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Nearly every economics student shares one similar obstacle while studying the discipline, the obstacle of abstraction. Students are generally baffled by abstract examples and graphs that make economics look like physics or other natural sciences. Terms like "homo economicus" seem unrealistic for explaining the phenomena happening within the complex economic and political systems.
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Jetzt kostenlos anmeldenNearly every economics student shares one similar obstacle while studying the discipline, the obstacle of abstraction. Students are generally baffled by abstract examples and graphs that make economics look like physics or other natural sciences. Terms like "homo economicus" seem unrealistic for explaining the phenomena happening within the complex economic and political systems.
You can't find any "homo economicus" around you. Most of the time, you see individuals or groups within a continuous relationship with other agents, institutions, political structures, etc. Within this bewilderment, students generally pass through a moment of epiphany, the moment when they hear about political economy. Want to learn more about the field of political economy and what it can tell us about things like how people might vote? Then read on!
Political economy is a cross-disciplinary field that combines economics, political science, and sociology to understand the role or roles of the economy, political systems, law, government, institutions, and culture, their interactions, and the impact that they have on the agents within society.
Political economy is the interlinkage between mainstream economics and other social sciences. The main focus of the political economy is to define the aspects of economic and social phenomena with the help of an interdisciplinary lens. But how did a field with such diversity emerge?
To understand the core aspects and origins of political economy, it is better to start and trace the word itself. Since the political economy is directly related to the institutions and the state, we can trace its origins back to Ancient Greece.
We can come across the term economics as early as the works of Xenophon. Xenophon mentions economics while using the word "Oeconomicus". The word Oeconomicus is the combination of the words "okios" (household) and "nemein" (administration, management). Written in a Socratic manner, the dialogue takes us to the humans' relationship with institutions, religion, education, and with each other.
In a similar period, we can find Aristotle's work, titled similar to Xenophon's work, "Oeconomica". The treatise is constructed with two books. In the first book, Aristotle focuses on the definition of economics, the roles of the members of the family, and the impact of the citizens on society while selling and buying things. The second book separates the economies and inspects the details of different types of economies.
Fig. 1 - Statue of Xenophon located outside the Austrian Parliament
After some time, we can track similar approaches to political economy in the works of 13th Century Arabian historians and 17th Century French philosophers. Nonetheless, the story of the political economy, as we define it today, starts with the works of physiocrats.
Physiocrats were the supporters of physiocracy, a school of economic thought that suggested that labor is the only thing that creates value. They elaborated this by saying that free trade is natural and any intervention in the economy will tip the balance. They were against mercantilist policies and thought.
The most well-known physiocrat, François Quesnay, tries to explain the relationship in the economy with his work "Tableau économique". His work can be summed up as a table that roots the wealth in a nation to agricultural output. Quesnay traced the relationship between artisans, merchants, landlords, and farmers. Nonetheless, the most important aspect of his work was his method and formulation of explaining the relationship between different classes of society.
As you can see, Quesnay, unlike his predecessors, approached the matter with a formulation, nearly in a scientific manner, to uncover the relationship between different strata of society. We shouldn't be surprised by Quesnay's approach. At the end of the day, Quesnay was a physician and a surgeon who served King Louis XV.
Fig. 2 - F.Quesnay "Master of Medicine"
After approaches made by Quesnay, surely the most known author in the field of economics, Adam Smith, published his work "An Inquiry into the Nature and Causes of the Wealth of Nations" in 1776 and structured the political economy on a whole different level. Similar to Quesnay, Adam Smith took a scientific approach to uncover the aspects of a country's economy and its relationship with the political and institutional structure.
It is important to note that Adam Smith was a philosopher. He was interested in history, religion, and politics, and he gave lectures on the theory of morality. His other famous work, "The Theory of Moral Sentiments," was the ground for his future publications. During this period, we can see similar approaches from David Ricardo and Thomas Malthus, which can be seen as the pillars of contemporary economics together with Adam Smith. Similarly, John Stuart Mill, the author of the "Principles of Political Economy", was interested in economics in a moral and sociological sense. Therefore political economy was redefined at the moment when economics was born.
Nonetheless, the birth of modern economics affected the progress in the field of political economy. Political economy was cast into the shadow after Alfred Marshall's book, "Principles of Economics". This period within the history of economic thought is generally named as the marginalist turn.
