Political economics

Economics—the social science that deals with the production, distribution, and consumption of
material wealth and with the theory and management of economic systems or economies—was
once called political economy. Today, political economists study interrelationships between
political and economic institutions (or forces) and processes, which do not necessarily lead to
optimal use of scarce resources.
Political economy is founded on the predicament of economic choices in a society comprising
heterogeneous agents. Its focus is different from that of welfare economics. In a nutshell,
political economy analysis investigates the interaction of political and economic processes in a
society; in the context of historical legacies, this entails comprehending.

Definitions:
Adam Smith: "Political Economy describes the actual working of the economy (positive
aspect), and also the way the economy should work (normative aspect)".
o Was more prescriptive, than descriptive.
o Role of State Policy,
o Branch of Civil government.
Lionel Robbins: "Political Economy analyses the political effects of economic actions, and
economic effects of political actions."
o Shows interaction between economic and political systems.

Marx and Engels: "Political Economy studies production relations in terms of their
interconnections with the contemporary development of productive forces, as by history."
o Role of productive relations — workers and capitalists

Schumpeter: "Political Economy is an exposition of a comprehensive set of economic policies

on the strength of certain unifying normative principles."
o Policy prescriptions
o Normative approach
Political economics is split into two sections:
• Classical Political Economy: Classical Political Economy studies the works of philosophers
such as Machiavelli, Adam Smith, and Karl Marx. Modern Political Economy
• Modern Political Economy. The work of modern philosophers, economists, and political
scientists such as John Maynard Keynes, Milton Freidman, and Friedrich Hayek is modern
political economy.

Political Economy Analysis

Political economy analysis investigates the interaction of political and economic processes in a
society. This entails comprehending
o The power and authority of groups in society, counting the interests they hold and the
incentives that drive them, in conducing outcomes.
o The role that formal and informal institutions play in allocating scarce resources.
o The influence that values and ideas, including culture, ideologies, and religion, have on
shaping human relations and interaction.

Each country should have a strategic policy framework, thus the introduction of Sustainable
Development Goals (SDGs) which act as a guide to all countries to formula a policy framework
keeping in mind with the SDGs.

Economic systems:
1. Capitalism: Capitalism is often thought of as an economic system in which private actors
own and control property in accord with their interests, and demand and supply freely set
prices in markets in a way that can serve the best interests of society. The essential feature of
capitalism is the motive to make a profit.
2. Socialism: The sole objective of socialism is the maximum social welfare of the society. It
means that there is no scope of exploitation of labour class. A socialist economy is a system
of production where goods and services are produced directly for use, in contrast to a
capitalist economic system, where goods and services are produced to generate profit (and
therefore indirectly for use).
3. Communism: Communism has a centrally planned economy; it can quickly mobilize
economic resources on a large scale, execute massive projects, and create industrial power. It
can move so effectively because it overrides individual self-interest and subjugates the
welfare of the general population to achieve critical social goals.
4. Liberalism: In liberal market economies, firms rely primarily on competitive markets to
secure access to finance, skills, labor and technology, while firms in coordinated market
economies rely more heavily on collaborative arrangements, often coordinated by business
associations or trade unions.
5. Marxism:  Marxism is a social, political, and economic philosophy named after Karl Marx. It
examines the effect of capitalism on labor, productivity, and economic development and
argues for a worker revolution to overturn capitalism in favor of communism.
CAPITALISM
Marx wrote CAPITAL to lay out the inner workings of the economic system called capitalism.
Marx went deeper & tried to discover capitalism’s fatal contradictions.

Marx saw Capitalism as an economic system driven by the need to maximize profit. Two
fundamental classes dominate society:
– A capitalist class that privately owns society’s means of production.
– A working class that owns no means of production & must sell its labor power to the capitalist
class to survive.
 Capitalists make profit by exploiting wage labor. Capitalists make profit by exploiting wage
labor.

Marx begins his analysis of capitalism by examining the commodity. The goods & services
produced for sale under capitalism are commodities.
– Commodities are “useful” things or activities designed to be sold in a market. Thus,
commodities have a dual nature: They have a “use value” & an “exchange value.”

What is a Commodity’s Exchange Value?

