance to accumulate wealth
• Some forms of economic activity are more valuable than others – Manufacture > agriculture
Mercantilism and the State
• Decisions about how economic resources should be allocated are too important to be left up to the market
• Economic policy used to direct resources to areas of national interest
Liberalism
Adam Smith David Ricardo
Liberalism’s Core Principles
• The purpose of economic activity is to enrich individuals, not the state
• Countries gain from trade whether they run a trade surplus or deficit
• Countries become wealthier by making products they can produce at low cost and trading them for goods that would cost more to produce at home – Comparative advantage
Liberalism and the State • Government efforts to allocate resources will only reduce national welfare
• State’s role: – est. property rights – enforce those rights and contracts that transfer them
Marxism
Karl Marx
Marx’s Critique of Capitalism • Capitalism is characterized by two central conditions – Private ownership of the “means of production” (or capital) – Wage labor
• Factory owners (capitalist class) only pay workers (working class) a subsistence wage, retain profits
• Predicted that because capitalism divided society into classes, it would lead to a workers’ revolution that would do away with private property – Concentrated capital à falling capital returns à reduced wages – Imbalance between ability to produce goods vs. purchase goods
Marxism and the State
• Capitalist class makes decisions about how resources are allocated in a society
• State has no autonomous power; rather, it is an agent of the capitalist class
Mercantilism Liberalism Marxism
Key Actor The State Individuals Classes, esp. the capitalist class
State’s Role
Intervene in economy to allocate resources
Est. & enforce property rights to facilitate market exchange
Instrument of capitalist class; uses power to sustain capitalism
Proper Econ Policy Goal
Enhance power of the nation- state in the international system
Enhance aggregate social welfare Promote equitable distribution of wealth and income
Image of Int’l System
Conflictual: Countries compete for desirable industries; engage
in trade conflicts as a result.
Harmonious: Int’l economy offers benefits to all countries. Just need a political framework that enables
all to realize these.
Exploitative: Capitalists exploit labor w/in countries; rich
countries exploit poor countries in int’l economy.
Summary
Questions?
Agenda
• Review • Political Economy vs. Economics • Three theoretical traditions • Our analytical framework • Summing up and Looking Ahead
Our Analytical Framework
• Interests
• Institutions
• Interactions
Interests • Various actors in political economy
− individuals, firms, labor unions, interest groups, and governments
• Economic policies create distributional consequences – winners vs. losers
• Interests are the goals that central actors want to use foreign economic policy to achieve
• Interests are the product of two mechanisms – Material interests derived from actor’s position in the economy – Ideas are mental models that provide a coherent set of beliefs about cause-effect
relationships
Institutions • Political institutions establish the rules governing the political process
– Determine which groups are empowered to make policy decisions – Aggregate, reconcile, and transform competing interests
• Domestic-level example – Democratic vs. authoritarian institutions
• International example – Industrial countries often make decisions with little participation of developing countries
Domestic (State) Level International State System
interest group
interest group
institutions
interests
interests
institutions
Interactions
Domestic vs. International Systems • Domestic systems – Hierarchic – A central authority (the state) upholds law and order, enforces contracts
• International systems – Anarchic – No central authority overseeing the behavior of states – Commitment problem: tempting to cheat
The lack of a central authority in the international system makes cooperation among states difficult
Questions?
Exercise • Apply framework to 2002 US Steel Tariffs Example
• Pair with 1-2 neighbors and answer following questions (5 minutes) – Who were the winners and losers? – How did political institutions shape politician incentives and policy? – What was the role and impact of WTO in the case
• Trump’s steel tariffs?
Agenda
• Political Economy vs. Economics • Three theoretical traditions • Our analytical framework • Summing up and looking ahead
Summing Up
• Political economy vs. Economics – How pie gets divided vs. how to make pie bigger
• IPE’s three theoretical traditions – Mercantilism, Liberalism, Marxism
• Our analytical framework – interests, institutions, interactions
Domestic Interests on International Trade
Next Time
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