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Chapter Review

  • The Components of Political Economy
    • Political economy is the study of how the relationship between politics and economics shapes the balance of freedom and equality. States use several institutions to achieve their economic goals.
    • Critical to any economy are markets—the interactions between the forces of supply and demand, or how goods are services are exchanged. Another critical component of an economy is property—the ownership of those goods and services.
    • All states provide some measure of public goods—those services or goods that no one person or organization can own. States differ greatly in what they define as a public good, though national defense and public education are often seen as public goods. Social expenditures—the state’s spending on public benefits—incites furious debates over who benefits from, and pays for, public goods. One major source of public funding—and public debate—is taxation.
    • One basic way states seek to control the economy is through the creation and management of money. To manage money, states may rely on a central bank, a state institution that controls the flow money and how much it costs to borrow money in that economy. A central bank tries to reduce both inflation (when prices rise because there is too much money and not enough goods) and deflation (when prices drop because there is too little money and too many goods).
    • Many economic debates focus on regulations—the rules that the state sets to manage the production and exchange of goods or services. Trade is often a focus of regulation, where the state uses tariffs (taxes on imported goods), quotas, and other nontariff regulatory barriers (health, packaging, and other restrictions that make it more difficult for goods to be traded) to help its economy.
  • Political-Economic Systems
    • A political-economic system can be defined as the actual relationship between political and economic institutions in a particular country, as well as the policies and outcomes they create. Various types of political-economic systems view the ideal relationship between state and market, and between freedom and equality, in different ways.
    • As a political-economic system, liberalism emphasizes individual freedoms over collective equality and the power of markets over the state. Liberals favor free markets (the principle of laissez-fair) and strong protections for private property, also known as capitalism.
    • Social democracy also emphasizes capitalism; however, social democrats argue that markets should be checked by the state and that the state should provide more public goods—health care, unemployment and retirement benefits, public education, and others—to balance the inequalities that emerge from the market. In a social democracy, the state plays a larger role in the interaction between business and labor (this is called neocorporatism). Social democracy draws from liberalism and communism in an attempt to temper the extremes of too much freedom or too much equality.
    • As a political-economic system, communism emphasizes collective equality over individual freedom. The state controls all aspects of the market, including property, labor, and trade, and guarantees employment, health care, education, and other services.
    • Mercantilism favors neither freedom nor equality, instead focusing on economic growth to increase the power of the state. In a mercantilist system, the state strongly encourages some industries over others, usually establishes high tariffs on outside goods and services, and provides a lower level of social expenditure.  They may due this with full or partial state ownership of specific industries (called parastatals) to create or control businesses viewed as critical for international competitiveness. 
  • Political-Economic Systems and the State: Comparing Outcomes
    • Political scientists use several measures to compare economic development across countries. Four of the most useful are: 1) gross domestic product (GDP), the total value of all goods and services produced in a country—made even more instructive by applying purchasing power parity (PPP, which is the buying power of income, with levels benchmarked to the United States); 2) the Gini index, a mathematical formula that measures inequality and poverty; 3) the human development index (HDI), which measures the overall well-being of a country’s people; and 4) overall happiness.
  • The Rise and Fall of Liberalism?
    • For the past two decades, social democracy and liberalism appeared to be the only viable political economic systems and political economic systems have been undergoing further economic liberalization—cutting taxes, reducing regulation, privatizing state-owned businesses and public goods, and expanding property rights. Economic liberalization has increased significantly around the world.
    • In spite of the increasing trend towards liberalization, most industrialized democracies still follow social democratic ideology. Many countries that have traditionally relied on social democratic systems have continued to manage social expenditures and good economic growth. 
    • Liberalism and its adherents have also met with considerable criticism since the 2008 global economic downturn. To many, the economic crisis has been a direct result of growing and excessive global liberalization, and in many countries liberalization has reversed. Shifts in international power may transform domestic political economies worldwide, as they have always done in past.