Comparative Political Economy

Theory and Evidence

Prosper M. Bernard, Jr.

• Publisher: Routledge
• Year: 2021
• ISBN:
  9780429581168
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Makroökonomie

Why do unemployment, inflation, and growth rates vary across political economies? Why are some capitalist societies more equitable than others? Why is public spending higher in some countries than others? Drawing on insights from political science, economics, and business, this book addresses these and other related questions in the context of advanced capitalist democracies.

The first part of the book investigates how macroeconomic performance and policy outcomes such as public spending, tax revenue, and trade openness are shaped by various economic and political institutions as well as democratic politics. The second part probes the effects of economic performance and social changes on domestic politics. At the end of each chapter, key terms, review questions, and a short list of recommended readings are included.

Each chapter is designed to familiarize readers with core concepts, theoretical arguments, and empirical evidence related to different substantive themes. With in-text focus boxes and short case studies, this book is ideal for anyone seeking a rigorous introduction to the comparative political economy of advanced political economies, and will be a valuable text on courses in political economy, comparative economics, and related areas.

CHAPTER 1
Introduction to the study of comparative political economy

DOI: 10.4324/9780429199462-1

As a subfield of political science, comparative political economy (CPE) analyzes the differences in economic outcomes and policies across countries and time. It focuses on the comparative performance of modern capitalist economies—probing in particular the factors that contribute to the different patterns of distributive, redistributive, and collective outcomes across countries. CPE scholars are especially interested in the following questions: Why are some countries more prosperous than others? Why do unemployment and inflation rates vary across political economies? What accounts for the cross-national variance in GDP growth and income growth? Why are some capitalist societies more equitable than others? What accounts for the differences in the level and composition of taxation and public spending across countries and over time? These questions define the analytical parameters of the study of comparative capitalism. A key objective of this book is to address them in the context of advanced capitalist democracies.

These questions direct our attention to the interaction of markets and government, two different means of ordering and organizing human endeavors. Let’s first describe, in an abstract way, the key properties of each. The logic of the market is to channel resources (capital, labor, land, and entrepreneurship) to the most competitive and profitable economic activities. To achieve that end, markets function more or less as decentralized allocative mechanisms: market exchanges are free and voluntary in the sense that the actions of firms and individuals are motivated by self-interest rather than compliance to non-market commands. Leading economists such as Adam Smith (1723–1790), Friedrich Hayek (1899–1992), and Milton Friedman (1912–2006) championed market capitalism over alternatives because it allocated resources efficiently, fostered competition and innovation, and created opportunities for individuals to promote their material interests.

On the other hand, the logic of the government is to exercise authority on behalf of the interest of the public. Governments, particularly in democratic systems, can be effective agents of the public by virtue of their ability to define and compel appropriate market behavior, monitor and enforce compliance, allocate public resources, and protect the personal rights of citizens in the economy (Hacker and Pierson 2016; Vogel 2018). Governments use a variety of tools to promote the public interest as defined by the democratic process—laws, regulations, public spending, taxation and licensing, public ownership, among other tools. In effect, the government functions like a centralized allocative mechanism: members of a society acquiesce to the commands of public officials, trusting that society is better off under the guidance of “an informed, efficient, and humane government” than to be left to their own devices (Wolf 1993: 3).

We have, of course, described the market and the government in idealized ways. Markets are depicted as if they always function perfectly; the government is characterized as a benevolent agent of the public. If each offered a perfect means of organizing human endeavor, then societies would choose market over government, or government over market. In fact, it is because both are flawed that modern democratic capitalist systems have opted for some kind of market-state mixture. Next, we briefly elaborate how governments and markets affect each other.

How governments affect markets

The first row in figure 1.1 spotlights key positive and negative effects associated with government intervention in the economy. Positive effects mean that the exercise of public authority in the economy improves distributive, redistributive, and/or collective outcomes; negative effects imply the opposite. The effects vary by the degree of gains or losses and by their durations, some being short lived others lasting much longer.

