THE ECONOMY AND SOCIETY
“at almost every level, politics is intertwined with the
economy and with society.”
Economic system
>form of organization through which goods and services
are produced, distributed and exchanged
CAPITALIST ECONOMY
1. There is generalized commodity production, a
commodity being a good or service produced for
exchange—it has market value
2. Productive wealth (“means of production”) is held
predominantly in private hands
3. Economic life is organized according to market
principles: the forces of demand and supply
4. Material self-interest and profit maximization
provide the motivation for enterprise and hard
work
SOCIALIST ECONOMY
1. There is a system of production for use, geared, at
least in theory, to the satisfaction of human needs
2. There is predominantly public or common
ownership of productive wealth, certainly
including the commanding heights of the economy
3. Economic organization is based on planning, a
supposedly rational process of resource allocation
4. Work is based on cooperative effort that results
from a desire for general-well being
There is no ‘pure’ capitalist or socialist economy.
TYPES OF CAPITALIST SYSTEM:
1. ENTERPRISE CAPITALISM
“Pure” capitalism based on ideas by Adam Smith and David
Ricardo
There is faith in the untrammeled workings of market
competition, born out of the belief that the market is a self-
regulating mechanism or an “invisible hand.”
“It is not from the benevolence of the butcher, the brewer,
or the baker, that we expect our dinner, but from their
regard to their own interest.” –Adam Smith
The emphasis on the growth and enterprise of this form of
capitalism stems, in part, from the fact that productive
wealth is owned largely by financial institutions such as
insurance companies and pension funds, that demand a
high rate of return on their investments.
>Profit-driven, importance on high productivity and labor
flexibility, free market
Economic globalization: the incorporation of national
economies in a single “borderless” global economy through
transnational production and capital flows
Marketization: the extension of market relationships
based on commercial exchange and material self-
interest, across the economy and possibly society
Globalization promotes marketization
1. Intensified international competition has encouraged
governments to deregulate their economies and reduce tax
levels in hopes of attracting ‘inward’ investment and
preventing multinational corporations from relocating
elsewhere
2. Downward pressure exerted on public spending, and
particularly welfare budgets, by the fact that control of
inflation has displaced the maintenance of full employment
as the principal goal of economic policy
The “new” political economy: a depoliticized form of
economic management in which direct state intervention
is scaled down and the market is placed at the centre of
economic life
Features:
1. Emphasis on technological innovation and development,
particularly wider use of information and communication
technology
2. Governments have increasingly targeted investment in
human capital, in the belief that improved levels of
education and training will both improve the supply side
features of the economy and enable citizens to become
more flexible and self-reliant
DISADVANTAGES
>Tendency towards wide material inequalities and social
fragmentation
>Turbo features may have less to do with the dynamism of
the market or technological innovation than with the
willingness of consumers to spend and borrow and the
willingness of businesses to invest
2. SOCIAL CAPITALISM
Founded on the ideas of Friedrich List
List emphasized the economic importance of politics and
political power, arguing, for instance, that state
intervention should be used to protect infant industries
from the rigours of foreign competition
Central theme: the idea of a social market: an attempt to
marry the disciplines of market competition with the need
for social cohesion and solidarity
DISADVANTAGES
>because it places such a heavy stress on consultation,
negotiation and consensus, it tends to encourage
inflexibility and make it difficult for businesses to adapt to
changing market conditions
>social capitalism is nothing more than a contradiction in
terms: the price of financing ever-expanding social
programmes is a decline in international competitiveness
and a weakening of the wealth creating base of the
economy
3. COLLECTIVE CAPITALISM
a model that the East Asian ‘tigers’ (South Korea, Taiwan,
Singapore, etc.) have adopted
places emphasis on cooperative long-term relationships
and allows the economy to be directed not by an
impersonal price mechanism but through what have been
called ‘relational markets’ stress is placed on teamwork
and the building up of a collective identity, which is
underpinned by relatively narrow income differential
between managers and workers
The state plays a vital role in ‘guiding’ investment,
research and trading decisions
DISADVANTAGE
>criticized as being invariably underpinned by
authoritarianism
Managed or unmanaged capitalism?
The central issue in economic policy is the proper balance
between politics and economics => STATE AND MARKET
Does a capitalist economy work best when it is left
alone by government or can stable growth and general
prosperity be achieved only through a system of
economic management?
