political economy essay

2013 Theses Doctoral

Essays in Political Economy

Turban, Sebastien

This dissertation presents three essays in Political Economy with different approaches, but a single line of inquiry: how can political institutions shape individual behaviors by modifying the incentives of political actors? Krugman and Wells (2005) defines economics as "the study of economies, at both the level of individuals and of society as a whole" and an economy as "a system for coordinating society's productive activities." Political Economy, in parallel, can be seen at the study of politics, at both the level of individuals and of institutions as a whole, where institutions are defined as systems to coordinate individuals' interactions. The two dimensions are important: although politics consists in decisions taken at the individual level, the outcomes are shaped by the institutional rules which thus partly determines those choices. The three chapters presented here consider particular cases of this interdependence between individual political actors and political institutions. Chapter 1 analyzes how the effective super-majority in the US Senate along with the role of parties as imperfect coordinators of politicians' actions affect the incentives of the centrist senators; and suggests in a stylized model that, counter-intuitively, a smaller minority might be more successful in its effort to fight the majority's priorities. Chapter 2 studies empirically how changes in a country's constitutional executive term limits affect the incentives of politicians and the consequences on a country's default probability by considering the effect those shocks have on the perception that international investors have of a country's financial soundness. Chapter 3 completes the parallel between the standard definition of Economics and Political Economy by investigating the understudied extension of markets for goods to markets for votes, and shows that the idiosyncratic characteristics of votes imply that a typical market performs badly in allocating the decision power to the parties valuing it the most. This dissertation not only tackles a series of problems in Political Economy, but also discusses and develops a wide range of methods which are available to understand those issues. Chapter 1 proposes a participation game model where a certain number of contributors are required to pay in order for a public good to be provided. The main theoretical contribution of this paper is to show that when the contribution cost falls in the number of ex-post contributors, not only individual participation is more likely when the required number of participants increases with the size of the group, but the provision probability increases too. On the contrary, this does not occur in a fixed cost model. One practical implication of the model suggests that if a party in the US Senate keeps its majority while losing seats at the center of the political spectrum, it might be more successful in overcoming a cloture vote without any change in policy ideology. This chapter then uses a laboratory experiment to test the model's predictions and underlines how, generally, simple experiments can guide theorists to first find identifiable, testable comparative statics predictions, and second, design experiments which would not be easily replicated in the field and provide clean identification. The experimental results also show the importance of using models with testable implications: although the theory's predictions on individual behavior are qualitatively borne out by the data, the quantitative deviations from standard "rational" behavior as expressed in game theoretical solution concepts differ across the set of parameters and generate aggregate outcomes which do not match the theory exactly. Optimization-based models with additional, behavioral elements, or models of bounded rationality which are discussed in part in that chapter should thus also be an integral part of political economy models: a general equilibrium model which answers its motivating question under the assumption of perfect rationality will only be of limited use if it is not robust to the individual deviations from this assumption that we observe in reality. Chapter 2, co-authored with Laurence Wilse-Samson, is an empirical study which uses an event-study methodology to uncover the impact of changes in a country's constitutional executive term limits on international investors' perception of that country's risk, by analyzing the evolution of bond market spreads around the time of those changes. It provides two main contributions, one methodological, and the other empirical.. The flourishing literature on institutions mainly considers the impact of institutions on low-frequency variables such as fiscal outcomes, while this study uses high-frequency financial data. The trade-off in these two approaches is informative. With high frequency data and using event-studies, the identification is clear: any movement in financial markets can be linked to the institutional change under investigation. However, failures of rational expectations means that this impact on expectations might differ from the effect on realized economic variables. This chapter thus emphasizes that while these two types of analyses are complementary, high-frequency analyses are underused. On the empirical side, the chapter considers the unresolved debate over the impact of term limits on fiscal outcomes, as underlined by contradictory results in the empirical literature. Moreover, theories developed on term limits also suggest ambiguous effects: for instance, do term limits prevent insiders from controlling the political process, or do they prevent elections from creating incentives for the executive to behave well? The chapter considers the movement of bond spreads around term-limits "shocks" and shows that although bond spreads fall after restrictions on term limits, there is no significant impact of extensions. Furthermore, it provides suggestive evidence that the impact of such shocks is larger in relatively weakly institutionalized countries, and that the separation of branches also matter to investors since restrictions implemented by the judiciary also generate strong movements. Finally, Chapter 3, co-authored with Alessandra Casella, is motivated by the simple question of whether in a committee of members belonging to two opposing parties and voting on a binary decision, markets, which have been thoroughly studied in economic theory and are considered to function quite well in allocating goods to the agents valuing them the most, can work in allocating votes and decision power in the same way. Generally, one question in thinking about voting mechanisms has been that formulated by Dahl (1956): "What if a minority prefers an alternative much more passionately than the majority prefers a contrary alternative? Does the majority principle still make sense?". A market for votes appears like an intuitive way to allow members of a committee to sell and buy votes using a numeraire, but this chapter shows that it is unable to do so in an efficient way and usually performs worse than majority voting, in particular in a large electorate. A market for votes indeed yields a competition between the higher-intensity member of each party irrespectively of the size of those parties, which generates a systematic bias in favor of the minority which will win too often. In particular, it is shown that for any party sizes, the probability of a minority victory converges to a half as the electorate becomes infinitely large. The model also emphasizes other inefficiencies: this institution implies intra-party trade and supermajorities. Importantly, the implications of the model have been tested in a laboratory experiment in a previous paper and are generally verified by the experimental results.