Market failures

Governments perform an instrumental role in the economy when they fix market failures. If governments decided not to address these problems, markets would cease to function efficiently. The negative effects would be significant—slower productivity and innovation, poorer quality of life, many unhappy consumers, and slower growth. It is for these reasons that even the most ardent defenders of market capitalism have agreed that market failures have to be corrected by the government from time to time.

Market failures can be defined as conditions in which markets fail to achieve efficient outcomes. Outcomes are Pareto efficient if no actions are available that can make somebody better off and no one else worse off. When outcomes are inefficient, it implies that an economy’s available resources are not being used to their fullest potential and that there are opportunities to improve the well-being of society. Markets are competitive when barriers to entry are low and control is diffused among firms. The lack of competition can lead to inflated prices, limited consumer choices, and inferior products and services—all of which undermine the well-being of society.

Figure 1.1 Typology of political economic effects

There are several types of market failures. For example, public goods such as public transportation, clean air, street lighting, national defense, the police and justice system, roads, and knowledge would be undersupplied if left solely to markets given that they are for the most part non-excludable and non-rival in consumption. Non-excludable means that people cannot be denied the ability to consume such goods; non-rival refers to the idea that a person’s ability to consume such goods does not impair others’ ability to do so. It is the fact that people can consume public goods even though they have not paid for them (sometimes called the ability to “free ride”) that discourages markets from supplying such goods and has led governments to provide them using different delivery methods.

Another type of market failure involves externalities which exist when the negative or positive effect of an action falls on people other than those responsible for carrying out that action. If polluters are not required to shoulder the cost of their actions, polluting will go unabated and it is the people living around them who will bear the cost even though they are not responsible for degrading the air quality. If companies are not compensated somehow for training their workforce, fewer companies will do so and the productivity of the national workforce will suffer. Governments typically use regulations to combat negative externalities. They use subsidies and tax incentives to encourage firms to perform activities that are known to lead to positive externalities. Governments have assumed a great deal of responsibility in nurturing an educated workforce by establishing public educational systems and supporting higher education as well.

Markets can also fail when individuals and firms face information asymmetries. A transaction might fall through if a seller fails to disclose sufficient information about a product or service. For example, someone might walk away from buying a used car if the seller fails to produce a report of the car’s history. Similarly, a seller might refuse to sell a product or service if the potential buyer fails to disclose enough information about their qualifications. For example, life insurance providers might refuse to sell this product if the consumer fails to reveal her health history. Lack of information might lead consumers, investors, and firms to make bad decisions—decisions they otherwise would not have made had more information been available. Governments can create information-rich environments by mandating and standardizing product and service description, holding someone liable for misstatements and misreporting, and requiring firms to make regular financial disclosures.

Fixing market failures speaks to a broader point—namely, markets need public governance. Markets are complex institutions; to function effectively they need to be supported by a robust set of laws, regulations, and standards. From property rights protection, to anti-price fixing and anti-insider trading legislation, to consumer safety standards, to accounting standards, to antitrust enforcement, to disclosure requirements, to environmental protection regulations, these and other governmental tools prevent markets from succumbing to their inherent flaws. Reflecting this view, Vogel (2018: 2) notes, “there is no such thing as a free or perfect market,” rather market institutions “must be created and sustained by the visible hand of the government.”

Distributional equity

The association between growth and equity is often portrayed as a trade-off. The trade-off argument is summarized here by Pontusson (2005: 4):

governments may create a more equal distribution of income and consumption … but in so doing they inevitably distort market forces and undermine efficiency, which in turn leads to slower growth, less employment, and lower average standards of living.

