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Economics as a Political Subject essay plans

Discuss the way in which power relationships shape the economy.

Define: Power relationships the ability to set constrains on the freedom of another individual to choose

4 Powers in the lectures

1. Structural Power
2. Power to discriminate
3. Power to dictate things within organisation
4. Power to make others think what you want them to think

Intro: Mention how power relationships are found everywhere in the economy, making politics and
economics irreversibly intertwined.

1. Structural Power between people who hold wealth and those who do not
- A term that is referred to by Ha-Joon Chang
- People usually see the market system as devoid of power relationships because all transactions are
voluntary.
- Even the worker who spends 16 hours in a Chinese sweatshop in Shenzhen also has the freedom to
choose between which company to work for
- But he does not have the freedom to choose not to work, whereas the factory owners can survive
without working for a while.
- Workers are often compelled by the need to feed their families amidst ever rising living costs to
continue working at the factory. Even though there is an ostensible freedom to quit, their economic
conditions do not allow them to.
- The grim reality of this lack of freedom and the economic conditions that compel these workers to
slave away in a sweatshop is highlighted by the high rate of suicides in Shenzhens factories. This
story of course parallels the IR.
- The extent to which this structural power has pervaded and shaped our economy is further
highlighted by the many attempts to curb this extent of structural power that many modern
democracies find to be unacceptable.
- Over time, this led to the introduction of welfare state policies that has reduced the imbalance of
power between capitalists, showing that structural power not only shapes our economy directly,
but also prompts responses to reduce this structural power.

2. Power to discriminate
- Prominent economists, namely Gary Becker, have argued that discrimination cannot exist in a
competitive market because firms that discriminate against productive workers of that race will not
be as competitive as those who do not.
- Two problems with that view: imperfect competition is found in a lot of economies, and if people
discriminate in large numbers (the majority), they will not suffer as much from this loss of
productivity
- Apartheid in South Africa and Segregation in the US

3. Power to dictate things within organisations

- 22% SOE Singapore
- 30-50% of international trade flows intra-organisation
- Concept of transaction cost

4. Power to make others think what you want them to think

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- False Consciousness
- Murdochs media empire
- Democratic National Convention, Republican National Convention

5. Democratic institutions shaping the economy

- Checks and balances on the executive, limiting their ability to go for extractive economic policies

6. Exclusive institutions lack of Creative destruction

- Acemoglus theory that the threat of revolution forces governments to reform, etc
- Acemoglus theory that extractive, exclusive institutions ban new ideas and technology that
threaten the position of the incumbents > leads to economic slowdown
- Comparative origins of colonial development (seminal paper)

Conclusion: Power relationships exist in forms that we may even be unaware of (structural power). They
can make or break an economy, and they coexist with the market. Economics and politics thus
fundamentally intertwined.

American system of free enterprise rests on the conviction that the federal government should interfere in
the market place only when necessary (George W Bush). What does this statement suggest for the debate
on the role of the state?

Introduction: The statement is rather banal and vague, lacking meaning due to the ambiguity of the word
necessary. The statement suggests that the role of the state should be limited, but the extent of that
limitation is not clarified in this statement. We make a value judgment to deem what is necessary.
Whether avoiding inequality is necessary etc, only in very rare cases where there is a consensus that
government intervention is necessary, and that is for public goods.
This essay shall discuss what that extent of limitation should be. Market Failure view vs Government
Failure view

1. One area where there is a consensus on state intervention Public Goods

- State intervention clearly necessary in this case (severe under-provision without state intervention)
- Classic cases of public goods national defence and drainage system and flood defences

2. Other cases of market failure contentious

- Externalities direct regulation, Pigouvian tax, Permis vs Coase Theorem
- Imperfect competition competition regulation vs letting it be (Schumpeterian view)

3. Role of the State in Macroeconomic management? Necessary?

- Economy naturally recovers, so is it necessary? Given time, even the worst recessions will fade
away.
- Keynes redefined the question in the long run we are all dead. Economists are setting themselves
a task too easy if they say that after a storm/tempest, the sea is calm.
- On the account of avoiding social devastation? Perhaps necessary, given the chaos and possible
erosion of social order and cohesion that our societies value
- Keynesianism vs Monetarism
- Even here, value judgment of price stability against unemployment not a categorical fact that one
is worse than the other

4. Role of the State in driving economic growth (industrial policy)

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- The State has a duty to produce economic growth for its people pretty much a value judgment
most can agree with
- Problem is State intervention vs less state intervention as policies to encourage economic growth
- Should the State encourage the development of markets (free-market policies) or introduce
industrial, investment and trade policies
- This can only be resolved by empirical findings of which is better, since we agree that economic
growth is a target we can strive for
- Changs Golden-Age of Capitalism evidence of 2.5% growth rates across the world
- Empirical finding not conclusive though many criticisms levelled at the finding, including how it
does not conduct a proper regression analysis to find the influence of other factors between these
periods
- Use Solow Growth Model to argue (post-colonial societies, fast growth, converge to their own
steady-states), capital stock destroyed in countries

5. Statement is supported by the government failure view solution may be worse than problem,
cure may be worse than disease
- Government intervention not a panacea, silver bullet
- May create more problems, Downs theory that politicians are self-seeking
- Stop-go macroeconomic policies in the 1960s-70s caused stagflation! (seek re-election)

6. Other government failures

- Niskanens Bureaucrat budget-maximising theory
- Rent-seeking groups
- All the chances for these government failures increase with government intervention

Conclusion: The extent of limitation on government intervention is defined by what we deem as necessary,
which is heavily influenced by our value judgments. Empirical findings can shed some light on what is the
most effective way to achieve what we want, but at the end of the day, necessity of government
intervention is not a positively determined fact, except for in the rare case of Public Goods. But even then,
the extent of intervention in Public Goods can differ complete state provision or just state funding with
contractors (e.g. defence contractors in the military). But we have to note that because the economy can
never be free of government influence, we need to decide what kind of influence we want.

