The Relationship between States and
Markets
Political Economy
 Three different types of political economies
- Market economy
- Command economy
- Mixed economy
How are these related to major “isms,” especially
capitalism, communism, and socialism?
 Political order depends on the economic system to
generate income, goods and services for the
survival and prosperity of its citizens
Key Concepts
 Three major factors of production:
1) land - ground plus raw materials on or in ground
2) labor - human productive input
3) capital- nonhuman productive input, such as
financial resources, machinery and technology
Each factor controlled by owner (household)
 Some actor (firm or producer) acquires a
combination of above to produce a good or service
The State: A static concept
 Based on juridical and administrative unity
 Territorial integrity
 Territorially based national identity and
loyalty
 Internal sovereignty: Legitimate authority in
relations with subjects within its
jurisdiction
 External sovereignty: legal equality among
states
The Market: A fluid/dynamic
concept
 Involves production and commercial activities
 Transactions, exchanges transcend national
boundaries, identities, and loyalties
 Operates within and across the confines of individual
states
 Is an intricate web of interdependent transactions that
reflect and shape
 Prices
 Technological
advances
 Consumer tastes
Power in the Political Economy
 Relational Power: A makes B do something that B
otherwise would not do
 Structural Power: the power to shape and determine the
rules of the game under which political and economic
institutions have to operate—domestically and/or
internationally.
 4 Major Structures: domestic/global
1.
security: individual and national
2.
Production: private and state enterprises, MNCs
3.
Finance : credit and money
4.
Structure of knowledge: information,
education, science, technology
Political-Economic Framework
 Interaction between state and market (economy)
results in processes called political economy
 Imports and exports
 Balance of Trade: ratio of imports to exports
1. Trade Deficit: A state imports more than it exports
f.ex. the U.S.
2. Trade Surplus: A state exports more than it imports
f.ex. China
Purchasing
Power Parity
(PPP)
GDP or GNI (GNP) is
usually expressed in a
single currency; often the
U.S. dollar. The value of all
goods and services
produced by a state or
nation respectively.
PPP—Purchasing Power
Parity corrects monetary
indicators to reflect the
amount of local currency
required in that country to
buy certain standard goods.
Shortcomings of GDP/GNP
Does not reveal how wealth is distributed among the
country’s economic actors
2. Only goods that actually enter the societies monetary
sector are actually measured
3. Many states do not have the bureaucratic
infrastructure to adequately measure GDP
4. GDP and GNP/GNP are often used to compare the
prosperity of one country with another—even
though there are huge between-country disparities
in the exchange value of money.
1.
Example
 India has only $654 of GDP per capita but it compares with
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
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
$2,892 per capita in purchasing power.
The purchasing power of Japan’s $33,713 is actually only
27,976.
In purchasing power dollars, the economic gap between the
wealthier and poorer countries usually decreases.
For many of the poorer countries, the purchasing power
dollars are 5 to 8 times greater than GDP per capita dollars.
In terms of global trade, the purchasing power of a
countries’ currency is directly tied to international
exchange rates, not the price of bread at home and thus its
relative wealth or poverty remains
Political-Economic Framework
 Two ideal-type political economies:
- Market economy
- Command economy
 Mixed economy is real world compromise
Comparing
PoliticalEconomic
Frameworks:
Five Major
Questions
Market Economy
 Market economy: total private control
 Actors have direct, personal control over
factors of production and what goods are
produced
 Actors are motivated to maximize value
associated with goods and resources they
control
 Invisible hand of market determines value
and distribution of goods and services
 State role and intervention are minimal
Command Economy
 Command economy: Total state control
 State owns all factors of production
 State determines what goods are produced
according to state plan, their value, and
how they are distributed
 Competition is eliminated since the state
established payments for every factor
 State has dominant role, and surplus value
(profit) is accumulated by the state
Mixed Economy
 Mixed economy - hybrid compromise
 Means of production ownership shared between state
and private actors. State usually owns major factors
such as transportation or communications
 Primarily demand-oriented, but public sector under
state control. State intervenes on behalf of national
priorities.
 Private actors maximize profits, but state taxes to
purchase goods or transfer payments to redistribute to
certain actors in social order
The Politics of Political Economy
 The three “isms”: capitalism, communism, and
socialism
 Related to market, command, and mixed
 Capitalism is based on Adam Smith’s laissez-faire
economics
 Communism is based on the idea that the state
must control land, labor and capital to serve the
best interests of all the population
The Politics of Political Economy
 Socialism, a confusing term in practice, tries to balance
state involvement and private control to reduce
inequalities
 No country is an ideal-type; every state engages in
some forms of redistribution of resources and
regulation of actors
 Economic “isms” usually tied to broader sociopolitical
order
 Every state engages in some regulation
Capitalist Example
 Switzerland
 6th wealthiest (GDP per capita)
 Weak central government
 Private control, little regulation
 Government spending among lowest of all
developed countries
 1990s saw a rise in welfare spending
Mixed and Capitalist
 South Korea
 Government expenditures lowest among
developed countries (goods/services)
 Government greatly promotes economic
development
 29th in the world (GDP per capita)
 Export-oriented
 35th in measure of economic freedom
Mixed and Socialist
 Denmark
 3rd among major countries (GDP per capita)
 13th ranking in economic freedom
 Strong regulation in working conditions and
environmental quality
 Government provides extensive welfare benefits
 High taxes
Command and Communist
 Cuba
 Although lessened in recent years, state control of
economy, owning means of production
 Ranked 149th among the 154 countries in economic
freedom
 Government commitment to fund education, health
care, and control of land and income guarantee
equality between genders, race, urban and rural
citizens
 Ranks in the top 50 countries for quality of life (UN)
Discussion Questions
 What is the attraction of command
economies to market economies when they
are generally inferior in productivity?
 What would be the greatest benefits if the
state played virtually no role? What would
be the problems?
 Is capitalism so individualistic that it can’t
protect the collective good?