POLITICAL ECONOMY

Political economy is a term used for studying production and trade, and their relations
with law, custom, and government, as well as with the distribution of national income and
wealth. Political economy originated in moral philosophy. It was developed in the 18th
century as the study of the economies of states, or polities, hence the term political
economy.

A classic definition of the term was articulated in 1877 by Friedrich Engels: "Political
economy, in the widest sense, is the science of the laws governing the production and
exchange of the material means of subsistence in human society... Political economy is
therefore essentially a historical science. It deals with material which is historical, that is,
constantly changing.

COMPONENT OF POLITICAL ECONOMY

1. MARKET :A market economy is an economic system where decisions regarding
investment, production, and distribution are based on the interplay of supply and
demand,[1] which determines the prices of goods and services.Market economies
can range from free market systems to regulated markets and various forms of
interventionist variants. In reality, free markets do not exist in pure form, since
societies and governments all regulate them to varying degrees. Market
economies do not logically presuppose the existence of private ownership of the
means of production. A market economy can and often does include various types
of cooperatives, collectives, or autonomous state agencies that acquire and
exchange capital goods in capital markets. These all utilize a market-determined
free price system to allocate capital goods and labor.[3] In addition, there are many
variations of market socialism, some of which involve employee-owned
enterprises based on self-management; as well as models that involve the
combination of public ownership of the means of production with factor markets.
2. Public good: a commodity or service that is provided without profit to all members of a
society, either by the government or a private individual or organization. "a conviction
that library informational services are a public good, not a commercial commodity"the
benefit or well-being of the public."the public good clearly demands independent
action"

3. TRADE : Trade, or commerce, involves the transfer of goods and/or services

from one person or entity to another, often in exchange for money. A network that
allows trade is called a market.Trade is a basic economic concept involving the
buying and selling of goods and services, with compensation paid by a buyer to a
seller, or the exchange of goods or services between parties.

LIBERALISM

Liberalism is a political philosophy or worldview founded on ideas of liberty and

equality. Economic liberalism is most often associated with support for free markets and
private ownership of capital assets, and is usually contrasted with similar ideologies such
as social liberalism and social democracy, which generally favor alternative forms of
capitalism such as welfare capitalism, state capitalism[citation needed], or mixed economies.
Economic liberalism also contrasts with protectionism because of its support for free
trade and open markets. Historically, economic liberalism arose in response to
mercantilism and feudalism. Today, economic liberalism is also generally considered to
be opposed to non-capitalist economic orders, such as socialism and planned economies.
[3]
Theories in support of economic liberalism were developed in the Enlightenment in
opposition to mercantilism and feudalism, and is believed to be first fully formulated by
Adam Smith, who advocated minimal interference of government in a market economy,
though it does not necessarily oppose the state's provision of basic public goods with
what constitutes public goods originally being seen as very limited in scope.[4] Smith
claimed that if everyone is left to their own economic devices instead of being controlled
by the state, then the result would be a harmonious and more equal society of ever-
increasing prosperity.[5] This underpinned the move towards a capitalist economic system
in the late 18th century, and the subsequent demise of the mercantilist system.

Private property and individual contracts form the basis of economic liberalism. The early
theory was based on the assumption that the economic actions of individuals are largely
based on self-interest (invisible hand), and that allowing them to act without any
restrictions will produce the best results for everyone (spontaneous order), provided that
at least minimum standards of public information and justice exist, e.g., no one should be
allowed to coerce, steal, or commit fraud, and there is freedom of speech and press.

Initially, the economic liberals had to contend with the supporters of feudal privileges for
the wealthy, aristocratic traditions and the rights of kings to run national economies in
their own personal interests. By the end of the 19th century and the beginning of the 20th,
these were largely defeated.

Today, economic liberalism is associated with classical liberalism, "neoliberalism",

"propertarian" libertarianism, and some schools of conservatism.

2. SOCIAL DEMOCRACY -a socialist system of government achieved by democratic

means.

Social democracy is a political, social and economic ideology that supports economic
and social interventions to promote social justice within the framework of a capitalist
economy; and a policy regime involving collective bargaining arrangements, a
commitment to representative democracy, measures for income redistribution, regulation
of the economy in the general interest and welfare state provisions.[1][2][3] Social
democracy thus aims to create the conditions for capitalism to lead to greater democratic,
egalitarian and solidaristic outcomes; and is often associated with the set of
socioeconomic policies that became prominent in Northern and Western Europe
particularly the Nordic model in the Nordic countriesduring the latter half of the 20th
century.Modern social democracy is characterized by a commitment to policies aimed at
curbing inequality, oppression of underprivileged groups, and poverty;[11] including
support for universally accessible public services like care for the elderly, child care,
education, health care, and workers' compensation.[12] The social democratic movement
also has strong connections with the labour movement and trade unions, and is supportive
of collective bargaining rights for workers as well as measures to extend democratic
decision-making beyond politics into the economic sphere in the form of co-
determination for employees and other economic stakeholders.[13]The Third Way, which
ostensibly aims to fuse right-wing economics with social democratic welfare policies, is a
major ideology that developed in the 1990s and is sometimes associated with social
democratic parties, but some analysts have instead characterized the Third Way as an
effectively neoliberal movement.[14]