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8.1: What is Political Economy?

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• Page ID 135862

• Dino Bozonelos, Julia Wendt, Charlotte Lee, Jessica Scarffe, Masahiro Omae, Josh Franco, Byran Martin, & Stefan Veldhuis
• Victor Valley College, Berkeley City College, Allan Hancock College, San Diego City College, Cuyamaca College, Houston Community College, and Long Beach City College via ASCCC Open Educational Resources Initiative (OERI)

Learning Objectives

By the end of this section, you will be able to:

• Describe political economy as a field of study.
• Define key terms associated with political economy.

Introduction

Political economy, as defined in Chapter One, is a subfield of political science that considers various economic theories (like capitalism, socialism, communism, fascism), practices and outcomes either within a state, or among and between states in the global system. In its simplest form, political economy is the study of the relationship between the market and powerful actors, such as a country’s government. The market is defined as the exchange of goods and services within a given territory. This almost always involves the forces of supply and demand and the allocation of resources through private economic decision-making. The interaction between the state and the market through political, economic, and societal institutions can frame deliverable outcomes, such as public goods. This can occur not only within a country, but between them as well. Public goods are defined as goods and services provided by the state that are available for everyone in society. They are nonexcludable and nonrival in nature. Examples include public roads, public hospitals and libraries. Clearly, political economy will involve the mixing of political and economic policy goals. Finally, political economy also studies how individuals interact with the market and society (Britannica, n.d.)

Political economy is a subfield of political science that often overlaps with other fields and subfields in the social sciences, most notably economics. Political economists are tasked with understanding how the state affects the market. A good example is the concept of wealth distribution within a country. Wealth distribution is defined as how a country’s goods, investments, properties, and resources, or wealth , are divided amongst its population. In some countries, wealth is distributed quite evenly, whereas in other countries, wealth is distributed unevenly. Countries with uneven wealth distribution are more susceptible to political tension as some groups often feel they have been denied their ‘fair share of the pie’. Similarly, political economists look at how the market affects the state and its society. For example, market forces can force elected politicians to change their perspectives. A downturn in the market is correlated with the election chances of sitting politicians. Just ask US President George H.W. Bush, who won a decisive victory in the 1991 Gulf War, but the economic downturn a year later overshadowed his accomplishments. It led Clinton’s campaign manager to coin his now famous phrase, “it’s the economy, stupid!”

Given its definition and scope, areas of research within the political economy discipline can be quite diverse. Generally, though, the three main ways political economy are engaged today include:

• Studying how the economy (and/or economic systems) affects politics. (Given the expansive scope of this field, our chapter will focus on economic systems.)
• How political forces affect the economy. (i.e. How do institutions, voters, interest groups affect economic outcomes? How does this influence public policy?)
• How economic foundations and tools can be applied to study politics.

To gain a fuller understanding of how political economy is studied by comparativists, it’s important to consider its history as a subdiscipline as well as a number of key terms used in the practice of the field.