Marginalists claimed that the preferences of individuals depend on the marginal utility of a product. Marginalism is attributed to the Austrian school of economics. It has been accepted by mainstream economics. Marginalist theory can be seen as a definitive line that divides classical economics and modern economics.
Nonetheless, during the 20th century, political economy shined again. While its theory stays loyal to its roots, it merged with contemporary political science. Now the theory of contemporary political economy contains many elements, both from political science and economics.
The contemporary political economy focuses on the problems with two different approaches. One is micro-based, and the other is macro-based. The micro-based approach analyses the markets and focuses on consumer decisions and products, individual decisions, and their relationship with the institutions. The macro-based approach focuses on the concepts like development, growth, and unemployment while paying attention to their linkage with political systems and various institutions. To tackle the issues of modern-day governments, political economy uses a statistical arsenal with the help of a rigorous scientific approach.
Let's dive into the theory of political economy. We can divide the political economy into three main parts, national political economy, comparative political economy, and international political economy. Contemporary literature focuses on agent choices within an economy while categorizing economies into three different main segments; capitalist, socialist, and communist economies.
We should remember that these economies are hard to find in real life, we can find their image, a reflection, but none of them will be the same as the textbook definition.
While explaining the aspects and properties of different types of political systems and economies, political economists are trying to uncover the concepts like social welfare, utility, distribution of wealth and equality, and public choice theory.
For example, the public choice theory is interested in how agents prefer one thing over another or with the questions like can the individuals' preferences be demonstrated as a whole? Since such a question is heavily related to the political system itself, the political economy becomes a perfect fit for inspecting and researching the topic. In this case, political economy derives the utility and preferences theory from the microeconomics literature and the voting systems from the political science literature.
Another famous research area of political economy is the allocation of resources. This field is interested in questions like how the government should interact with the economy. This is a long-lasting question debated throughout the centuries. Is the market economy efficient? Does it allocate the resources with respect to individuals' best interests? Why do inequalities occur? How can we overcome inequalities, or should we overcome them?
As you can immediately realize that these questions are directly related to moral principles, political structures, institutions, and culture. Thus, without political economy, economics literature will fail to answer such complex questions.
The importance of political economy is underlined by its return as a school of economics in the 20th century.
After the marginalist turn, economics became a set of axioms and the relationship between agents and markets. Nonetheless, after some debates within the 20th century, political economy has returned as the new school of economics. The return of the political economy is related to the need for its existence. This sounds contradictory in the beginning. Why do we need it if we have already overcome it? The truth is we didn't overcome it at all.
The set of axioms set by the marginalists failed to explain the extremely complex events happening within the societies. Every society has different cultural aspects, different markets, and different institutions altogether.
For example, a policy suggestion made for one country may fail to explain the phenomena in another. Similarly, due to different types of institutions, expected agent behavior within markets may change. This is similar to writing a pill for all types of diseases. This is why the political economy is so important. Because we only can understand the economies if we see the picture as a whole. Therefore, political sciences, sociology, and international relations are now inseparable from economics.
A well-studied case where political economy proved to be important is the case of Mongolia. For financing the government revenues from extracted natural sources, Mongolia adopted international practices that are applied in many countries. Nonetheless, after adoption, management became impossible due to the institutional structure of governance and law. While adopting policies, we must consider not just markets and agents, as the economics literature is usually concerned about, but also institutions.
We can divide the components of political economy into three main parts. Nonetheless, this shouldn't imply that they are not connected. On the contrary, they are highly connected and continuously affect each other.The first part is the political or economic system's structural features. You can think of these features as the fundamental building blocks of a country. They are resilient to change, and they need a vast amount of time to adjust to new policies.
A country's historical roots are a structural factor. For example, the colonization of Africa left a big mark on the country's structure. These marks should be taken into account while creating policy suggestions or setting the agenda.
In addition to structural features, institutional features are highly important in political economy. We should think of institutions as the rules of the social game. It is highly important to notice that institutions aren't just physical phenomena but include all rules. These structures are highly effective on individual behaviors. These are relatively less resilient to change when we compare them with structural features.
