POL S 335 A: Topics in Political Economy

POLITICAL ECONOMY OF CAPITALISM, DEMOCRACY & DICTATORSHIP

In this class, we examine several questions. What is capitalism? How has capitalism evolved over time? What is the role of the state in creating and sustaining capitalism? What is dictatorship? How do non-democratic regimes use and abuse markets to consolidate their grip on power? What is democracy? What is the relationship between democracy and capitalism? What is welfare state capitalism and its consequences?

When appropriate, we will evaluate these questions through the lens of the crisis sparked by the COVID 19 virus. What role do capitalism, dictatorship, and democracy play in addressing the public health, social, economic, and political dimensions of the crisis?

How will capitalism, dictatorship, and democracy be changed by the crisis?

To address these questions generally, we familiarize ourselves with the “new institutional economics” framework. To begin with, describe and explain the four essential components of capitalism. First is specialization along comparative advantage and trade. Second is competition between firms and the allocation of inputs to the production process and its output based on prices. Third are incentives and opportunities to innovate. Fourth is the role of financial markets in allocating scarce capital to its highest value use and fostering innovation and economic development.

The new institutional economics approach also makes sense of the infrastructure provided by the state that sustains capitalism: property rights, contracts, rules that reduce transaction costs, and policies that solve market failures. And it gives us a lens by which to examine different regime types. We care most about their incentive structures regarding the economy. We also care about the role that markets play or do not play in advancing incumbents’ political strategies.

Issues include several. First, the use of crony capitalism by authoritarian regimes to consolidate their rule by creating and distributing rents to their supporters and finance the state. Second, why democracies are more likely to foster market exchange that more closely approximates “free market” capitalism: secure and impersonal property rights and contract enforcement, the encouragement of freer entry and exit and market competition, the promotion of larger and more sophisticated financial systems, and institutions and regulations that foster innovation. Third, why democracies are also more likely to provide public goods and policies that reduce the risks associated with market exchange. That is where “welfare state capitalism” comes in.  

TEACHING GOALS

1. How to think about capitalism using basic micro-economics and neo-institutional economics.
2. To understand the elements of modern economic development: the state’s role in creating a framework that promotes impersonal exchange at a large scale, the public and private sectors’ systematic approach to continuous innovation, using markets to allocate and transform scarce resources, and the role of the financial system in promoting savings, investment and innovation.
3. Familiarize students with the political economy of regime types and how their differing incentive structures lead to different types of “capitalism”.