Political Economy: Foundation and Key Terms

Scholars have been thinking about the interaction between society and the economy for centuries. Ancient Greek philosophers such as Plato and Aristotle, wrote about the oikos , which is the ancient Greek word for house. Aristotle saw the oikos as the basic unit within the polis , or city. From oikos is derived the English word econ -omy, or the study of household accounts, which over time has translated into the study of a country’s wealth and assets. Formal study of political economy began in the mid-1700s. Adam Smith’s 1776 work, the Wealth of Nations , is often considered the starting point. His work was followed by David Ricardo, who wrote about comparative advantage, which will be discussed further below. His work complemented Smith’s thoughts about the free market. A few decades later came the writings of Karl Marx, whose reactions to the free market and capitalism still provide much of the basis for contemporary criticism. Over time, the field garnered more widespread attention. Political economy’s growth as a specific discipline in universities was noted by Dunbar as early as 1891, in an article in The Quarterly Journal of Economics published by Oxford University Press. The article attributes public interest in the subject as a significant cause in its expanded role in academia:

It is the perception of the scope and importance of the questions with which political economy deals that turns the popular current so strongly towards it today. It is keenly felt that on the right answer of these questions must depend not only the future progress of society, but also the preservation of much that has been gained by mankind in the past. (Dunbar, 1891)

Political economists also consider various concepts including private goods, property, and property rights. In contrast to public goods, private goods are defined as an economic resource which are acquired or owned exclusively by a person or group. Public and private goods can vary greatly between countries, for instance, healthcare is sometimes a public private good in some countries whereas it is a public good in most countries. A defining feature of private goods is their potential scarcity, and the competition that arises from this scarcity. Property is defined as a resource or commodity that a person or group legally owns. Property can include tangible items, like cars and houses, to intangible items, like patents, copyrights or trademarks.

Property rights are defined as the legal authority to dictate how property, whether tangible or intangible, is used or managed. These concepts help form the foundation for the vast majority of political economy studies.

States can affect the market through a variety of measures. First, they can simply pass laws that regulate the market. Regulation is defined as rules imposed by a government on society. Various types of regulation exist, from rules on protecting public interests, such as the environment to social cohesion. Regulation that affects the marker is often referred to as regulatory policy, economic regulation, or fiscal regulation. For example, an effective form of regulation is through the policy of taxation. Taxation is defined as the process of a government collecting money from its citizens, corporations, and other entities. Taxes can be imposed on income, capital gains and on estates. Taxes are an important part of a functioning society as governments use tax revenue to pay for public goods. Taxes can be used to regulate economic activity. A country can impose higher taxes on a product, driving up the price, to dissuade people from using it. A good example is the taxes imposed on cigarettes. Referred to as sin taxes , these are taxes levied on a product or activity that are deemed harmful to society. Sin taxes exist on tobacco, alcohol, and gambling in almost every state. Taxation, spending, and regulation are referred to as fiscal policy .

In addition to fiscal policy, governments can exercise monetary policy. Monetary policy is defined as the actions taken by a state’s central bank to affect the money supply. Money is simply a medium of exchange. It is a way to store value and is used as a unit of account in economic transactions. Printed money has no intrinsic value. Its value is determined by the government that prints it. A five-dollar bill is worth five dollars because that is what the US government says it is. Of course, the people of a country need to also believe that the printed money is worth what the government says it is. If the public does not, then the money can be worthless. A good example is the former currencies of countries that adopted the Euro. The German mark, the French franc and the Greek drachma no longer have any value.

A central bank can either expand the money supply, to grow the economy and maximize employment. Economic growth is the process by which a country’s wealth increases over time. Or it can contract the money supply, to slow the economy and moderate inflation. An economic slowdown can be the result, which often occurs in the form of a recession. A recession is defined as two consecutive quarters (three months) of declining economic activity. In each instance, a central bank will manipulate the money supply through interest rates. Let’s examine each scenario. A central bank will reduce interest rates to stimulate economic growth. This makes it easier for businesses to borrow money to expand production, increase hiring, or invest in research & development. Similarly, consumers can borrow at lower interest rates to buy homes or consumer goods.

