Chapter Five: Political Economy as the Interdependence Between Markets and States
Introduction
Political economy (PE) is an allocative system or a system for solving the allocation problem.
Political economy is the interaction between politics and economics in the areas of allocation that call for combining the norms of the marketplace with the social concerns of government.
Synonyms for politics include the state, government, and social or collective decision making, and politicians.
Synonyms for economics include the market(s), market or economic exchange, exchange system, and capitalism.
Politics and economics are the only systems for allocating scarce resources.
Resource allocation is the calculated assignment of goods and services to production, distribution, consumption, and wealth and prestige accumulation.
Four areas of economic activity that sum up the human, individual and society's, needs or economic wants
PE deals only with the reason or logic behind resource allocation, but not with the determination of the quantities transferred, nor who gets what, when and how.
Allocation is the rational (carefully calculated) assignment of scarce resource to satisfy human needs.
We allocate resources as apposed to randomly distributing them because resources are always scarce relative to human needs.
So technically speaking human utilities have to be scarce to be considered resources.
Rationality presupposes three things: (a) choice; the availability of more than one value or resource
(b) ability to rank order the different values such that one is more desirable than the other; and (c) the selection of a higher ranked value over a lower one.
Politics and economics are the only two systems for allocating scarce resources.
Politics is a collective decision making system used for allocating social or collective scarce resource or for resolving conflicting social values.
Because the scarcity problem in politics is social or collective in nature, only collective decision making can be competent in resolving such problems.
Economics is the individual decision making to solve individual scarcity problems.
Economic.
Proposition One
Political economy has no logic of its own that is separate from the logic of politics and economics, its two originating components. This is to stress that political economy is not a third system distinguished from politics and economics. It is at best only a different and unique method of combining the two systems.
Proposition Two
All political economies mix in varying degrees some elements of markets and states. Each political economy has a different market to state ratio or mix; and no PC relies completely on only one of the two systems.
No political economic system relies on either system exclusively to the neglect of the other.
Political economy exists for two reasons: cross pollination between politics and economics and market failures.
Cross pollination because in everyday life our economic and political decisions are not independent or free of one another. Political issues like democracy affect our economic choices while economic realities like capitalism affect the political system we have.
Market failure because the market often does not live up to its potential as a self-fulfilling, self-perfecting system. And the many areas where the market fails, government must enter into the market to supplement its operation in order to secure a more efficient outcome than would be possible if we pursue pure market principles.
Examples of laissez faire capitalist economists will include: France 1768-87. But even under the physiocracy of this period, there was a lot of the residuals of the high handedness of the preceding mercantile system.
Money and prices are just two examples of the uses of market principles within the former pure Communist Soviet Union.
Proposition Three
The method of ownership determines the type of political economy a country has.
Capitalism and mixed economies stress the importance of private ownership of capital or the means of production.
Socialist political economies such as market socialism and communism stress public ownership of the means of production as a means of achieving greater equality than is possible under capitalism
Proposition Four
Combining the method of allocation with the method of ownership of property gives us four major types of political economy: Capitalism, Mixed economy, Market Socialism, and Communism.
Examples of Mixed Economy will include: Canada, Great Britain and modern-day France.
Examples of Market Socialism will include a lot of Third World countries, especially shortly after their mass independence from colonialism in the 1960s.
Examples of communist countries: the former Soviet Union, China, Cuba and North Korea.
Proposition Five
The different political economies tend to stick with the original mix of markets and state processes adopted in their constitutional makeup because those decisions are not taken slightly. Rather they reflect the profound and solemn consideration during the critical stage of nation building.
The US Constitution stresses individualism because of the importance of individual freedom from British central rule that the American Revolutionary War fought against.
For Russians, the Communist Manifesto written earlier by Karl Marx provided the main alternative of a people's government to the dictatorship of the Czar.
Proposition Six
Only countries that recognize the need to merge the norms of the marketplace with the social concerns of government have been progressive. Countries selecting either purely market or purely political systems have never been progressive. That includes the US in the 1920s, that is, before the great Depression
Proposition Seven
Because the historical, geographic, cultural, economic and political values of countries are different, each country's PC is unique. But there is a special affinity or cross pollination between democracy and capitalism. Democracy is aided by capitalism while capitalism thrives only when combined with democracy.
The American system is considered as an ideal illustration of progress through the combination of democracy and capitalism.
Interdependence is the best way to describe this interaction between markets and states.
Positively considered, two things are said to be interdependent if neither can achieve its full potential without help from the other.
The market cannot be as efficient as it could without the assistance of the State. And the state cannot perform its functions properly without the benefits of the many good attributes (qualities) of the market.
Negatively considered, interdependence of markets and state is necessary because neither system can solve all the problems of society.
This special case of cross pollination between democracy and capitalism is evident in the following areas:
The origins of modernity;
the peaceful organization of society;
the preservation of democracy;
the promotion of individualism;
the optimization of production;
and the attainment of individual and collective efficiency
The Origin of Modernity Debate
The relationship between the market and the state systems in their formative years is a major controversy.
Proposition 8a
The state-centered approach argues that the state was the first to emerge and set the conditions without which the capitalist system could not have emerged.
The feudal system was noted for its wastefulness and the consumption of all agricultural surplus by the feudal lord.
The feudal lord consumed all of the agricultural surplus because there was no room for long distance trade, it was too risky there being no protection beyond the small feudal enclave.
The state provided a set of laws and with its sovereign right to tax, was able to hire and sustain a standing army to protect long distance trade.
The possibility of long-distance trade encouraged the trading of surplus and so ended the consumption of all agricultural surplus by the feudal Lord.
Proposition 8b
The market-centered explanation of the earliest stages of political economy argues that the early formation of states was too weak to have survived without the tax revenue from long-interstate trade.
