Paul Lydio Anthony S.

Ariola October 1, 2015

12-1262 Theories of Political Economy
Democracy, Capitalism, and Rational Choice

1. What is the common theme in the readings of unit 3 and 4?

The common theme between unit 3 and 4 is that there is an inescapable connection
between capitalism and rational choice. As stated in the description of the reading, the
aftermath of Keynesian view declined due to its unresponsiveness to the economic downturns.
However, there came Hayek who believes to be the obscurantist of neoliberalism. This ideology
pushed for the rationale ideal of free markets in a new age of globalization (Salao, 2015).
However, rising industrialized countries appeared to offer a contrasting reality about the state
as an economic actor through self-interest which can be supported by Scott’s rational theory.

Hayek’s discussion on the idea of serfdom is based on a neoliberalist perspective. According

to Boettke, Hayek’s ideology is against the conglomeration between the government and the
market. Hayek believes that politicians must never try to influence the economy of a particular
state since this will only lead to a loss of freedom and prosperity to all citizens living in a
particular area. Thus, free market should be allowed from any influences of internal and
external factors in the sense that they should be the only ones allowed to determine any
economic activities. Government will only intervene if there is a market failure. Aside from this,
there should be no any other government actions that will intervene within the private sphere
to respect the rights of the citizen’s private property and personal freedom. Moreover, he
argued that a centralization of power in the government can be used as an economic power to
manipulate individuals. This is being supported by Friedman’s book entitled “Capitalism and
Freedom.” For Friedman, central planning will only lead to violations of personal freedom in
which not only the government will do the decision making but also with the citizens who have
the potential to acquire a seat in the political arena and has the capability to voice out the
concerns of the society. With that, a set of elected public officials must agree on laws, create
the rules of the game and let the government enforce the laws presented and should be
favorable by the people. In addition, Friedman believes that trade restrictions are too arduous
and upsetting to the market economy. The most effective way to turn a market economy into
an authoritarian one, says Friedman, is to the impose direct controls on foreign exchange. In
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connection to unit 4, the unit focuses on how rational individuals make decision through their
own self-interests. John Peter Scott describes rational people as individuals who calculate the
costs and benefits of any action before deciding what to do or what to have. In connection with
the previous discussions, an example of such action can be applied in the field of economics
wherein people are considered to be motivated by money and profit. With this, people are
rational by action in which they are highly motivated in terms of getting incentives and benefits
than costs or loss.

2. Specify how you think the readings in units 3 and 4 relate on the overall theme of the
course.

The common theme of units 3 and 4 contributes to the theories in political economy
mainly because it talks about capitalism as a means towards the development of a
particular state. However, the economy must not be held by the government per se. Powers
of the government must be decentralized to have an effective and efficient market
economy. This paves the way to the idea of democracy wherein free market must be done
for a better development of the state. According to Milton and Friedman, "The idea that
there may be an inescapable connection between capitalism and democracy has recently
begun to seem plausible to a number of intellectuals who once would have regarded such a
view not only as wrong but even as politically dangerous." However, he then argued that
the “government must see to it that the economy expands to provide the wherewithal for
the cold war and demonstrate to the uncommitted nations of the world that a democracy
can grow more rapidly than a communist state.” This is seen through how people choose
their own course of action to achieve what they want based on their own self-interest. As
what Boettke says, centrality in the government is bad because the government decides
what to do based on their interest and course of action. This is bad to the fact that
government leaders make decisions in terms of laws or policy without the consent of those
from the lowest levels. With this, policies based on their interest will not be effective to a
particular state if these certain policies formulated does not answer the questions asked or
solve the real problem. Only in the grassroots will they be able to know the real dilemma to
which people will need to bring it up to the agenda and ensure the delivery of these
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12-1262 Theories of Political Economy
identified problems to the government. These self-interest of the individuals in the
government serves as a barrier from improving the market economy of the state. The
centrality in the government will only hinder the state to develop since they are the ones
who determine the flow or the structure of the market in the economy.

3. What are the key concepts in the assigned readings? Why do you think so?

The key concepts in the assigned reading would be Capitalism and Rational choice.
These two are interrelated in the sense that the former was the result of the latter.
Rationalism is the very cause on how certain individuals create institutions that are in-
charge of planning to improve market economy. Scott describes rationalism as how
individuals calculate the amount of benefits they can get before they proceed to their
course of action. It assumes that individuals are only motivated by their wants and goals.
Moreover, actions are based on these preferences of the individual however these are
under the condition of constraints. Individuals anticipate the outcomes of alternative
courses of action and calculate which are the best among them. These description, in
reality, are the actions of a rational being unless these actions are habitual, effectual,
emotional or value oriented actions. We can relate these descriptions to capitalism in the
sense that the capitalists handle the structure of the market economy based on their self-
interest. The self-interest of an individual, be it from the government or the grassroots,
determine the market economy of the state. We must never deny that there is an
inescapable connection between capitalism and democracy (Friedman, 1962).

4. For each unit, quote one sentence each from three readings you found to be the most
important.

There are three quotes I find very important which is interrelated with the course and
reality. One would be the quote from Boettke. Franklin stated that "those who would give
up essential liberty to purchase a little temporary safety deserve neither liberty nor safety"
(Franklin, cited by Boettke, 1995). This means that any individual who gives up the most
important freedom to get an impermanent security does not deserve any rights, freedom,
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12-1262 Theories of Political Economy
or any forms of security. One must take into account that the trade-off between safety and
liberty is only but illusionary. Once an individual sacrifices his or her freedom, security can
no longer be guaranteed since these rights are already taken away. An individual who has
the strength to apply the standards of freedom can guide the society towards development.
Second would be the one from Hall and Soskice. The authors stated that “viability of policy
depends not only on the organization of political economy but on the organization of
political realm” (Hall & Soskice, 2001). Hall and Soskice points out that the feasibility of the
policy does not depend in the political and economic aspect but the political aspect alone.
These formulated policies, with the help of the technocrats, will be implemented to certain
sectors who need it but the possibility of the success of the policy still depends on how the
government will implement these policies. Lastly, Scott stated that “collective action is
sustained through selected incentives” (Scott, 2000). This is in fact a reality wherein people
only get to work based on their interest of the incentives. They are only motivated if it
concerns their taste and preferences. An example of which would be employees living in
corporate businesses or companies. An employee would only work efficiently and
effectively if the company will give him or her a bonus or extra amount of salary. Another
example would be in the classroom. A student, if he or she does not have the passion to
excel in class, will only work harder if he or she gets to benefit by giving him or her bonus
points to help the student either pass the class or get higher grades. These benefits or
incentives will only motivate individuals to achieve their own goals depending on their
tastes and preferences.

Reference:
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12-1262 Theories of Political Economy
Boettke, Peter J., 1995: “Hayek’s The Road to Serfdom Revisited” Government Failure in the
Argument Against Socialism,” in Eastern Economic Journal, Vol. 21, No. 1, pp. 7-26

Friedman, Milton, 1982 [1962]: Capitalism and Freedom, Chapter 1, pp. 7-21, Chapter 2, pp.22-
36. Chicago: University of Chicago Press

Scott, John, 2000: “Rational Choice Theory,” In: G. Browning A. Halcli and F. Webster, eds.,
Understanding Contemporary Society: Theories of the Present, New York: Sage Publications

Hall, Peter A./David Soskice, 2001: “An Introduction to Varieties of Capitalism: The Institutional
Foundations of Comparative Advantage, Oxford: Oxford University Press, pp. 1-70.