Introduction to Political Economy

Lesson Objectives
• Recall the history of Political Economy.

• Relate the discipline of Economics to the discipline of Political Science.

Political Economy
Individuals

Political economy is an
interdisciplinary branch It is a branch of social science that studies the
of the social sciences. It Governments relationship that forms between a nation's population
focuses on the and its government when public policy is enacted. It is,
interrelationships therefore, the result of the interaction between politics
among and the economy.

Public
Policy
 Political economy studies both how the economy affects politics and how politics
affect the economy.
Political changes can impact many areas of the economy, which can in turn impact
Importance of Political elections and government policies. These include:

Monetary and fiscal policy

Food security
Economy

Global trade

Labor supply, demand, and crises

Gross domestic product (GDP)

Financial inequality

Disaster management

Environmental stability
 Today - Barter

History of Neoliberalism

Rome and the

Political
18th - 19th
creation of
century – monetary
Liberalism systems

Economy 16th – 18th

century -
Mercantilism
13th century
Medieval
Europe – the
emergence of
17th and banking
18th
century –
The gold
standard
History of Political Economy
Barter, Rome, & 13th century Medieval Europe

• Until recent centuries, trade was local and based on

barter – the direct exchange of goods without money.
When barter became inadequate, precious metals like
gold and silver were used to make payments. Rome
established a monetary system throughout its empire,
and long after that empire collapsed, its gold coins
remained in use and were accepted everywhere.
• Europe’s medieval world evolved slowly under the
influence of social and economic change. In Flanders,
Belgium, and northern Italy, self-governing city-states
emerged as commerce flourished. Growing trade
required money, and banks appeared. By the end of
the thirteenth century, Florence had become Europe’s
banking center. The most important Florentine
banking family was the Medici family, later to become
the city’s rulers. It was to Lorenzo de Medici the
Magnificent that Machiavelli dedicated The Prince.
The Medicis loaned money at high interest rates to
Europe’s rulers, especially when those rulers waged
war.
History of Political Economy
States & the Gold Standard

• As territorial states emerged as principal global actors in the seventeenth and eighteenth
centuries, they assumed the role of providing money and regulating trade. These states
developed the first international monetary system – the Gold Standard System – under which
gold and money were equivalent. Under this system, national currencies were linked to gold that
was kept in national treasuries. Gold was used to pay for imports from countries that imported
more than they exported.

• As the global economy grew, several theoretical perspectives evolved concerning the
relationship between economics and politics.
History of Political Economy
Mercantilism

• The changes in politics and the economy that occurred during the 17th and 18th century deeply
altered political and economic practices domestically and internationally. The centralization of
political power in the hands of the monarch in Western Europe, known as Absolutism, illustrates
the impact of these changes and how they laid the foundations for the market economy. During the
absolutist era, the belief in divine providence—that God had chosen the monarch to govern—was
widespread. Monarchs had absolute political power and made decisions with the aim of increasing
that power. At the time, power and wealth were interchangeable concepts: power begot wealth
and wealth begot power.
• This environment provided fertile ground for mercantilism, the dominant economic system
throughout the absolutist era. Mercantilism was based on capital accumulation, or the increase of
wealth. Notice, however, that during the absolutist era, there were no paper currencies: no US
Dollars, Mexican Pesos, or Euros. The currency was made of precious metals, gold and silver. The
more gold and silver acquired, the wealthier—and more powerful—the monarch or the country.
Precious metals are naturally occurring elements and cannot be created; thus, the amount of
wealth in the world was considered finite. The fact that a monarch got some gold meant that
others had lost it. In this, mercantilists were political realists.
 History of Political Economy
Mercantilism
• As rumors about “new worlds” rich in
gold and silver circulated in Western
Europe in the 16th century, monarchs
sponsored naval fleets to venture into
unknown seas in search of riches.
Several European ships ended up
“discovering” land and colonizing Native
peoples in the Americas as well as in
Asia, Africa, and Oceania. As the “new
worlds” were colonized, monarchs could
extend their domain to the colonies.
Taking advantage of their absolute
power, they seized precious metals and
increased their wealth. Therefore, the
mercantilist era was an intense colonial
rivalry among European powers.
 History of Political Economy
Mercantilism
• Wealth meant power. During the 16th,
17th, and 18th centuries, European armies
were composed of mercenaries. In times of
impending war, monarchs would hire
soldiers to defend their countries. The more
wealth a monarch possessed, the more
soldiers they could afford, and thus the
higher their chances were of winning the
war and maintaining their power.
• Given that wealth was finite, monarchs
sought to accumulate wealth, or capital,
through protectionist policies, which
safeguard the domestic economy against
foreign competition through the
establishment of trade barriers such as
tariffs, subsidies, import quotas, and other
restrictions on imports. The rationale
behind protectionist policies is that as a
country’s balance of trade, or the
difference between the value of exports
and imports in a given period, maintains a
surplus, the country accumulates capital.
History of Political Economy
Mercantilism
History of Political Economy
Liberalism
• Mercantilism began to give way to economic
liberalism during the industrial revolution and
Britain’s conversion to free trade. The industrial
revolution (c.1760–1830) transformed Britain
from an agrarian to an industrial society.
Industrialization and accompanying urbanization
empowered a commercial middle class, greatly
enlarged the numbers of urban workers, and
advanced the spread of democracy, evidenced
by Britain’s 1832 Reform Act, which expanded
the number of eligible voters. By 1860 Britain
had become an advocate of free trade, and, for
another half- century, British power was
instrumental in maintaining an open trading
system. Mercantilism, however, did not
disappear. America, for example, maintained
high tariff walls behind which its industries
could flourish.