The growth-equity trade-off is often discussed in the context of the interplay between capitalism and democracy. There are two aspects of capitalism that contribute to socioeconomic inequality. One is that the main catalyst of the individual drive to be productive, innovative, and efficient is the expectation of unequal distribution of rewards. If everyone expected equal rewards, what would be the point of working harder than others or investing in higher education? It is the expectation of higher returns when individuals go above and beyond the norm that fuels market behavior. When individual efforts are aggregated upwards into macroeconomic outcomes, the result is economic growth coupled with unequal sharing of prosperity. The inequality effects of capitalism are also attributed to the fact that capitalism commodifies the labor of individuals. Specifically, the well-being of individuals is dependent on their market participation (for more see Chapter 2; also see Esping-Andersen 1990). Not only does capitalism tend to bring all human activities into its orbit, the valuation or worth of one’s contribution in the marketplace varies greatly across groups and individuals.

The egalitarian effects of democracy stem from the needs and desires of the majority. The logic of democracy is to promote the will of the majority, which typically represents the lower and middle classes. The majority espouses policy preferences that are distinct from those of the affluent class because these groups face different economic circumstances. In modern times, democratic majorities have advocated the idea of a moral economy—one in which human dignity, egalitarianism, and social rights are prioritized over market outcomes (Streeck 2011). In response, democratic governments have created social safety nets and market regulations that redistribute income and wealth, protect people against income losses, and impose social obligations on capital. Democracy has also penetrated the walls of companies via laws that promote codetermination, an industrial relations arrangement that gives workers an effective voice in the workplace and, in some cases, corporate boards (for more see Chapter 2).

A commonplace view of the relationship between capitalism and democracy is that they are in tension with one another. The rising concentration of income and wealth in the top echelon of societies in the early 1900s (symbolized by the “Roaring Twenties”) and in recent decades in the United States (characterized as the “New Gilded Age”) are stark reminders of the inegalitarian dynamics of capitalism—of rising unequal prosperity. For many, the historical evidence reveals how democratic capitalist systems are unsustainable—time and again capitalism subordinates democracy to the dictates of market operations. The 30 years following World War II (“the golden age of capitalism”), when prosperity was shared across income groups, “should be recognizable as truly exceptional,” as Streeck (2011: 5–6) observes. The periods before and after represent “the normal condition of democratic capitalism—a condition ruled by an endemic conflict between capitalist markets and democratic politics.”

An alternative view is that democracy and capitalism can coexist, delivering both equality and economic growth. The golden age of capitalism illustrated how democracy can harness capitalism without suffocating productivity, innovation, and output growth, leading to shared prosperity. In fact, comparative political economists have found that since the 1970s several democratic capitalist countries, notably those in the Nordic region, have been more successful than Anglo countries such as Canada, the United Kingdom, and the United States, at fostering shared prosperity.

The variations in the institutional configuration of advanced capitalist countries is central to understanding why there are persistent cross-national differences among these countries with respect to levels of growth, equality, and employment. In the Nordic countries, markets are “embedded” in an institutional framework maintained by laws and social practices which has been flexible enough to avoid stifling the dynamism of markets but strong enough to protect people against the excesses of markets (Pontusson 2005; Thelen 2014). In these coordinated capitalist systems, governments encourage market development using a variety of tools that we described earlier, coordinate their policy actions with groups representing employers and labor, and invest in education and fixed capital projects (both of which help ease market operations). The social safety net plays an instrumental role in coordinated capitalism (for more see Chapter 2). Certain social policies induce wage restraint among organized labor, encourage individuals to invest in occupational- and firm-based skills, and facilitate business investment. In short, this alternative view of the relationship between capitalism and democracy holds that coordinated capitalist systems have a better track record of fostering equitable growth than uncoordinated capitalist systems like those of Anglo countries.

Smoothing out business cycles

The Great Depression (1929–1939) put into full relief the fragility of markets. It called into question the notion that markets could recover on their own. Keynesianism was born out of the experiences of that decade. This school of economic thought holds that the government should intervene in the economy when aggregate demand cann...