•USE VALUE: Any service, resource, or product that is transformed through labor to make it
useful has a use value. Example: A haircut, water, a sandwich.
• EXCHANGE VALUE: Anything with use value that is exchanged has an exchange value as
well. Example- A Supercut, bottled water, a Subway sandwich.
 As the capitalist market expands, the profit motive turns more & more useful activities &
goods into commodities with exchange value.
Marx reasoned that the exchange value of a commodity is based upon the average socially
necessary labor-time that went into making it.
• Labor is the underlying element that all commodities have in common which allows people to
roughly compare their relative values.
• Capital (like machinery) is essentially “dead labor”—labor embodied in the machines it
produced.
 Thus, capital is a condition where “dead labor” exploits “living labor”.
Capital is a Relationship

Capital is any form of wealth (machinery, land, resources, money) that is used to employ labor
for the purpose of generating greater wealth (surplus value) for the owners of capital (capitalists).
Capitalists gain profits by paying workers less for their labor power than the exchange value of
the wealth they produce. This is the meaning of exploitation.
The more wealth (surplus value) workers generate above the cost of their labor, the more
exploited they are…the greater the “rate of exploitation.”
Modes of Exploitation:
Absolute Surplus value- Lengthen the working day without increasing wages. (Working longer).
Relative Surplus value – Decreasing necessary labor time needed to reproduce labor power. This
is accomplished by cheapening the labor power by increasing productivity. (Increased
productivity).

Where Multiple Profits Come From?

The wealth produced by workers above the value of their wages Marx called surplus value. For
capitalism to function, this surplus value must be large enough to:
o Return a profit to the employer.
o Pay for resources & machinery.
o Generate interest to investors.
o Pay rent on property.
o Make profit for retailers, advertisers & other “middlemen”.
 Workers are not paid the value of the products they produce. If they were, the capitalist
would make no profit, which is clearly not the case.

Marx’s labor theory of value

The exchange value of labor power is the average socially necessary labor time that went into
creating it. - -Therefore, wages should meet the cost of the food, shelter, clothes &
transportation, etc. needed to keep workers alive & returning to work
To increase profit, wages must be kept lower than the value of the products labor produces. So
capitalists always try to avoid paying the full value of labor while increasing its productivity. •
Wages do not cover housework or childcare, unless they are commodified.
The unpaid labor of those who cook, clean, care for workers & raise future workers is
externalized—usually onto women (or society, as in public education). Damages done to the
environment are also externalized.
Concept of Alienated Labor
Workers receive wages for the products they produce which is an unequal exchange. The
products workers make become the property of the capitalists. This means that workers are
“alienated” from their tools & the products of their labor, which now face them as commodities
they must buy in the market. Competition also alienates them from each other.
While they work, their time & energy belongs to the capitalist as well. This transforms the self-
directed, cooperative, creative, life-fulfilling process of useful activity into time spent under the
bosses’ control doing whatever makes him the most profit relative to what he pays his workforce.
These are the conditions Marx calls Alienated Labor.
The Eco-Materialist Critique of Marx’s Understanding of Capitalism
- Marx’s view of capitalism rests on the proposition that labor creates ALL value. This is not
true.
– Work in many forms creates wealth & surplus value.
– Remember, energy is the capacity to do work.

- The wealth that could be produced when human work was only supplemented with animal,
wind & water energy was limited.
- But when human labor was subordinated to the fossil powered industrial machines, it became
just a small part of the energy applied toward producing unprecedented amounts of wealth.

MODERN DAY CAPITALISM

 The mechanism of capitalism’s economic advances became the leading object of economic
research early in the twentieth century and remained so for decades.
Then Joseph Schumpeter arrived with a new perspective. Innovations are normally the creation
of businesspeople, he said, and do not spring reliably or quickly from recent inventions by
scientists and engineers. Furthermore, innovations “are as a rule embodied...in new firms.” 
Banks—the venture capitalists of that era—selected which investment projects of these
entrepreneurs to finance. The start-ups that met success inspired other entrepreneurs and together
caused the “creative destruction” of various established enterprises. However, this mechanism of
Schumpeter, for which he became renowned, is not consonant in an important respect with
subsequent understanding of the essential nature of innovative ideas, and it doesn’t apply to a
large sector of capitalist economies in the present age. The other shortcoming of Schumpeter’s
mechanism is that, in centering on the entry of start-up firms, it does not encompass the
innovations that come from the sector of established firms.