What is PE

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ORIGIN OF POLITICAL ECONOMY

the term for studying production , buying, andselling, and their relations with law , custom , andgovernment , as well as with the distribution of national income and wealth , including throughthe budget process .originated in moral philosophy and developed inthe 18th century as the study of the economiesof states, polities .Economics was refered to PE, e.g., JS Mill (1848)Principles of Political Economy French physiocrats , Adam Smith, David Ricardoand Karl Marx were some of the exponents of PEAdam Smiths (1776) Wealth of Nations
http://en.wikipedia.org/wiki/Production_(economics)http://en.wikipedia.org/wiki/Lawhttp://en.wikipedia.org/wiki/Custom_(law)http://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Distribution_(economics)http://en.wikipedia.org/wiki/National_incomehttp://en.wikipedia.org/wiki/Economic_wealthhttp://en.wikipedia.org/wiki/Budget_processhttp://en.wikipedia.org/wiki/Moral_philosophyhttp://en.wikipedia.org/wiki/Polityhttp://en.wikipedia.org/wiki/Physiocratshttp://en.wikipedia.org/wiki/Physiocratshttp://en.wikipedia.org/wiki/Polityhttp://en.wikipedia.org/wiki/Moral_philosophyhttp://en.wikipedia.org/wiki/Budget_processhttp://en.wikipedia.org/wiki/Economic_wealthhttp://en.wikipedia.org/wiki/National_incomehttp://en.wikipedia.org/wiki/Distribution_(economics)http://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Custom_(law)http://en.wikipedia.org/wiki/Lawhttp://en.wikipedia.org/wiki/Production_(economics)


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DEFINITION OF POLITICAL ECONOMY

= how politics affects economic outcomesno longer used as a synonym for economics

The term 'economics' came to replace PE,coinciding with publication of an influential

textbook by Alfred Marshall in 1890. Earlier,William Stanley Jevons, a proponent of mathematical methods applied to the subject,advocated 'economics' for brevity

New PE, not simply a fad, but an area of analysisthat is here to stayDepartment of Political Economy in GlasgowUniversity, where Smith was Professor of Logicand Moral Philosophy, changed its name to theDepartment of Economics.


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WHAT IS POLITICS

= study of power and authority, and the exerciseof power and authority: how power/authority areattained & exercised: study of mechanisms formaking collective choices

Power = the ability of an individual or group toachieve outcomes which reflect his objectivesAuthority exists whenever one, several, or manypeople explicitly or tacitly permit someone else

to make decisions for them in some category of acts (Lindblom): Politics = struggle overauthorityIn an untidy process called politics, people whowant authority struggle to get it while others tryto control those who hold it.


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Some Examples of Political Influences

Opportunistic political business cycle: Pre-election economic policies and outcomesinfluenced by the desire of the incumbent tomanipulate the economy in order to improve hisre-election prospects

Hyperinflation Economies: Though it isagreed that deficit reduction is a necessarycomponent of an inflation stabilization program,deficit reduction is long delayed while inflationacceleratesTransition Economies: Though it is generallyagreed that economic efficiency and socialwelfare will be substantially higher once amarket system of allocation is in place, thetransition has been slow, far slower thanobservers expected at the outset on the basis of


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DISCIPLINES COMPARED - I

1. Public Economics / Public Finance= Economics of public sector: How economic

decisions of the government affect economicactors: Effects of tax & expenditure policies on

individuals & firmsNeoclassical welfare economics: taking thegovernments objective of welfare maximizationas given and asking how tax and expenditurepolicies may be used to achieve the objectiveOne area of normative public finance is theformulation of simple criteria for governmentdecision making, but this is not in terms of choosing the objective to be maximized, but of choosing criteria and methods to achieve the


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DISCIPLINES COMPARED - II2. Public Choice= How the objectives are chosen: How collective

choices are madestudying decision making mechanisms per se ,considering not only the positive and normative

aspects of different ways of making collectivechoices, but also the question of how a societycan choose over the set of possible choicemechanisms.Public choice differs from political science, in

that it stresses the use of tools of economicanalysis to study collective choices.Public choice can be defined as the economicstudy of non-market decision making, or simplythe application of economics to politicalscience.


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TYPES OF HETEROGENEITY

Importance of heterogeneity for PE - twopropositionsheterogeneity is necessary for there to bepolitical constraints.the effect of politics on economics follows fromthe mechanisms by which these conflicts areresolvedHeterogeneity is also necessary for there to bemarkets, but heterogeneity of interests plays out

quite differently when addressed through themarket than through the political process1. Ex ante-heterogeneity : individuals are

heterogeneous in a number of dimensions,leading them to prefer different policies ex ante

2. Ex post heterogeneity: distributional implications


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Heterogeneity is Central to PE

1. All individuals may be identical ex ante , but arenot identical ex post - ex - post heterogeneity iskey to the possibility of time inconsistency in thepresence of a benevolent government

Time inconsistency = a policymaker announcinga policy for t 1at t 0and then enacting a differentpolicy at t 1 if it suits his own interestsimperfect credibility of policy due to thepossibility of time consistency

2. Though heterogeneity is central to both areas,there is a key differencePE: endogenous determined objective functionWelfare economics: given multi-agent objectivefunction


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What is PE