If, however, economic demand is growing too fast, a central bank raises interest rates to cool off the economy. Some may ask what is wrong with a hot economy? Is that not a good thing? Not necessarily, as a major consequence of higher spending is inflation. Inflation is defined as a general increase in prices, usually within a given time. If the public has access to excess cash or credit and decides to spend, it becomes a simple matter of supply and demand. More demand for products and services leads to higher prices. Prices can also rise for other reasons, including higher labor costs, or an increased cost of inputs, such as fuel for transportation. Regardless of the reason, inflation simply means your dollar will not go as far tomorrow as it did today.

Finally, a country’s economy can be affected externally as well through international trade. International trade is defined as the exchange of goods, services, and activities between countries. States, however, never trade equally. In every trading relationship, one country benefits more than the other. Sometimes, the trade surplus or trade deficit is small and not so consequential. Other times, the surplus or deficit can be large and have important consequences. If a country is experiencing large trade deficits, then that country is importing more than it is exporting. A positive effect of a large deficit is that it is likely that the goods, services, and activities being imported are less expensive, which can help lower costs for consumers in that country. A negative effect of a large is that hard money leaves the country. This can affect the money supply of the country. Conversely, a large surplus usually means that prices of goods, services and activities are generally higher in that country. However, the country is bringing in quite a bit of money, which can be used by a government to fund numerous development projects.

A foundational principle in international trade is that of comparative advantage. Comparative advantage refers to the goods, services or activities that one state can produce or provide more cheaply or easily than other states. Developed by David Ricardo in the early 1800s, comparative advantage entails states that can mutually benefit from cooperation and voluntary trade. This is because no nation is entirely self-sufficient and therefore must trade. Even when states can produce the same goods and services, they often have to trade with other states to overcome their different allocation of resources. This is especially true for states with certain natural resources such as oil or minerals. Thus, because nations have different allocations of resources, such as land, labor, or capital, each enjoys a comparative advantage in producing those goods that use its abundant resources. Over time, the ability of one business or entity to engage in production at a lower opportunity cost than another business or entity will lead to specialization. In this scenario, goods will be less expensive, and production will be more efficient for states that engage in trade.

Political Economy as a Modern Discipline

Per Bozonelos (2022), “in the early twentieth century, economics began to separate itself formally from politics by focusing on theories of economic behavior as they related to human behavior”. The graph below details how interest in economics has skyrocketed, whereas interest in political economy has remained relatively constant. One way to distinguish the two disciplines is to think of economics as focused on analysis of the economy, both at the national, or macro level, and at the firm, or micro, level. Principles of economics include calculating market equilibrium given supply and demand, the projection of various outcomes based on finite resources, and observations regarding the distribution of wealth. Instead, think of political economy as an extension of economics, but with a focus on how politics and public policy affects economics.

While political economy is less well known than economics, “the assumed separation of politics and economics is very much a 20th-century phenomenon” (Robbins, 2017). In our 21st century, economists have increasingly accepted and have in most analyses, incorporated politics and policy decisions. A good example includes housing affordability, where the economics of owning a house are highly political. The market does not always mean fairness and “many issues of political economy are bread-and-butter issues that are important to scholars as well as the public at large.” (Robbins, 2017). Economic decisions are not made in a vacuum by “rational” actors always maximizing their economic self-interest. If that were the case, we would not spend more money on a pair of sneakers just because of the brand or color.

The field of political economy can be extended into two more specific subgroups: comparative political economy and international political economy. The subgroups parallel the subdisciplines of political science discussed in Chapter One: comparative politics and international politics. Comparative political economy (CPE) is defined as the comparison across and between countries of the ways in which politics and economics interact. Often, this comparison lends to observations of similar economic policies resulting in different political outcomes, or vice versa, similar political policies resulting in different economic outcomes. Comparative political economy has generally focused on the politics of economic development, the analysis of different economic systems, the effects and implications of globalization, as well as general economic and social policies. International political economy (IPE) is defined as the study of political economy from a global perspective or through international institutions. Conversations over the distribution of wealth take place at a higher level than individual or cross-national studies. IPE focuses on international trade, economic development, international monetary bodies, as well as the influence of multinational corporations and non-governmental organizations.

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How to Write a Political Economy Essay Step by Step

If you have an upcoming political economy essay, just follow this simple guide. You can also use it as a checklist as you go to make sure that you don’t forget anything.

