The Political Economy Reader

Contending Perspectives and Contemporary Debates

Naazneen H. Barma, Steven K. Vogel, Naazneen H Barma, Steven K. Vogel

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000414684
• Edition: 2
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The Political Economy Reader advocates a particular approach to the study of political economy – the "market-institutional" perspective – which emphasizes the ways in which markets are embedded in political and social institutions. This perspective offers a compelling alternative to the market-liberal view, which advocates freer markets and less government intervention in the economy, as if states and markets were naturally at odds with each other. The reader embraces a truly interdisciplinary approach to the study of political economy, with extensive coverage from sociology, economics, history and political science. It includes some of the most important classical and contemporary theoretical perspectives on political economy. And it engages some of the most topical debates in political economy today, such as climate change, the global financial crisis, inequality, the digital platform economy, and the COVID-19 pandemic. For political economy courses at a variety of levels and from a range of disciplines, the reader is also of interest to scholars and citizens wanting perspective on the intersection of economics, politics, and society.

New to the Second Edition

• More than 20 new readings included by such notables as Elinor Ostrom, E. J. Hobsbawm, Dani Rodrik, Amartya Sen, Thomas Piketty, and Mariana Mazzucato among many others.

• Fully updated introductions to the book and each thematic chapter of readings.

• Coverage of key emerging debates including climate change, the financial crisis, inequality, the digital platform economy, and COVID-19

Part I

Contending Perspectives

1

The Classics

Political economy is a relatively new discipline and its classic works are clearly identifiable. Distinct approaches to the study of political economy and views on the nature of markets emerged at the outset. The three classical theorists considered here, for example, differ on the relationship between politics and economics in the functioning of the market and the capitalist system, as well as on the role of the state in relation to the economy. The three perspectives are representatives of the capitalist, communist, and mercantilist approaches to political economy. Together they cover the theoretical poles of debates on political economy and provide much insight into the political–economic traditions of the modern world.

Adam Smith is considered by many to be the father of modern political economy. One of a group of scholars known as the Scottish moral philosophers, Smith explicitly examined the linkages between politics and economics. Grounded in an inductive, observational approach to understanding how economic activity was conducted, he was one of the first theorists of the capitalist system, breaking down how its component parts – such as the production process, the market system of exchange, and the international trade system – actually function. Smith is still remembered today for these insights into the working of markets. His analysis left enduring legacies for the subsequent discipline of economics and also lives on in prevailing worldviews about the nature of economic freedom.

Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, was one of the earliest attempts to study industry and commerce in Britain, where the Industrial Revolution began. The selection presented here includes insights that have had a lasting effect on the way we think about markets. The concept most commonly associated with Adam Smith is the “invisible hand” through which an unorganized and potentially chaotic market system creates the amount and variety of goods desired by society in the most efficient way possible. Economic liberals today continue to believe that markets are self-regulating and that failures are introduced externally rather than being inherent in markets. Equally influential is Smith’s definition of the “division of labor,” elaborated through his pin factory example. He details how the specialization that emerges through the division of labor increases the productivity of labor and how, in turn, society functions organically as a well-oiled machine, with pieces fitting together seamlessly to provide humans with all their needs.

In Smith’s analysis, this well-functioning system of production and trade is not constructed artificially. It is the “consequence of a certain propensity in human nature … the propensity to truck, barter, and exchange.” That propensity, in turn, is encouraged by self-interest, which Smith views as a natural phenomenon that consistently motivates human behavior and interaction. He argues that a system in which self-interest is allowed to function achieves the highest collective good.¹ A free market, animated by the pursuit of self-interest, through the unintended consequences of the invisible hand, begets a system of economic relations and social organization that surpasses any based on altruism in the production of both economic output and social harmony. This philosophy has had a lasting impact right up to the present day: market liberals, such as Friedrich Hayek and Milton Friedman, go even further than Smith in arguing that behavior driven by self-interest is a natural human trait and that the most effective and efficient way to maximize collective social welfare and the public interest is to allow individuals to act in their own self-interest.