Institutions are a spectrum with a wide range. Central banks of our governments are an institution but also, our social contract that maintains our property right is an institution. Even the traffic lights can be examined as an institution.
And finally, political economy focuses on individuals and organizations while considering their decisions within a society. This part of political economy is highly important, and it links microeconomics with political economy. This area uses approaches from game theory too.
One prominent field that is highly important is the political economy of development since the development of a country is correlated with the institutions that it contains, the allocation of resources, the structures of the market, and obviously, its regime.
The economic development of a country can be defined as the increase in well-being, quality of life, freedom, and capabilities of individuals and communities in that country.
Maybe the most successful development story of the last century is the "Asian Miracle" or "Asian Tigers". In the last century, Singapore, Hong Kong, Taiwan, and South Korea grew within the range of 7 and 14 times compared to their GDP per capita in the 1960s. Nonetheless, this was not a result of just economic policies but other policies from different disciplines. This was a result of combined policies of equality in education, agricultural reform, and basic health care provided by the government. Furthermore, during these periods, these economies adjusted their institutional structures to create more transparent structures.
Another crucial area for political economy to shine is its application in the public choice theory. As we all know, economics assumes that agents act with a utility-maximizing behavior for their decisions. Public choice theory is interested in this utility-maximizing behavior's application in the voting theory. It focuses on questions like how agents vote. What are their preferences, and how can we rank their preferences? Which voting system is more successful? Is the majority rule enough for aggregating individual preferences? To answer such questions, political economy combines political science and economics.
The most well-known theories of public choice are the Median Voter Theorem, Arrow’s Impossibility Theorem, and the Condorcet Paradox.
1. Median Voter Theorem suggests that the preferred policy of the median voter will be the elected policy if preferences do not contain a Condorcet Winner.
2. Arrow’s Impossibility Theorem suggests that there is not any social welfare function that can aggregate individuals’ preferences and represent them in an objective manner. It draws attention to the flaws of public choice while using economics as a background to support the claim.
3. Condorcet Paradox is related to the aggregation of individual votes and how it may lead to different representations of the majority's will. It suggests that even in a situation where individuals’ decisions are rational, social welfare function may be irrational or non-transitive.
These are vital theories in political sciences and even today, the vast literature of debates about these theories expands.
We have covered these different types of public choice theory in detail. Don't hesitate to check out these explanations:
- Condorcet Paradox
- Arrow's Impossibility Theorem
- Median Voter Theorem
Political Economy is a cross-disciplinary field that combines economics, political science, and sociology to understand the role or roles of economy, political systems, law, government, institutions, and culture, their interactions, and the impact that they have on the agents within society.
we can track traces of the political economy in the works of 13th Century Arabian historians and 17th Century French philosophers. Nonetheless, the story of the political economy, as we define it today, starts with the works of physiocrats.
The contemporary political economy theory combines the political sciences with economics. It borrows theories like game theory and utility theory from economics literature and applies them to the theories in political science.
Every society has different cultural aspects, different markets, and different institutions altogether. For example, a policy suggestion made for one country may fail to explain the happening phenomena in another. Similarly, due to different types of institutions, expected agent behavior within markets may change. This is similar to writing a pill for all types of diseases.
This is why the political economy is so important. Because we only can understand the economies if we see the picture as a whole. Therefore, political sciences, sociology, and international relations are now inseparable from economics.
Ancient Political Economy, Classical Political Economy, Contemporary Political Economy
What do we mean when we say preferences are cyclical?
Cyclical Preference denotes the scenario where the choices of agents differ between states, where the options are selected pair-wise or combined as a whole.
Can we give the following scenario as an example of cyclical preferences?
\(P_1 > P_2 > P_3 > P_1\)
Yes we can, when preferences are combined agents are indifferent between \(P_1\text{ and } P_3\)
How can we define the Condorcet Paradox ?
The Condorcet Paradox denotes the situation where majority preferences are cyclical but individual preferences, which construct majority preferences, are not.
Which of the following conditions is not necessary for Arrow's Impossibility Theorem ?
Non - Transitive Preferences
What is a Condorcet Winner ?
A Condorcet winner is a preference that is always preferred when it is compared pair-wise to other preferences.
What is a Condorcet Loser ?
A Condorcet loser is a preference that is never preferred when it is compared pair-wise to other preferences.
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