• Today, a modern form of mercantilism –

called neomercantilism – persists, even in the
face of globalization. Few countries wish to
remain self-sufficient under conditions of
globalization, an exception being “the hermit
kingdom” of North Korea whose leaders
propound a variant of self-sufficiency called
juche (self-reliance).
History of Political Economy
Liberalism

• Unlike mercantilism, the underlying norm of economic liberalism is that economic policies should
improve citizens’ standard of living, not increase state power.

• As a coherent perspective, economic liberalism was pioneered by Adam Smith. In The Wealth of
Nations (1776), Smith argued that trade impediments impoverish rather than enrich. Precious metals,
he believed, were less important than manufactures. Countries could achieve economies of scale by
specializing in goods that they could produce most efficiently. Smith described how markets produce
general welfare, arguing that competition among numerous self-interested individuals' benefits society
as a whole because competition results in a wide choice of goods at low prices. An “invisible hand”
transforms individual greed into social prosperity. Individuals would only act this way, however, if
private property and the rights to buy and sell were assured. State interference in economic life, Smith
contended, should be limited to providing national defense and public goods such as roads and schools.
Beyond this, government interference distorted markets, thereby reducing social welfare.
History of Political Economy
Liberalism
• The ideas promulgated by Adam Smith and other political
economists slowly promoted trade liberalization in Europe.
Britain moved toward free trade in the 1780s with the repeal
of the Corn Laws, trade restrictions such as tariffs and quotas
on imported corn and food. The Corn Laws intended to keep
corn prices high and favor domestic producers of food. Several
European states followed Britain’s move and similarly
promoted trade liberalization. Nevertheless, Britain returned
to protectionist policies during the Napoleonic Wars (1803–
1815), a series of battles fought by the French Empire and its
allies, led by Napoleon I, against several European countries
that formed various coalitions. The costs of war were high, and
as war expenses accumulated, the British government levied
tariffs on imported goods to generate revenues and pay for the
costs of war.
• The end of the Napoleonic Wars ended with the Concert of
Europe, a general consensus to promote equilibrium among
the five great European powers. It prevented another war from
breaking out in Europe from 1815 to 1914.
• The Concert of Europe period saw the flourishing of trade
liberalization. In general terms, international trade picked up
from the late 19th century until World War I. After World War
I, protectionist policies became the rule again until the end of
World War II, when the bases of the current international
financial system were established.
 History of Political Economy
Neo-liberalism
• Economic liberalism has evolved since Smith. Today’s giant
corporations are rivals in markets that often have too few
competitors to assure genuine competition based on comparative
advantage. Global trade increasingly occurs among or within these
corporations and their subsidiaries. Success is measured by a
corporation’s share of the global market – as well as the profits it
earns. Also, unlike manufacturers in earlier centuries, corporations
can improve their comparative advantage by moving to countries
with low labor costs or few regulations.
• Today’s neoliberal economists still favor free markets,
elimination of trade barriers, and minimal government interference
in markets, but they see a greater role for international economic
institutions than did classical economic liberals. They argue that
free movement of investment capital and labor produces greater
wealth for the world as a whole even though inefficient countries
and industries may suffer. Economic efficiency, they believe,
matters more than economic equality. With free markets, there
may be inequality, but even the poor become better off because of
the overall growth in wealth. Moreover, concentrations of wealth
provide needed capital investment for further economic growth.
In a Nutshell
Mercantilism → dominated economic thinking between the sixteenth and eighteenth centuries. Although it
was eclipsed by liberalism, a version of mercantilism still influences many countries today.

Economic liberalism or free-market capitalism → arose in the late eighteenth and early nineteenth centuries,
spread by British and American advocates.

Marxism → developed in the nineteenth century as an alternative to liberalism, with socialists advocating
various Marxist approaches as alternatives to capitalism.

Neo-liberalism → Three factors – the Cold War’s end, the influence of free-market capitalists, and globalization
– have made economic liberalism, now called neoliberalism, today’s dominant perspective.