Smith also mounts a defense of the functioning of free markets in international trade. Foreign policy practice and scholarship in the seventeenth and eighteenth centuries predominantly reflected a framework of ideas that came to be known as mercantilism.² The Wealth of Nations represented Smith’s impassioned plea to the British Parliament to cease its counterproductive mercantilist strategy, which attempted to increase national wealth by enlarging reserves of gold and silver bullion through import restrictions. In a simple exposition of the gains from trade, Smith explained that foreign trade actually increases national wealth by exporting surplus production and importing needed goods in return. His analysis of the benefits of free trade continues to form the basis of pro-free trade arguments today.³ One of the major inefficiencies of managed trade, according to Smith, is that the individual is the better judge than the state of the most valuable use of his own capital.

Smith argues more generally that any attempt by the state to direct economic activity, such as through trade barriers or industrial incentives, actually subverts those goals it hopes to achieve by tampering with the efficient functioning of the invisible hand. This analysis leaves the state with only three major functions: to defend national security, to establish and administer a framework for the just rule of law, and to provide public goods that would not be supplied by the market. Having acquitted itself of these “night-watchman” responsibilities, the state should conduct a laissez-faire policy with respect to markets, intervening in the capitalist system only where markets cannot regulate themselves. Although Smith himself was not a dogmatic advocate of laissez-faire in every circumstance, the prescription – along with the principles of self-interest and the invisible hand on which it was based – have been reified as the central tenets of the market liberal perspective.⁴

Karl Marx’s analysis of capitalism and his communist school of thought provide the classical counterpoint to Adam Smith’s liberal philosophy. Yet, even though capitalism and communism represent the polar extremes of political economy theory and practice, Smith and Marx share a number of interesting analytical similarities. Both saw markets as natural systems rather than as constructed institutions. Both present materialist views of history, in which economics – the mode of production and the division of labor associated with it – drives social change and history. Both also saw a natural unilinear dynamic in history, with society moving through different stages of production and associated social orders. Yet whereas Smith saw capitalism as an equilibrium political–economic state for society, Marx was more teleological, conceiving of capitalism as a stage through which societies must pass on their way to the inexorable endpoint of communism. Both theorists recognized the human alienation in the division of labor. Smith considered that to be a necessary cost in achieving economic efficiency and thereby greater wealth for everyone. For Marx, however, the division of labor represented the crux of his critique of capitalism: that capitalists reap the benefits of the system through the exploitation of labor, while labor is alienated by its own work. In Marxist thought, market relations embody power relationships and do not take place on the equal terms of exchange that the classical and neoliberal economists claim. In emphasizing the power and social relationships embedded in markets, Karl Polanyi and Charles Lindblom are the social democratic heirs to some of Marx’s insights, accepting many of the tenets of Marxist analysis while rejecting its prescriptive direction.

Marxist thought holds that the capitalist system contains the seeds of its own destruction. In a dialectical relationship between the two classes associated with capital and labor, the social upheaval that results from the bourgeois class continuously revolutionizing the means of production in the quest for ever-greater efficiency and profit eventually leads to the proletarian revolution and the communist stage. Whereas Smith recognized that the state could be in thrall to special interests (such as the mercantilists), Marx saw the relationship as more insidious, calling the state the executive committee of the bourgeoisie or the “instrument of the ruling class.” Furthermore, the bourgeoisie, according to Marx, strips away all social relations and reduces them to their economic essence, using ideology, such as religion and “liberalism,” to legitimate its own rule. Marx theorized about the capitalist mode of production, including particularly the labor theory of value and his thinking on surplus value and exploitation, in his landmark work Das Kapital (1867).