3. COMMUNISM

a political theory derived from Karl Marx, advocating class war and leading to a society
in which all property is publicly owned and each person works and is paid according to
their abilities and needs

Communism is an ideological and a social political movement. Its aim is to set up a

communist society. This would be based on the common ownership of the means of
production and the absence of social classes, money,[1][2] and the state.[3][4] No large
society has ever achieved this. In the Soviet Union, for example, all ownership was taken
by the State. In effect, this meant a small ruling elite took all the major decisions in a one-
party state.
Socialism is worker's control of the means of production. Communism considers itself a
more advanced form of socialism. It says this will set the people free to find a higher
meaning of life. Work would not be something a person had to do to stay alive, but
instead something people could choose whether or not to do.

MARKET FAILURE

In economics, market failure is a situation in which the allocation of goods and services
is not efficient. That is, there exists another conceivable outcome where an individual
may be made better-off without making someone else worse-off. Market failure describes
any situation where the individual incentives for rational behavior do not lead to rational
outcomes for the group. Put another way, each individual makes the correct decision for
him/herself, but those prove to be the wrong decisions for the group. In traditional
microeconomics, this is shown as a steady state disequilibrium in which the quantity
supplied does not equal the quantity demanded.Commonly cited market failures include
externalities, monopoly privileges, information asymmetries and factor immobility. One
easy-to-illustrate market failure is the public good problem. Public goods are goods or
services which, if produced, the producer cannot limit its consumption to paying
customers.
Public goods create market failures if some consumers decide to not pay but use the good
anyway. National Defense is one such public good because each citizen receives similar
benefits regardless of how much they pay. It is very difficult to privately produce the
optimal amount of national defense. Since governments cannot use a competitive price
system to determine the correct level of national defense, this may be a market failure
with no pure solution.

Externalities[edit]
A good or service could also have significant externalities,[7][16] where gains or losses
associated with the product, production or consumption of a product because it differs
from the private cost. These externalities can be innate to the methods of production or
other conditions important to the market.[2] For example, when a firm is producing steel,
it absorbs labor, capital and other inputs, it must pay for these in the appropriate markets,
and these costs will be reflected in the market price for steel.[16] If the firm also pollutes
the atmosphere when it makes steel, however, and if it is not forced to pay for the use of
this resource, then this cost will be borne not by the firm but by society.[16] Hence, the
market price for steel will fail to incorporate the full opportunity cost to society of
producing.[16] In this case, the market equilibrium in the steel industry will not be optimal.
[16]
More steel will be produced than would occur were the firm to have to pay for all of
its costs of production.[16] Consequently, the marginal social cost of the last unit produced
will exceed its marginal social benefit.[16]
Traffic congestion is an example of market failure that incorporates both non-
excludability and externality. Public roads are common resources that are available for
the entire population's use (non-excludable), and act as a complement to cars (the more
roads there are, the more useful cars become). Because there is very low cost but high
benefit to individual drivers in using the roads, the roads become congested, decreasing
their usefulness to society. Furthermore, driving can impose hidden costs on society
through pollution (externality). Solutions for this include public transportation,
congestion pricing, tolls, and other ways of making the driver include the social cost in
the decision to drive.[2]
Perhaps the best example of the inefficiency associated with common/public goods and
externalities is the environmental harm caused by pollution and overexploitation of
natural resources.[2]
Keynesian Economics'

An economic theory of total spending in the economy and its effects on output and
inflation. Keynesian economics was developed by the British economist John Maynard
Keynes during the 1930s in an attempt to understand the Great Depression. Keynes
advocated increased government expenditures and lower taxes to stimulate demand and
pull the global economy out of the Depression. Subsequently, the term Keynesian
economics was used to refer to the concept that optimal economic performance could be
achieved and economic slumps prevented by influencing aggregate demand through
activist stabilization and economic intervention policies by the government. Keynesian
economics is considered to be a demand-side theory that focuses on changes in the
economy over the short run.
BREAKING DOWN 'Keynesian Economics'

Prior to Keynesian economics, classical economic thinking held that cyclical swings in
employment and economic output would be modest and self-adjusting. According to this
classical theory, if aggregate demand in the economy fell, the resulting weakness in
production and jobs would precipitate a decline in prices and wages. A lower level of
inflation and wages would induce employers to make capital investments and employ
more people, stimulating employment and restoring economic growth.

The depth and severity of the Great Depression, however, severely tested this hypothesis.
Keynes maintained in his seminal book, General Theory of Employment, Interest and
Money, and other works, that structural rigidities and certain characteristics of market
economies would exacerbate economic weakness and cause aggregate demand to plunge
further.

For example, Keynesian economics refutes the notion held by some economists that
lower wages can restore full employment, by arguing that employers will not add
employees to produce goods that cannot be sold because demand is weak. Similarly, poor
business conditions may cause companies to reduce capital investment, rather than take
advantage of lower prices to invest in new plant and equipment; this would also have the
effect of reducing overall expenditures and employment.

