WHAT IS POLITICAL EONOMY?

PROFESSOR U KYAW MIN HTUN Pro-Rector (Retired) Yangon Institute of Economics

ORIGIN OF POLITICAL ECONOMY

the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. originated in moral philosophy and developed in the 18th century as the study of the economies of states, polities. Economics was refered to PE, e.g., JS Mill (1848) Principles of Political Economy French physiocrats, Adam Smith, David Ricardo and Karl Marx were some of the exponents of PE Adam Smiths (1776) Wealth of Nations

DEFINITION OF POLITICAL ECONOMY

= how politics affects economic outcomes no longer used as a synonym for economics The term 'economics' came to replace PE, coinciding with publication of an influential textbook by Alfred Marshall in 1890. Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated 'economics' for brevity New PE, not simply a fad, but an area of analysis that is here to stay Department of Political Economy in Glasgow University, where Smith was Professor of Logic and Moral Philosophy, changed its name to the Department of Economics.

NEW POLITICAL ECONOMY

The study of the interaction of politics and economics differs from straight economics or from other areas of economics concerned with policy choice Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses. (Lionel Robbins 1932) = study of the optimal use of scarce resources PE = political nature of decision making and is concerned with how politics will affect economic choices in a society use of the formal and technical tools of modern economic analysis to look at the importance of

WHAT IS POLITICS
= study of power and authority, and the exercise of power and authority: how power/authority are attained & exercised: study of mechanisms for making collective choices Power = the ability of an individual or group to achieve outcomes which reflect his objectives Authority exists whenever one, several, or many people explicitly or tacitly permit someone else to make decisions for them in some category of acts (Lindblom): Politics = struggle over authority In an untidy process called politics, people who want authority struggle to get it while others try to control those who hold it.

HETEROGENEITY OF INTEREST
a conflict of interests between economic actors in a society Questions of power and authority are relevant only when there is heterogeneity of interests Actual policies are often quite different from optimal policies, the latter defined as subject to technical and informational, but not political, constraints Positive PE = how political constraints may explain the choice of policies and thus economic outcomes that differ from optimal policies and their outcomes This positive view implies a normative approach, how, given the existing political constraints,

Some Examples of Political Influences

Opportunistic political business cycle: Preelection economic policies and outcomes influenced by the desire of the incumbent to manipulate the economy in order to improve his re-election prospects Hyperinflation Economies: Though it is agreed that deficit reduction is a necessary component of an inflation stabilization program, deficit reduction is long delayed while inflation accelerates Transition Economies: Though it is generally agreed that economic efficiency and social welfare will be substantially higher once a market system of allocation is in place, the transition has been slow, far slower than observers expected at the outset on the basis of

DISCIPLINES COMPARED - I
1. Public Economics / Public Finance = Economics of public sector: How economic decisions of the government affect economic actors: Effects of tax & expenditure policies on individuals & firms Neoclassical welfare economics: taking the governments objective of welfare maximization as given and asking how tax and expenditure policies may be used to achieve the objective One area of normative public finance is the formulation of simple criteria for government decision making, but this is not in terms of choosing the objective to be maximized, but of choosing criteria and methods to achieve the

DISCIPLINES COMPARED - II
2. Public Choice = How the objectives are chosen: How collective choices are made studying decision making mechanisms per se, considering not only the positive and normative aspects of different ways of making collective choices, but also the question of how a society can choose over the set of possible choice mechanisms. Public choice differs from political science, in that it stresses the use of tools of economic analysis to study collective choices. Public choice can be defined as the economic study of non-market decision making, or simply the application of economics to political science.

TYPES OF HETEROGENEITY
Importance of heterogeneity for PE - two propositions heterogeneity is necessary for there to be political constraints. the effect of politics on economics follows from the mechanisms by which these conflicts are resolved Heterogeneity is also necessary for there to be markets, but heterogeneity of interests plays out quite differently when addressed through the market than through the political process 1.Ex ante-heterogeneity: individuals are heterogeneous in a number of dimensions, leading them to prefer different policies ex ante 2.Ex post heterogeneity: distributional implications

Heterogeneity is Central to PE
1. All individuals may be identical ex ante, but are not identical ex post - ex-post heterogeneity is key to the possibility of time inconsistency in the presence of a benevolent government Time inconsistency = a policymaker announcing a policy for t1at t0and then enacting a different policy at t1 if it suits his own interests imperfect credibility of policy due to the possibility of time consistency 2. Though heterogeneity is central to both areas, there is a key difference PE: endogenous determined objective function Welfare economics: given multi-agent objective function

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