Chapter 4 Notes
Chapter 4 Notes PLSC 2013
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This 5 page Class Notes was uploaded by Elise Herenton on Thursday July 28, 2016. The Class Notes belongs to PLSC 2013 at University of Arkansas taught by William Sullivan in Fall 2016. Since its upload, it has received 67 views. For similar materials see Intro to Comparative Politics in Political Science at University of Arkansas.
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Date Created: 07/28/16
Chapter 4: Political Economy v What is Political Economy? Ø Political Economy refers to: the relationship between politics and economics, as well as their effects on political life in a state. § The main components of political economy are markets and property. Ø Markets refer to the interaction of supply and demand, which allocate resources through the intera ctions. § Sellers attempt to develop products that individuals will purchase, while consumers attempt to find the highest quality product at the lowest price . § Because multiple sellers, or producers, sell the same goods, these individuals naturally compete with each other to sell more. Ø States may regulate markets as a way to protect consumers or to prevent a market from emerging . § Ex. Minimum Wage or the FDA (Drug Laws-‐ illegal to protect individuals and society as a whole) v Property Ø Property refers to the ownership of goods and services that are exchanged in markets . • There is no marketplace without property. § Some protections are also associated with property owners hip, primarily from having property taken without compensation. Ø Intellectual Property, or a personal creation which lacks a physical presence , is protected by the state. • Ex. music/writings Ø States construct and enforce property rights. • The state protects owners from losing property without compensation. • Why? Taxation. What money you make off your trade the government can take a portion through taxes. v Public Goods Ø States also provide goods and services that facilitate economic growth. § (Ex. Highways) Ø These are referred to as public goods, or resources that are guaranteed and provided by the state and are available for use by society. § Such goods are usually considered indivisible, meaning ownership of these resources cannot be transferred from the state and cannot be fragmented. • One cannot sell or transfer public good to private. § These resources also reduce business costs by providing some basic utilities free of cost for businesses. Ø The level of public goods a state provides varies according to the state. § All states consider infrastructure a public good. Resource rich states may consider their natural resources to be a public good. • Ex. states with oil: US-‐ If you have oil on your property, it’s your oil and you can sell it; Russia -‐ If you find oil on your property, it belongs to the state. v Social Expenditures Ø Public goods can be considered a type of social expenditure, or a state’s provision of public benefits that provide economic and social resources for use by its citizens. § Such expenditures are commonly referred to as being part of the “welfare state.” Ø Some argue that social expenditures may create a drag on economic growth. § Such claims are typically unfounded, yet social expenditures may be very expensive. Specifically in states that provide a high level of benefits and feature an aging population. Ø Who, specifically, benefits from social expenditures varies according to the service. § Some benefits are designed to target and assist at-‐risk members of society. (Ex. Unemployment) § However, expenditures such a s education, or maternity leave equally benefit all levels of society. v Taxation Ø As states provide increasing levels of benefits, the public must be willing to support them with higher levels of taxation. § Taxation represents the main source of revenue for funding social expenditures. • Social expenditures-‐ money spent in an economy Ø The level of taxation that a state imposes is usually in line with the level of public benefits that a state wishes to provide. § In states with high levels of benefits, taxation acc ounts for a significant percentage of the national gross domestic product (GDP), or the total market value of all good and services produced by on country in a year. § Ex. In the US with (lower levels of benefits), taxation accounts for about 30% of the GDP. In Sweden, (with expansive services) it accounts for closer to 45% of the GDP. v Economic Growth Ø Broadly speaking, governments are responsible for esta blishing a relationship between property and markets . § Specifically, how regulated should marketplaces be ? Which goods should be classified as public property, and what should be considered private property (and how one can develop it)? Ø States must also establish a level of public services that meets with public expectations. § In turn, this requires creating a tax policy that allows a state to meet these needs. • Taxes are the paycheck that countries use to pay for public services. Ø However, in order for a tax policy to be effective, a state must achieve a basic level of economic growth . § Thus, states must establish regulations that encourage economic development while also maintaining a level of taxation that funds services that meet public expectations. v Money Ø Economic growth can be achieved through the creation and management of the national currency, or money. § The amount of currency in supply, and how interest rates are managed, helps a state trigger economic growth or slow an economy down as is necessary. Ø Money has no intri nsic value. Its main function is as a medium for