What is a Political Economy Essay?

Political economy refers to the relationship between - you guessed it - politics and economy. It focuses on how they are connected, and more specifically, it examines how economies behave in various political conditions such as democracy, socialism, and communism. It also demonstrates how different government groups share resources. Here’s a basic guide on how to write effectively about this subject.

Where Should I Start?

First of all, do your reading. You’ll need to know what you’re talking about in order to write an essay worthy of a high grade. When you’re ready, write out a solid first draft that includes all of your main points and arguments. If you quote anyone in your text, you have to explicitly state the name of the author, the year the excerpt was originally published, and the page number where you got the quote from. For example, (Harrison 1999: 164).

If you are going to include an abstract, it should serve as a snapshot of what your paper is about and what conclusion you came to. Keep it limited to one short paragraph that very briefly summarizes your overall paper. Organize your essay according to the following structure:

1) Introduction

Your introduction should clearly state your thesis (the main argument you pose) and briefly summarize the subject matter in your paper. While doing this, it’s important to draw the reader in to want to read the rest. A great way to do this is to find something unusual or interesting about your topic, and pose a question to the reader based on that fact. For example, describe the political system at hand and question the origin or future consequences of an intriguing aspect within of your topic and how it impacts the economy.

The body of your political economy essay must expand on your main ideas, outlining your arguments in detail, and providing sufficient support against any likely counterarguments. You should attempt to demonstrate without a doubt the validity of your claim and provide a thought-provoking examination of your selected form of government and the various ways it influences the economy and vice versa.

Each paragraph should completely or at least partially communicate one idea or argument. You may include graphs, charts, and statistical data to support your argument. Be sure to properly cite all materials taken from outside sources according to your professor’s expectations. Your grade will depend on it!

3) Conclusion

Whatever your findings may be, and whether they prove your original claim or disprove it, you should clearly state the result of your efforts in researching and writing about your topic. You may reiterate the most essential findings to bring closure to your argument. A simple prediction of what the future holds for your examined political economy might also serve as a good way to bring your paper to an end.

Strategy for Composition

Since your topic falls in the realm of political economy, you should approach your paper not as an informative essay, but an explanatory essay that attempts to make sense of the relationship between the economy and its overarching political system and its laws. If you state any fact that is central to your topic, attempt to explain to the reader what significance you can draw from that fact since you chose to include it in your paper.

Finishing Touches

Be sure that your paper coincides with whatever academic style your professor asked you to use (MLA or APA). Edit your paper rigorously for errors, and go through a series of drafts until the structure and content of your paper is worthy of an ‘A’. If possible, ask a classmate or friend to read through it and provide suggestions for improvement. Use this outline as a guide as you write your political economy essay and you can’t go wrong.

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This thesis consists of three chapters, in which I study the role of globalization and how political views are formed. The first chapter studies the rise of backlash against tourism as a form of antiglobalization sentiment, looking at the role of Airbnb. I construct a spatially disaggregated dataset to study the consequences of Airbnb in London. First, I document that 1 additional Airbnb tourist per 1000 residents increases complaints against tourists by 2.2 per cent. Secondly, I explore the roots of these reactions. I find that higher Airbnb penetration decreases neighbourhood quality, while the housing market is marginally affected. These negative externalities can be explained by a lack of monitoring and coordination by hosts, which are key differences compared to traditional hotel accommodations. Finally, I show that the deterioration of neighbourhood quality markedly reduces social capital, and worsens attitudes towards globalization, with higher support for Brexit. The second chapter documents how firms in tradable sectors are more likely to be subject to external competition to limit market power while non-tradable firms are more dependent on domestic policies and institutions. We combine an antitrust index with firm-level data from Orbis covering more than 12 million firms from 94 countries and find that profit margins of firms operating in non-tradable sectors are significantly lower in countries with stronger antitrust policies. The third chapter studies the impact of the Italian civil war and Nazi occupation of Italy in 1943– 45 on postwar political outcomes. The Communist Party, more active in the resistance movement, gained votes in areas where the Nazi occupation was both longer and harsher, mainly at the expense of centrist parties. This effect persists until the late 1980s. These results suggest that civil war and widespread political violence reshaped political identities in favour of the political groups that emerge as winners.

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