Chapter 9: Political Economies Learning Objectives After reading this chapter, students should be able to do the following: 9.1: Describe three concrete ways in which national economies vary, the abstract economic models of market and command economies, and how mixed economies today relate to those models 9.2: Describe key features of the U.S., German, and Malaysian economies in terms of labor, finance, and government interventions, and explain how they represent contrasting political choices 9.3: Explain the classical-liberal case for markets as good, the Marxist case for markets as bad, and how modern liberals and social democrats stand between these options 9.4: Identify three plausible explanations for Germany s generous redistributive policies Review of Learning Objectives 9.1 Describe three concrete ways in which national economies vary, the abstract economic models of market and command economies, and how mixed economies today relate to those models National economies can be concretely characterized by how much wealth they produce, how they produce it (or their level of industrialization), and how they distribute it (or their pattern of inequality). More abstractly but just as important, they can be organized on different principles. One classic model is the market (or capitalist) economy, in which individuals own almost all property and freely buy and sell as they please. Its opposite is a command (or socialist) economy, in which the state owns almost all property and dictates production and distribution. Though these models often frame debates about economies, no real-world economies fully fit them because no pure market economy ever existed. To at least some degree, governments always play a variety of roles in organizing and intervening in exchange. Some communist countries once came close to a command model, but all such economies ultimately have disintegrated or reformed. In today s world, we have only mixed economies that combine some market mechanisms with some government action. 9.2 Describe key features of the U.S., German, and Malaysian economies in terms of labor, finance, and government interventions, and explain how they represent contrasting political choices To understand any political economy today, we must see how its mix of markets and various kinds of government action reflects certain political choices. The United States tends to favor market relationships within modest government regulation, as we see in its flexible hiring and firing, stockmarket-based finance, and comparatively low levels of redistribution. Germany has opted for a social market economy, which sets capitalist production within long-term codetermination partnerships between employers and employees, long-term business-bank partnerships in finance, and generous welfare state redistribution. Malaysia displays fairly open market relationships in some ways flexible hiring and firing and not very extensive redistribution but has sought to catch up to richer countries rapidly by orienting private sector economic growth under the guidance of strong-handed intervention by government planners. All three countries are perceived as among the most competitive in the world, but the American model places its political emphasis on economic liberty, the German model places its political emphasis on coordination and solidarity, and the Malaysian model prioritizes rapid industrialization and growth above all. 76
9.3 Explain the classical-liberal case for markets as good, the Marxist case for markets as bad, and how modern liberals and social democrats stand between these options For classical liberals, markets are naturally and universally good for all. Not only do individuals have basic rights to private property, but the freedom to exchange in unfettered markets is part of that right. This freedom also delivers the most efficient, productive, healthy society overall. For Marxists, markets are naturally and universally bad for most of the population. We cannot allow private property without generating high inequality since those who acquire more property use their wealth and power to exploit others. Private property and market exchange should be replaced by public ownership and a planned economy. Non-liberal ideological traditions such as environmentalism, fascism, and Islamism seek to reorient the liberal-marxist debate toward other priorities, whereas modern liberals and social democrats develop their views in its middle ground. Inspired by thinkers like T.H. Green and John Rawls, they see private property and market exchange as good, but argue for government action on behalf of disadvantaged citizens to generate what they portray as genuine equality of opportunity. 9.4 Identify three plausible explanations for Germany s generous redistributive policies To review for this objective, try to brainstorm rational-material, institutional, and ideational explanations of why Germany could have decided to adopt generous redistributive policies without looking at Section 9.4. Start by asking yourself the following questions: What sort of material challenges might make a country (and especially the wealthier people in a country) decide to shift some of their wealth to poorer citizens? If we think instead of possible institutional explanations for choosing redistribution, what sort of organizational features in a country might make poorer people more able to demand redistribution, or richer people more inclined to compromise with them? From an ideational point of view, might there be features of German identity and culture that would make richer people more likely to share their wealth with poorer citizens? After imagining your answers to these questions, return to Section 9.4 to see how well you have brainstormed plausible alternatives to explain this case. Lecture Outline I. Nuts and Bolts of Economies A. Concrete Features of Economies: Wealth, Industrialization, Inequality 1. How much material wealth citizens own on average a. Measured in GDP per capita 2. How that wealth is produced a. Commonly described in terms of industrialization (i) Nonindustrialized societies: most people work in agriculture (ii) More industrialized societies: people work in manufacturing (iii) Post-industrial societies: low employment in agriculture and industry, most jobs in service sectors b. Inequality measured in Gini index (i) United States has higher inequality than other post-industrial countries 3. Abstract Political-Economic Systems: Market vs. Command Economies a. Pure version of market economy: private individuals own all property and do what they want with it 77