property exchange. • Money is just a piece of paper, however everyone agrees that the paper has value. § Without money, sales are difficult to negotiate and commerce deceases. Thus money plays a role in helping to promote economic growth. • Ex. tracker trading with no money: Trading 2 chickens for a tracker is not an even trade. Even trading half the chickens could be problematic. § States interactions with money are crucial because these allow a state to ensure that transactions take place and future transactions are possible. Ø Today, the value of a currency is determined by the faith that investors have in a national government. § A currency is only as valuable as the stability of the national government . • Euro vs Pound: The euro isn’t popular throughout Europe. v Interest Rates Ø Coordination of a national monetary supply is usually handled by a Central Bank. § A Central Bank is an institution that controls how much money is circulating in society and borrowing rates of a national currency. Ø Managed borrowing rates are referred to as interest rates. § Interest rates refer to the rate of return that is changed to private banks when they borrow from a Central Bank, or borrow from one another . § As a Central bank raises or lowers interest rates, private banks usually make similar adjustments to the rates they charge individuals to borrow from their bank. Ø As interest rates are lowered, access to a loan becomes less expensive and individuals (and businesses) are more likely take out a loan to finance economic activity. § This increases the amount of money in an economy and helps stimulate economic growth . v Interest Rates, Cont’d. Ø If a country raises interest rates, borrowing and lending become costlier , and less likely to occur. § This may also lead individuals to put money in savings , partially to take advantage of high interest rates. Ø As interest rates rise, the amount of money in an economy , and the economy is cooled off. • reduces the chance of inflation or the chance that your money will get lost § Sometimes this done as a way to prevent a recession. v Inflation Ø A Central Bank may also take steps to address concerns of inflation and deflation. Ø Inflation refers to an increase in price within an economy when supplies do not meet levels of demand . § Scarcity of supplies will automatically lead to higher prices within a specific market or the economy overall. When inflation is too high, the value of wages and savings are decreased . • The value of $20 now has changed since the 80s and 90s. Ø Government policy may also cause inflation, if a state borrows money at high interest rates . § This can lead to hyperinflation, or inflation that is higher than 50 percent a month, for more than two months in a row. • It most likely occurs to pay for debt. A country can print money to relieve debt, but the money has less value because there’s nothing to back it up. (Ex. Zimbabwe) § Hyperinflation is more likely to occur when states print money without discretion to cover debts , which leads to a loss of confidence in that state’s government. This usually causes a currency to collapse. v Trade Ø In order to create a healthy economy, states must ensure that competitive markets exist and that domestic business are themselves competitive . • Free trade-‐ few politic restraints, politics out of commerce, sell goods between international fines § These goals form the basis of trade policies. Ø States may use several types of policies to influence trade. These will also affect the strength of the economy as a whole. • The government doesn’t want domestic businesses to suffer. (Ex. Japanese cars made more expensive in the US so American car companies don’t suffer financially.) • If the tariffs are too high, less people will want the product less. If they go too far, the economy will become damaged. § States may impose tariffs, or the taxation of imports (usually set at a certain percentage of their value) . § States may also limit trade through import quotas, which place an upper limit on the amount of certain types of goods that can be imported. § States may also use nontariff regulatory barriers , or policies and regulations that limit imports without taxation. (Ex. American Airline Companies -‐ domestic flights owned by a majority of American airlines ) Ø Such policies involve a tradeoff between protecting domestic business and promoting growth through trade. v Political Economic Systems: Liberalism Ø A political economic system refers to efforts by state leaders to manage an economy according to specific ideological principles. • What do you want to accomplish? § Political economic systems therefore describe the relationship between political and economic institutions in a state. § Because political economic syst ems are designed to achieve specific goals, they usually form the basis of an ideology. § Main economic ideologies are liberalism, communism, and social democracies. Ø Economic liberalism shares the same principles as classical liberalism . § Economic liberalism places a high emphasis on freedom . Thus, they favor strong property rights and prefer that marketplaces be self -‐regulated. • Markets are a little more efficient with providing needs than the government. § This means that economic liberals prefer that taxation be kept minimal levels and public goods are limited to those that provide common benefits. (Ex. Education or Security) • Lower taxes = more money for providing individuals Ø In general, economic liberalism is characterized by an emphasis on individual liberties over the need for collective equality and by market self-‐regulation, rather than state regulation. • It