Markets may fail, but governments fail even more. Discuss.

Answers to this question required an exposition of the causes of market failure and of the various types of market
failure. A technical viz. geometric representation of market failure was very helpful. Answers also required an
exposition of selfseeking by those who operate in the public realm which can cause government failure. The best
answers pointed out that whether market failure is more or less significant than government failure is an empirical
question and cannot be categorically stated. Superior answers also referred to the prominent role of the state in the
East Asian miracle economies and the superior performance in many advanced capitalist countries during the
Golden Age of Capitalism, compared to more liberal periods before or after. Good answers also required reference
to the inherently political nature of markets.

Introduction: Market failure vs Government Failure. The relative extent of government vs market failure
cannot be categorically stated, but can only be seen from empirical evidence.

1. Market Failure: Public Goods

a. Clear case where there is outright failure, difficult for the government intervention as a
result of the government failure to be greater
2. Market Failure: Negative externalities
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a. DWL
b. Deserve government intervention
3. Market Failure: Imperfect competition
a. DWL
b. BUT Schumpeters argument
4. Government failure: Vote-seeking Politicians
a. Anthony Downs
b. Stop-go economic policies
5. Government failure: Rent-seeking interest groups
a. Aristocracy in the Corn Laws
6. Government failure: Niskanens budget maximisation
a. China BS something
7. Golden Age of Capitalism suggests government failure not as important
a. 2.5% growth in the period
8. Case of Asia vs Africa economic growth (government failure not important)
9. Boils down to Institutions extractive vs non-extractive (government failure very significant in the
former)
a. Not a universal law, generalities not really helpful because different historical circumstances
(depends on where one starts China communist in 1970s, opens up under Deng Xiao Ping),
so government failure obviously more critical in the 1970s as the State controlled
everything, different value judgments lead to different conclusions (for instance, inequality
not considered market failure)
b. Must pinpoint to specific cases is the monopolist redirecting profits into R&D due to the
threat of new firms? Or is it merely enjoying its monopoly position?

Conclusion: Let Markets do what they do best, which is to moderate price signals. A centralised system will
thus obviously fail. Look at hard facts, look at own circumstance, dont apply a hard and fast law because
every country has a different development path (Gerschenkron). The statement investigates the
relationship between markets and the government, suggesting that perhaps the rationality of the markets
should not be interfered with. Notion wrong cos of the inherent nature of markets. DEPENDS ON
IDEOLOGY Additional point can be made

Is less state intervention better for the economy? Discuss with reference to empirical evidence.
Introduction: What goals do you want for the economy? Equality vs efficiency?
1. More state intervention better: Golden Age of Capitalism empirical evidence vs Neoliberal period
a. Grew during the golden age at 2.5% and usually at 4% and even at 8%
b. BUT Solow Model?
c. Unemployment used to be 3-10% but it was 0-2% in the Golden Age (what about the deaths
during the war?)
d. No country in banking crisis during the Golden Age, whereas anything between 5% and 35%
of the world was in a banking crisis at any given point of time since then
e. Infant industry arguments etc, forced accumulation, big push (coordination failures)
2. Criticism of Golden Age growth via tech from US military-industrial complex and WWII recovery,
not certain that Golden Age of Capitalism was caused by more state intervention
a. Case of Britain clear dysfunction that can be causally linked to State intervention
b. It could also simply be the case that policies like fiscal expansion bring about immediate
benefits to economic growth but long-term structural problems
3. Less State Intervention empirical case of China
4. More State Intervention comparison between Asian economies and African economies (free-
trade policy)
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5. On the point of efficiency, NOT about whether state intervention was better, but more about the
QUALITY of State Intervention. Can the State be refrained from turning into the leviathan or is the
State more akin to the Philosopher King?
a. Less focus on a particular form of state intervention, and more on the underlying
institutions driving the state intervention
b. What generated those forms of state intervention? While ostensibly African economies did
not use tariffs due to IMF rules, their governments intervene in the economies routinely,
cronyism, bribery, corruption.
c. This extremely self-interested approach vs the technocratic approach of Asian economies,
that despite having flaws such as Nikansenss budget maximisation problems, at the very
least they are geared towards the intention of producing growth
d. Why Nations Fail Acemoglu and Robinson, 2011
6. On equality empirical study of Gini Coefficient (more state intervention is necessary)
a. Firms bid down wages etc
b. Welfare State helps, free healthcare helps, centralised wage bargaining in Norway and
Sweden

Conclusion: Empirical evidence tells us that there is no hard and fast link between the levels of state
intervention and economic growth depends on the situation at hand, and the institutional framework
that produced such state interventions. On equality, empirical study tells us that more state
intervention is absolutely necessary for lower levels of inequality.