Boils down to:
Keynesianism
 John Maynard Keynes: rejected the idea of a natural
economic order based on a self-regulating market and
argued that laissez-faire policies that established a strict
distinction between government and the economy had
merely resulted in instability and unemployment
 the level of economic activity is geared to ‘aggregate
demand’: that is, the total level of demand in the economy,
which the government has the capacity to manage through
its tax and spending policies
 when unemployment rises, government should regulate
the economy either by increasing public spending or
cutting taxes
the resulting budget deficit would be sustainable
because the growth thus brought about would boost tax
revenues and reduce the need for government borrowing
multiplier effect: mechanism through which a change in
aggregate demand has an increased effect on national
income as it circulates through the economy
HOWEVER
Stagflation, the simultaneous rise in unemployment and
inflation, damaged its credibility. Keynes’ ideas were
undermined by their association with the ‘tax and spend’
policies that free-market economies claimed had sapped
enterprise and initiative and undermined growth by
creating permanently high inflation
Monetarism
the theory that inflation is caused by an increase in the
supply of money; too much money chases too few goods
 result of economists such as Friedrich von Hayek and
Milton Friedman
 signaled a shift in economic priorities away from the
reduction of unemployment and towards the control of
inflation
 Thatcherism and Reaganism: the principal economic
responsibility of government came to be seen as ensuring
“sound money”
 job of the government was to squeeze inflation out of
the system and leave matters such as growth, employment
and productivity to the natural vigour of the markets
 Friedman: “inflation is always and everywhere a
monetary phenomenon”
 Keynesian policies designed o boost output and reduce
unemployment merely fuel inflation by encouraging the
government to borrow and print money. Alternative is to
shift attention away from demand-side policies that
encourage producers to produce => Deregulation and tax
cuts
Monetarism was able to convince Keynesianism of the
importance of inflation and the supply side
“New Keynesianism”: rejects top-down economic
management but also acknowledges the fact that the
workings of the market are hampered by uncertainty,
inequality and differential levels of knowledge
TYPES OF SOCIALISM
1. STATE SOCIALISM
“Economic Stalinism” first used by the USSR after the
Bolshevik Revolution
based on state collectivization, which brought all
economic resources under the control of the party-state
apparatus
USSR: “directive planning” which placed overall control of
economic policy in the hands of the highest organs of the
Communist Party
Planning: a system of economic organization that relies on
a rational allocation of resources with clearly defined goals
that are realized through the partial or complete
coordination of production, distribution and exchange
 Helped the USSR and much of Eastern Europe eradicate
homelessness, unemployment and absolute poverty
DISADVANTAGES
Inherent inefficiency because however competent and
committed the planners may be, they are confronted by a
range and complexity of information that is simply beyond
their capacity to handle
Does not really promote efficiency
Facilitated the emergence of new social divisions based on
political or bureaucratic position
State capitalism: a system of state ownership that
replicates capitalist class relationships by concentrating
economic power in the hands of a party-state elite
2. MARKET SOCIALISM
introduced in Yugoslavia
 permitted the development of cooperatives and single-
proprietor businesses to supplement the central-planning
system, and eventually allowed Soviet enterprises to
disengage themselves from the planning system altogether
and become self-financing and self-managing
 still needs a framework of planning
 not only does a market environment provide a
guarantee of consumer responsiveness and efficiency, but
the dangers of bureaucratic power are also kept at bay
SOCIAL STRUCTURE AND DIVISIONS
Society—is a collection of people who occupy the same
territorial area
Society shapes politics:
1. The distribution of wealth and other resources in
society conditions the nature of state power
2. Society influences public opinion and the political
culture
3. Social divisions and conflicts help bring about political
change in the form of reforms and revolutions
4. The social structure shapes political behavior, who
votes, how they vote, who joins parties, etc
Debates
Marxists: society is characterized by irreconcilable conflict
Liberals: harmony exists amongst competing interests and
groups
Conservatives: society is organic, ultimately shaped by the
forces of natural necessity
Most important debate: INDIVIDUAL—SOCIETY –
STRUCUTRE OVER AGENCY DEBATE
Individualism: belief in the primacy of the individual over
any social group or collective body which suggests that the
individual is central to any political theory or social
explanation.
 All statements about society should be made in relation
to the individuals who compose it.
 Human beings are naturally self-interested and largely
self-reliant, owing nothing to society for their talents and
skills
Classical liberalism. The New Right.
Collectivism: stresses the capacity of human beings for
collective action, highlighting their willingness and ability
to achieve goals by working together rather than through
self-striving.
 There is a social core to human nature, implying that
social groups are meaningful political entities
Statism.
Class divisions reflect economic and social differences in
society, and are thus based on an unequal distribution of
wealth, income and/or social status.
SOCIAL CLASS
Group of individuals who have similar economic and social
positions and are united by a common economic interest
RISE AND FALL OF CLASS POLITICS
Sourced from Marxist tradition: class as the most
fundamental and politically most significant social division
“The history of all hitherto existing societies is the history
of class struggle.” –Karl Marx
 political process is nothing more than the working out
of class tensions or conflicts which are rooted from the
mode of production and the institution of private property
 a “ruling” class of property owners—the bourgeoisie—
dominates and exploits a class of wage slaves—the
proletariat.
Marx’s two-class model
PROLETARIAT: destined to be the “grave digger” of
capitalism until it achieved “class consciousness and be
aware of exploitation
 would then become a class in-itself (economically
defined category) and for-itself (a revolutionary force)
Discredited by the failure of Marx’s predictions to
materialize in advanced capitalist societies
MAX WEBER
 developed a theory of stratification that acknowledged
economic or class differences but also took account of the
importance of political parties and social status
 an intermediate class of managers and technicians has
emerged and that there are internal divisions between
both the bourgeoisie and the proletariat
NEO-MARXISTS (at the final eclipse of class politics)
 looked to the revolutionary potential of students,
women, ethnic minorities and the third world
The declining political significance of class lies in the
phenomenon of deindustrialization which is the decline
of traditional labor-intensive industries such as coal, steel,
and shipbuilding industries
Who are the underclass?
JK Galbraith: pointed toward the emergence in modern
societies of a ‘contented majority’ whose material affluence
and economic security encourages them to be politically
conservative
Concentration of poverty and disadvantage amongst a
minority of the population is reflected in the development
of a so-called ‘two-thirds, one third society’
Underclass—those who suffer from multiple deprivation
and are socially marginalized: “The excluded”
Emergence of underclass:
Right-wing (Charles Murray): largely in terms of welfare
dependence and personal inadequacy
Left-wing: structural disadvantage and changing balance of
the global economy. Incapacity of modern economy to
provide jobs