The chief proponent of the market-centered approach are Immanuel Wallernstein and Karl Marx. Wallernstein argued that the ideological zeal of kings of the young and emerging nation states kept them separate and at war. And because none was powerful enough to dominate the others they were forced to embrace the only thing they had in common which was the growing strength of agricultural commerce.
Marx argued that under capitalism, the state is always the instrument of the powerful bourgeoisie.
Proposition 8c
A political economy approach to the issue of the interdependence between the state and the market system in their early formation years argues that the two emerged simultaneously together, developments in one system helping to promote development in the other.
Marx Weber is the chief proponent of the political economy approach to the interdependence between the emergence of capitalism and the state system.
The state provided a set of laws and with its sovereign right to tax, it was able to hire and sustain a standing army to protect long distance trade.
But the young nation states could not have held on for long without the revenue generated from agricultural commerce.
The Peaceful Organization of Society
The peaceful and progressive organization of society is not possible without modern advances made possible through the competitive private enterprise system.
Proposition 9a
Capitalism introduced specialization and specialization helps to aggregate the public into consumers, producers of all sorts. Market aggregation, by making it possible for people to find whatever they are looking for, is critical to the successful organization of modern society.
Proposition 9b
Because of market failures, the market alone cannot guarantee the peaceful organization of society without government intervention in the areas of regulation, public goods production, money and prices, and government laws to protect and promote private enterprise.
The Preservation of Democracy
Proposition 10a
A democratic political system will draw a lot of support from its citizens if it grants them the right to private ownership of property.
Democracy is a government by the people; which excludes the centralization of power in the hands of one person or a few.
Individuals identify themselves with their property, especially land and the means of production, and would tend to support the democratic system of laws that protect their property.
A democratic state with a large middle class of property owners tends to be more stable than one whose wealth is held by only a narrow upper class.
Proposition 10b
But the market system has no mechanism of protecting property rights. The supposition of economists as stated by John Locke that the individual is by nature free to possess and dispense of his wealth as he pleases is not realistic in a world full of evildoers who would at the least opportunity rub the individual of his wealth.
Whatever property rights individuals enjoy in the private sector is only guaranteed to them through the public political sector.
The Promotion of Individualism
Interdependence between markets and states is strengthened by their mutual reliance on individualized decision making.
Proposition 11a
Individualized economic decision making in the market sector is strengthened by the individual's right to vote in the democratic majority rule political system.
Both strengthen the confidence of the individual in his or her ability to take care of him or herself as well as contribute uniquely to society.
Additionally, there is a high degree of convergence or agreement between market competition and the democratic majority rule system. Each is organized without the powerful hand of a centralized ruler telling consumer and voters whose good they should buy and whom to vote into public office, respectively.
Capitalism encourages small families as the only means of guaranteeing that the individual is not overburdened by family problems and so could accumulate capital for investment. This is called the Protestant Ethics which Max Weber saw as the most influential factor in the development of the capitalist spirit.
Proposition 11b
Democracy is the best system in the guaranteeing of individual freedom and liberties. The progressiveness of the US economy is no small measure attributable to the political guarantees enshrined in the US Constitution to protect private property and the freedom of private enterprise.
Both economic and political power reside ultimately in the individuals that form the state and not in the government, the instrument they created to govern themselves.
On a negative note, the constitutional guarantees of unlimited private enterprise and freedom of the individual to accumulate as much wealth as he is legally capable can often lead to gross inequality and the political tensions that come with inequality particularly as in Canada, some western European countries and especially the United States where the resulting inequality breaks along racial lines.
To the extent that the market derives its legitimization from the state system, the state in a capitalistic society becomes the legal accomplice to the resulting inequality of the market system.
In making the charge, critics of capitalism presuppose the state has the capability of reducing or eliminating inequality.
But for those who would keep the state from redistribution, the level of government interference necessary to eliminate inequality would destroy the freedom of private enterprise and free competition so essential to the capitalist system.
Proposition 11c
A special case of government protection of private enterprise is government promotion of ailing domestic firms and industries against foreign competition called, industrial policy.
Globalization has increased the opportunities for competition as well as exposure to such external dangers as excessive import penetration.
Only government with its power to control what goods enter into the country can protect domestic firms and industries against excessive imports.
The Marshall Plan gave the US government the opportunity to promote the creation of US based multinational companies as carriers of the postwar economy recovery aid to of Western Europe and Japan.
The Optimization of Production
Proposition 12a
Optimization of production means attaining the highest possible output given a certain amount of resource inputs.
Economists claim the market system through its exchange system attains zero waste reduction, and is therefore perfect.
The contribution market exchange makes to further the task of democratic governance is its aggregating effects.
By aggregating consumer choices, suppliers are able to produce only that amount and quality the free democratic society of consumers are willing to spend their hard earned dollars on.
Thus the negative effects of false advertising and other malpractice aside, in the free marketplace society does not waste its scarce resources.
Proposition 12b
The Attainment of Individual and Collective Efficiency
A well organized free market system contributes to the efficiency of society in several ways:
People in a free market economy are generally more pleased with their system than people in a command economy because they see the economy as the result of their own aggregate free choice and NOT the imposition of government.
Capitalist competition compels the individual to seek to add to his store of values that he can trade in the exchange market.
Capitalist competition fosters collective competence and a people enjoying progress are a people at peace.
Capitalism is a system that drives everyone nuts. Its M-C-M process does not leave anyone, including the richest private entrepreneur, to do as he pleases. All must obey its demands to invest an increasing portion of their profits to further expand and improve their business or perish.
But capitalism is rightly criticized for focusing too exclusively on wealth creation.
Not that it does not promote social values like health, recreation, politics, associations, and family life, but that it sees them primarily as a money making venture, and not as values in their own right.