The Communist Manifesto, written by Karl Marx and Friedrich Engels, is a famous and stirring critique of capitalism. It was published in February 1848, intended as a clear elaboration of the principles of the recently formed Communist League. Its force of expression remains striking and Marx and Engels saw it for many years as the classic expression of their views.⁵ They theorized in the pamphlet the dynamics through which the proletarian revolution would occur and provided the inspiration for it by setting out the principles for how a socialist economy should be organized. Yet they left no real guidelines for how to get there, or, eventually, to true communism, defined by Marx as the abolition of private property and its conversion into common property. In theory, by exploiting the proletariat class upon which its prosperity rests, the bourgeoisie deterministically unleashes a set of economic and political forces that become too powerful for it to control. In practice, however, there was a big gap between Marxist theory and twentieth-century communist reality.⁶

Marxism had theorists but no statesman until Lenin, who finally intervened to tip the scales of history by arguing that the vanguard of the proletariat must actively create class consciousness and revolution. Marxism’s legacy in praxis rested in the system of political economy that we know as socialism, which persisted from the Bolshevik Revolution in October 1917 in Russia until the fall of the Berlin Wall in 1989 and the subsequent collapse of the Soviet Union. In China, Mao Zedong also claimed to be an intellectual heir to Marx, arguing that peasants and workers could play an important role in the communist revolution, even in countries that had yet to go through the capitalist stage of production. Marxist theory remains important today, succeeded in the field of political economy by neo-Marxist theories of the state – which consider the state an agent of the capitalist classes – and dependency theory – which applies dialectical class analysis to the international political economy.

The final theorist presented in this section, Friedrich List, is a representative of the mercantilist school of thought, which Adam Smith so inveighed against. Born in 1789 in Germany, List had the luxury, in 1841, of confronting Smith’s perspective directly. He developed much of his thought after a stay in the United States, inspired by the works of his mentor Alexander Hamilton, the first treasury secretary of the United States and a leading mercantilist thinker. Whereas Smith and Marx primarily developed theoretical perspectives on political economy, List’s writings serve as the classical view most reflected in real practice, both past and current.⁷

List was concerned primarily with national power and prosperity, emphasizing that the national interest should be paramount in determining a country’s political–economic system. He challenged Smith’s “cosmopolitanism” as well as his individualism, charging that the classical liberals ignored the principles of nationality and national interest and thereby misguidedly emphasized free trade and wrongly conflated individual economy with national economy. In his view, the national interest and the collective welfare require state direction and cannot be achieved by individuals focusing on their own self-interest, as Smith and the liberal school claim. For List, the prosperity of a nation depends not on the degree to which it has amassed wealth but rather on how it has developed its powers of production. These productive powers, which produce wealth, are more essential to individual and collective well-being than wealth itself. Thus, the state must guide economic activity to build productive powers, even at the expense of immediate material prosperity or individual interests, to ensure future national prosperity. One of the core principles underlying List’s theory of productive powers is that nations must develop all sectors of the economy – and manufacturing in particular must be emphasized rather than relying solely on comparative advantage in agriculture. In other words, List produces the rationale for protectionist trade practices to support a nation’s “infant industries” as it begins to industrialize and grow powerful.

Contrary to the liberal view that emphasizes the mutual benefit possible through the positive-sum game of international trade, List saw interaction between nations as conflictual and zero-sum. In his view, the state is both justified and bound to impose regulations on economic activity that are in the interests of the nation. He outlined the basic contours of many of the protectionist arguments against free trade that have become so prevalent in contemporary international political economy, such as emphasizing the social dislocation that accompanies the freeing up of trade. List also contended that nations have different requirements and optimal strategies based on their circumstances and levels of development. For a nation to be successful economically – and hence powerful in the global system – it is not enough for a government to play the referee and focus on ensuring fair play or process; instead, the government has to actively guide a process of deliberate development. Along with Marxism-inspired dependency theory, List’s writings were the precursor to later policy stances such as the import substitution industrialization strategy pursued by Latin American countries to protect their domestic infant industries from external competition and to build productive powers at home. Japan and the East Asian newly industrializing countries – particularly South Korea and Taiwan – successfully pursued the same strategy in transitioning to cheaper domestic production and then moving to an export-oriented strategy (see Naazneen Barma in this volume). Scholars of political economy have since built on List’s arguments to assert that nations can and do pursue very different strategies concerning the role of government in industrialization and that the premises of liberalism are not self-evident truths but rather a set of choices to be made.

Notes

1. Smith did not think that people are solely motivated b...

Table of contents

• Cover
• Praise Page
• Half Title
• Title Page
• Copyright Page
• Contents
• Preface
• Introduction
• Part I Contending Perspectives
• Part II Contemporary Debates
• Index