Adam Smith

Adam Smith is generally regarded as the father of political economy and of classical
economics. The Wealth of Nations provides the earliest comprehensive account of market
society as a decentralized, well-governed system in which prices coordinate the
efficient allocation of resources in a competitive economy. It is a multi-faceted work of
epic sweep, introducing complex concepts such as the labor theory of value, the benefits
of free trade, productivity and the division of labor, categories of economic analysis
(profits, wages, interest and rent), and the determination of prices, as well as the famous
images of the invisible hand and the pin factorywhile also delivering a history of
money and of Europe since the fall of the Roman Empire.

MALTHUS

Thomas Malthus warned that without any checks, population would theoretically grow at
an exponential rate, rapidly exceeding its ability to produce resources to support itself.
Malthus argued that an exponentially growing population will self-correct through war,
famine, and disease. Malthus cautioned that in order to avoid catastrophe such as famine
and war, people should enact deliberate population control, such as birth control and
celibacy. Malthusian catastrophes refer to naturally occurring checks on population
growth such as famine, disease, or war. These Malthusian catastrophes have not taken
place on a global scale due to progress in agricultural technology. However, many argue
that future pressures on food production, combined with threats such as global warming,
make overpopulation a still more serious threat in the future.
Early in the 19th century, the English scholar Reverend Thomas Malthus published
"An Essay on the Principle of Population." He wrote that overpopulation was the root of
many problems industrial European society suffered frompoverty, malnutrition, and
disease could all be attributed to overpopulation. According to Malthus, this was a
mathematical inevitability. Malthus observed that, while resources tended to grow
arithmetically, populations exhibit exponential growth. Thus, if left unrestricted, human
populations would continue to grow until they would become too large to be supported
by the food grown on available agricultural land. In other words, humans would outpace
their local carrying capacity, the capacity of ecosystems or societies to support the local
population.

As a solution, Malthus urged "moral restraint. " That is, he declared that people
must practice abstinence before marriage, forced sterilization where necessary, and
institute criminal punishments for so-called unprepared parents who had more children
than they could support. Even in his time, this solution was controversial.

According to Malthus, the only alternative to moral restraint was certain disaster: if
allowed to grow unchecked, population would outstrip available resources, resulting in
what came to be known as Malthusian catastrophes: naturally occurring checks on
population growth such as famine, disease, or war.

Over the two hundred years following Malthus's projections, famine has overtaken
numerous individual regions. Proponents of this theory, Neo-Malthusians, state that these
famines were examples of Malthusian catastrophes. On a global scale, however, food
production has grown faster than population due to transformational advances in
agricultural technology. It has often been argued that future pressures on food production,
combined with threats to other aspects of the earth's habitat such as global warming,
make overpopulation a still more serious threat in the future.

STRUCTURALISM

In sociology, anthropology and linguistics, structuralism is the methodology that

elements of human culture must be understood in terms of their relationship to a larger,
overarching system or structure. It works to uncover the structures that underlie all the
things that humans do, think, perceive, and feel. Alternatively, as summarized by
philosopher Simon Blackburn, structuralism is "the belief that phenomena of human life
are not intelligible except through their interrelations. These relations constitute a
structure, and behind local variations in the surface phenomena there are constant laws of
abstract culture

PARADOX PLENTY

The resource curse, also known as the paradox of plenty, refers to the paradox that
countries with an abundance ofnatural resources, specifically non-renewable resources
like minerals and fuels, tend to have less economic growth, lesdemocracy, and
worse development outcomes than countries with fewer natural resources. This is
hypothesized to happen for many different reasons, and there are many academic debates
about when and why it occurs. Most experts believe the resource curse is not universal or
inevitable, but affects certain types of countries or regions under certain conditions.

IPE

International political economy (IPE), also known as global political economy (GPE),
is an academic discipline within political science that
analyzes economics and international relations. As an interdisciplinary field, it draws on
many distinct academic schools, most notably political economy,political
science and economics, also sociology, history, and cultural studies.

A commercial policy (also referred to as a trade policy or international trade policy) is a

governmental policy governingeconomic transactions across international borders. This
covers tariffs, trade subsidies, import quotas, Voluntary Export Restraints, restrictions on
the establishment of foreign-owned businesses, regulation of trade in services, and other
barriers to international trade.

These are sometimes agreed by treaty within a customs union. In the case of
the European Union, commercial policy has been governed in common since the EU was
created in 1957.

The World Trade Organization (WTO) is an intergovernmental organization which

regulates international trade. The WTO officially commenced on 1 January 1995 under
the Marrakesh Agreement, signed by 123 nations on 15 April 1994, replacing the General
Agreement on Tariffs and Trade (GATT), which commenced in 1948.[5] The WTO deals
with regulation of trade between participating countries by providing a framework for
negotiating trade agreements and a dispute resolution process aimed at enforcing
participants' adherence to WTO agreements, which are signed by representatives of
member governments[6]:fol.910 and ratified by their parliaments.[7] Most of the issues
that the WTO focuses on derive from previous trade negotiations, especially from
the Uruguay Round(19861994).