(i) Prices naturally adjust to match supply with demand (ii) Concept of comparative advantage b. Capitalism is one process within a market system (i) People who own money (capital) make more money without directly doing the labor (a) Owning profitable businesses, investing their money in other people s businesses, or charging interest on loans c. Pure version of command economy (planned economy): government planning determines what economies produce (i) People do not own property (ii) If planners get it right, there are no winners and losers in the economy d. Command economy can be described as socialist (i) Caveat: there are many threads of socialist ideology (ii) Common use of socialist refers to state socialism, as in Soviet and Chinese Communism (a) Defined command economy as necessary response to immoral capitalism (b) Government should step in and allocate things fairly 4. Political-Economic Systems in the Real World a. No economy today comes close to pure versions of command or market economies b. Versions of command economies (i) Soviet Union and associate countries in Eastern Europe were close to command economies (a) Central planners often failed (b) After fall in 1992, countries moved toward market economies and capitalism (ii) People s Republic of China (a) Incorporated market-economy reforms in the 1980s (iii) North Korea c. Versions of market economies (i) Nineteenth-century United States probably closest in history (a) Even then, the United States had tariffs, regulations, and targeted grants of public land (b) Perception: unchecked industrialization led to unsafe factories and monopolies (ii) Today, all economies are mixed economies (iii) Governments with the lowest levels of spending and regulation are in poor countries or failed states II. The Varying Political Shape of Mixed Economies A. The United States: The Chief Business of the American People is Business 1. Seen as the most market-friendly country in the world 2. Labor markets a. Very open hire and fire arrangements b. Collective bargaining is allowed, but much less common than elsewhere 3. Financial markets a. Flexible sales on the stock market 4. Less redistribution a. U.S. taxes quite progressive overall, but government spends less money on programs for the poor than other countries do B. Germany: Redistribution, Codetermination, and Bank Finance in the Social Market Economy 1. Social market economy: mixes market capitalism with government programs 78
a. Redistribution of wealth b. Long-term partnerships with economic players 2. Social welfare state much bigger than in the United States a. Examples: free university education, widely available public transportation 3. Taxes are higher in terms of GDP and slightly more regressive than in the United States 4. Labor markets a. Codetermination: legally much harder to fire someone b. Companies have long-term relationships with workers c. Individual unions and collective bargaining across sectors d. Employers have strong incentives to train workers well (i) Strong vocational education programs and apprenticeships 5. Financial markets a. Businesses have long-term loans, and therefore long-term relationships, with big banks b. Corporate takeovers almost never happen C. Malaysia: Intervention for Capitalist Growth 1. Malaysia s GDP per capita is a third of America s, but its Gini score is close to America s 2. Unions even weaker than in United States 3. Affirmative action programs to help ethnic Malays 4. Goal of reforms since the 1970s: intervene to help economy grow faster a. Plans for whole economy and for every sector b. Incentivizes cooperation with plans c. Fixes prices for essential items to keep them low d. Closely manages international trading of currency D. Different Economies, Different Political Choices 1. American wealth not entirely due to economic model a. Industrialized faster than Germany or Malaysia b. Had vast resources and few organized competitors c. Unlike Germany, was not destroyed in World War II 2. Germany and Malaysia not necessarily paying a financial price for their more socialist models a. Germany (i) Weathered economic crisis well (ii) Has huge banks and corporations b. Malaysia (i) High growth over last 50 years (ii) Poverty rates have plummeted (iii) Has tallest twin towers in the world and many millionaires and billionaires c. Policies still debated within the respective countries 3. United States: stronger focus on economic liberty III. Political Ideologies and Political Economies A. Markets as Naturally Good 1. Classical-liberal ideas of individual rights and free markets 2. Rights to private property a. Developed in response to the actions of monarchs and aristocrats 3. Influence of Locke and Smith 4. Modern conservatives: wide-open markets are the most natural and desirable framework for human happiness 79
B. Markets as Naturally Bad 1. Influence of Karl Marx a. Capitalism is morally wrong and exploits most of the population b. Owning or investing in production does not count as real work 2. Actual Marxists are rare in the United States, but themes resonate a. Occupy Movement and the rhetoric of the 1 percent C. Markets as Crafted Political Institutions 1. Noneconomic traditions: economies should not be our first priority 2. Modern liberals and social democrats: markets can be modified 3. Environmentalists a. Market capitalism can lead to environmental devastation b. Need to focus on broader environmental priorities 4. Fascists and Islamists a. Markets are useful tools at best b. Fascists: markets were acceptable as long as they contributed to national strength (i) Took over some private businesses for war efforts c. Islamists: some Koran-based limits on capitalism 5. Mixed economy model: between liberals and Marxists a. Influence of T. H. Green (i) Liberty: an individual s freedom to realize his or her human potential (ii) Needed welfare, education, and social support b. Influence of John Rawls (i) Concept of the veil of ignorance IV. Explaining a Case: Understanding the Whys of German Redistribution A. Rational-Material Story: 1. Germany industrialized late and felt pressure to compete economically and militarily 2. Germany was split after World War II, with East Berlin run by communists 3. West Germany bought support with redistribution programs B. Institutional Story: 1. Germany came together as a federal state late, so it lacked a strong, top-down state 2. Compromise-driven politics 3. Strong vocational programs led to strong relationships between companies and workers C. Ideational Story: 1. Political culture emphasizes social order and solidarity 2. Paternalistic support for redistribution (welfare state is a duty to the community) D. Research on Cross-Case Patterns 1. Look for states that developed generous welfare states and faced strong external threats as they developed V. Conclusion: Why Understanding the Politics of Economies Matters to You 80