What is Political Economy? Lecture 1
I. What is political economy?
• Authoritative allocation of resources
• How politics and economics are interrelated
• States and markets; pursuit of wealth and power
A. Political (choice based on mandated rules and coercion) Economy (choice based on
free exchange and markets)
B. Political economy is about costs and benefits, incentives and tradeoffs
a. What they are, how they change over time (i.e. changes in incentive structure),
how they’re manipulated
C. 2 Big Questions:
1) Social Science – what motivates human behavior?
a. Cultural/Ideational – ideas, values, and norms given to us by others
b. Psychology – cognition and emotion
c. Rationality – costs and benefits
i. People are motivated more by interests rather than ideas (i.e.
Are you helping someone because you want to help them
altruistically or because it is in your self-interest so that they go
faster and you and you can get what you want? Lending
someone $ to help them or because you want a favor later.)
ii. Interests vs. ideas, self-interests vs. noble ideals. Does it
2) Political economy – How do we allocate resources?
D. The price of peanut butter represents political economy
a. The price includes:
i. Peanuts, oil, glass, labor, transportation
ii. Supply and demand (price allocation)
Rent seeking behavior:
iii. Government licenses (government restricts the amount of peanuts
grown to keep the supply down and keep the price up)
iv. Taxes (corporate), tariffs
v. Safety/health regulations
b. Peanut producers are w