looks at employment as a necessary evil in some instances and sometimes a good thing. • Self regulation = more wealth than if the government regulated it § This is the ideology most closely associated with capitalism. v Communism Ø Recall: Communism practically eliminates individual freedoms in favor of equality. § Communists believe that capitalism will eventually lead to a concentration of wealth through exploitation of laborers by property owners. Laborers will eventually revolt and establish a c ommunist society that guarantees equitable distribution. Ø Since private ownership leads to exploitation, the state controls ALL resources and property and makes ALL economic decisions. § Prices and wages are established by the state and revenue an industry generates is collected for public expenditures. Labor is managed by the state, and workers are told when and where they will work. § Communist states provide extensive social benefits that are designed to meet all basic needs of citizens. Ø In such a system, there is no separation between public and private decision -‐making and the state essentially controls the lives of its citizens , without tolerating dissent. § However, communist states claim they can guarantee a level of equality that no other system can. v Social Democracy Ø Social democracy attempts to combine the benefits of liberalism and communism. § Social democrats accept the need for the need for property rights and a competitive market, but also believe that the state should guarantee some equal provision for citizens . (takes that from communism) Ø Thus, states should make numerous public goods available to citizens. § Social democracies all provide universal (or near) healthcare, education, and retirement funds. Some states also provide greater benefits than this. Thus, taxes are noticeably higher. • Cradle to grave coverage • 45%-‐50% of income goes towards taxes. Ø Competition, though essential, is viewed as less important than state regulation of markets. § Some advocate state ownership of certain resources or sectors if they provide benefits deemed essential to citizens. • Ex. France-‐ 28 days paid vacation, 4 day work week v Measuring Outcomes Ø Recall: the simplest measurement of wealth is Gross Domestic Product, or GDP. • GDP-‐ final marketplace value § GDP is measured on a per capita basis by dividing a state’s GDP by its population . § However, income poorly explains wealth, as costs of living vary (wildly) around the world. Therefore, other measurements must be used to evaluate wealth. Ø One measurement of is Purchasing Power Parity (PPP) or estimates of the buying power of a currency by comparing the cost of a product in multiple countries . § The strength of a currency is determined by comparing the price of a product in one country to the price of the same product in the US. (Ex. The Big Mac Index-‐ compare the cost of a Big Mac in the US to the rest of the world) • Why the US? The value of the dollar is pretty stable § PPP allows for a more accurate comparison of national economies by using a common standard to compare different countries. v Measuring Outcomes, cont’d. Ø GDP also fails to measure how wealth is distributed within a country. § To track income inequality, economists developed the Gini Index, or a mathematical equation that quantifies how evenly income is dispersed among citizens . § On the Gini Index income equality is scored as a zero, while total inequality is scored as 100. • 0 = total equality, 100 = total inequality; both extremes are bad Ø The Gini Index can also illustrate the effectiveness of economic ideologies at promoting equality. § Economic liberalism tends to generate more inequality than do other systems. However, this is also influenced by the commitment a state has social expenditures . § Ex. The US scored a 45 on the Gini Index, China scored a 42, Germany scored a 27. v Human Development Index (HDI) Ø The Human Development Index tracks how a state reinvests its revenues on behalf of its population . § The Human Development Index refers to a statistical tool that tracks and evaluates social development by examining the overall wealth, health, and knowledge of a state. Ø HDI is measured using three variables: § Average life expectancy , access to education, and income (GNI per capita PPP). Ø HDI is measured on a scale of 0 to 1 and indicates the quality of life for a state’s population. • The closer you are to 1 the better. § Ex. Norway: 0.944, Chad, 0.392 Ø There is typically a correlation between high HDI and high GDP per capita values . § However, because the value is derived from three different sources, positive scores in some areas can mask deficiencies in others. (Ex. Japan-‐ average person lives to 88 years old, which pulls up the HDI score ) v Conclusions Ø Political economy reflects the ways that states provide access to markets and protect the rights of property owners. § Policies regarding trade, interest rates, and currency are essentially designed to allow citizens to utilize their property to enter the market . § Within this system, states must also decide what types of public goods to provide for citizens. Ø How states prioritize property rights and social equality forms the basis of political economic systems . § Each economic system places emphasis on either equality or individual freedom, and produces a distinct system with significant consequences. Ø How states perform economically is quantifiable. § Measurements such as GDP can be used to evaluate economic production. § Measurements like HDI can be used to measure what (and how) a state reinvests in itself.
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