Liberal Theories of Political Economy

How does Politics constrain economic choices?

Does “Big Oil” successfully lobby to halt development of alternative energy sources?

and how do economic forces (markets, decisions of individual firms) Motivate and constrain political choices….. Like voting behavior Or what economic policies governments pursue, What does the Liberal Theory of Political Economy say about the “proper” relationship between economic forces and politics?

According to Liberal Theory Who exercises Power? Interest Groups Political Parties The Government

Interest Groups

Political Parties

States/Governments What is a state? States have Three Characteristics – Institutions rule over territory – Territory has people Living on it – Power over the people in the territory

Sovereignty Over People in their territory (citizens) In the International System

The Question for Theories of Political Economy What is the proper and appropriate relationship between politics and economics, power and wealth, interest groups, political parties, and governments in shaping economic policy, the state and the market? Answer depends on Goals and Assumptions Goals and Assumptions are part of theory

What is Theory? Theory should explain and predict. They should assist in reaching goals Theories are arguments based on assumptions – Some assumptions about human nature – Some assumptions about institutions – Some assumptions about values/goals Is there anything objective about this?

Liberalism Core commitment: Freedom Historically liberals were activists, fighting for freedom They built institutions of Freedom

Political Liberalism The goals of Liberal political institutions What they must do to preserve freedom

Economic Liberalism Assumptions – Individuals desire freedom above everything – Economic actors are rational – Free, rational actors naturally create markets The model – The market – Non-coerced Exchange – Private Property – Division of Labor – Markets clear through supply, demand, and price Goals and Effects if the model is followed – Efficiency – Growth – Welfare – Peach

Example: A Free Market for Drugs

Some downsides that Liberal Theory tolerates Markets don’t ensure the same economic growth for everyone inequalities in income and wealth are likely Inequality is likely to be tolerated in private economic relations because the growth will make everyone better off even if there is inequality

Let’s talk more about markets Political actors pursue power, markets create wealth Many different markets acting together For markets to work properly, barriers to markets must be removed Markets need to be governed, but minimally States must be small but strong enough to protect the market from those who would destroy it But States and markets have different purposes.

Markets undermine state sovereignty They can reduce the functions of the state They can reduce state power They don’t recognize territorial boundaries They destabilize national society

The Business Cycle Prosperity Transition Trough Recovery

Casino Economy

Deregulation and corruption

Follow the crisis…. 3. Deregulation of financial markets 4. Easy money  easy mortgages as bets on  in housing prices + No regulation/ oversight: Run of CDOs and derivatives + borrowing to buy them (betting on  in value) + rating fraud + easy insurance (AIG)  highly leveraged banks  Housing supply overwhelms demand  housing prices fall + mortgage defaults  CDOs lose value + Bank stock prices fall  credit drys up  Begin the bailout  (hopefully) more credit  (hopefully) save businesses and jobs  (hopefully) economic growth

Some confusions Why are liberals opposed to conservatives? – Social conservatives – restrict individual freedom – Social liberals – increase individual freedom – Political conservatives—increase market freedom – Economic conservatives—classical liberals Political Liberals– evolution of the term “liberal”