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LESSON 1: BASIC CONCEPTS OF ECONOMY

Economics underpins a great deal of decision-making among private and public institutions but also in our
everyday lives.

 What is economics?
 the production, consumption, and transfer of wealth
 the study of the ALLOCATION of SCARCE resources to meet UNLIMITED human wants
 the study of scarcity and choice

o The Economic Problem: Scarcity and Choice

 SCARCITY is a finite amount of a good or service.
So studying economics helps us to make better decisions regarding how to deal with the condition of scarcity.
1. Goods are tangible items.
2. Services are intangible items.

o SCARCITY VS SHORTAGE
Shortage:
 Shortage is a limited amount of a resource.
 A shortage occurs whenever quantity demanded is greater than quantity supplied at the market price.
 A shortage is a market condition of a particular good at a particular price. Over time, the good will be replenished
and the shortage condition resolved

Equilibrium:
 When a shortage exists, the market is not in equilibrium. At equilibrium, the quantity demanded equals the
quantity supplied at the market price.

Scarcity:
 is a naturally occurring limitation on the resource that cannot be replenished. every choice has trade-off- what
didn’t you choose.

Every choice has trade-off- what you didn’t choose.

 Opportunity Cost is your second choice-what you give up when you make a decision.

o The Factors of Production

- In order for us to make better decisions, we must understand how goods and services are produced.
LALACE
1. LAND or NATURAL RESOURCES
- are products used in the production of goods and services, come from the earth. Examples could include lumber,
oil, coal, natural gas, gold, nickel, fuel,

 Renewable resources are materials that can be replenish..

 Nonrenewable resources are cannot be replenished.

2. LABOR and HUMAN RESOURCES

- work that goes into the production of a good or service
- the number or workers and the workers’ skills.
3. CAPITAL
- the items that are used to create a good or service.
4. ENTREPRENEURSHIP
- the putting together of land labor and capital to create a good or provide a service.
- the ideas that go into the process of creating a good or providing a service.

o Usefulness of economics
Economics provides an objective mode of analysis, with rigorous models that are predictive of human behavior.
a. Scientific Approach
b. Rational Approach

o Forms of Economic Analysis

1. Microeconomics
- decision-making by individual economic agents such as firms and consumers.
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2. Macroeconomics
- aggregate performance of the entire economic system.
3. Empirical economics
- relies upon facts to present a description of economic activity.
4. Economic theory
- upon principles to analyze behavior of economic agents.

 Microeconomics:
- basically analyzes individual business situations or sectors of the economy.
 Supply and Demand
When the demand is high and the supply is low, the price is high and vice versa. This is true because
people tend to buy the things they basically need regardless of how high the price of that product is.
 Elasticity
the degree to which prices impact behavior.
 Market Structures
the level of competition in a particular industry.
 Macroeconomics
- analyzes the broad aspects of a country’s economy.
- GDP, unemployment, inflation, and government’s tool on how to deal with economic circumstances.

Economics is the fact that opinions are intertwined with facts, and economists are influenced by their political
leanings.
Statements of fact (Positive Statements) would be statements such as “the unemployment rate has decreased by 1%”.
Statements including opinion (Normative Statements) are usually prescriptive. An example of this would be “The
government should decrease taxes to improve the economy”.

What is Political Economy?

1. The production, trade, and their relationship with the law and the government. It is the study of how economic
theories affect different socio-economic systems such as socialism and communism, along with the creation and
implementation of public policy.
2. The interaction between politics and the economy and is the basis of the social science discipline.

- The political economy refers to the advice given by economists to the government either on general economic
policies or on certain specific proposals created by politicians.

Political Economy Analysis:

- political economy is concerned with how political forces influence the economy and economic outcomes.
- it is economic activity that generates the resources that are required to sustain political activity, for example,
election campaign expenses.
- Political economists are very interested in who gains and who losesfrom a particular policy.
- it uses economic tools to examine political phenomena.
 As in economics, a characteristic of political economy analysis is the assumption that individual (political) agents
are both self-seeking and rational. Economics examines how rational individuals use the resources at their disposal
(capital, labour, land etc) to maximise some utility function (for example, maximising profits, income or
consumption) by producing goods and services and participating in markets.
 political economy examines how such individuals maximise their utility by participating in political activity. Again
they have capital and labour (time) at their disposal and they can use these to influence political processes so as to
generate policy outcomes that benefit them (most notably, by generating rents for them).

Understanding Political Economy

 Political Economist – are those who research political economy.
it involves examination of how public policy, political situation, and political institutions impact a country's
economic standing and future through a sociological, political, and economic lens.
o Components of Political Economy
1. Classical Political Economy
 Flourished in Britain
 18th century until early-to-mid 19th century
Main Thinkers:
 Adam Smith
 Jean-Baptiste Say
 David Ricardo
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 Thomas Robert Malthus
 John Stuart Mill
- Free market are self-regulating.
2. Modern Political Economy
Main Thinkers:
 John Maynard Keynes
 Milton Freidman
 Friedrich Hayek
- Important role of the government in the economy.

Game Theory as it involves different groups competing for finite resources and power that assess which policies will
provide the most beneficial results.

Three Major Studies

1. Interdisciplinary Studies
The political economy focuses on economics, sociology, and political science to understand how economic
systems, political institutions, and the environment affect and influence each other.
Three Areas:
economic models of political processes,
the international political economy and how it affects international relations,
resource allocation in different economic systems.
2. New political economy
It unites the ideologies of classical economics and new advances in the field of politics and economics.
It dismisses old ideals about agencies and the interest of states and markets and aims to encourage political
debates about societal wants and needs.
3. International political economy
Also known as global political economy, analyzes the relationship between economics and international relations.
It uses ideas from economics, sociology, and political science. International political economy focuses on how
states and institutions use global economic interactions to shape political systems.

International Economy X National Political Economy

Where international Where domestic
and sovereign policy makers,
states interacts. interest groups, and
institutions interact.

Political Economy Behavior

Capital and labor are used to influence political processes and generate policy outcomes with the most benefit. The
political behavior in an economy is shaped by:

1. Interests: They include the interest of individuals and groups who can use their power to influence policy.
Individuals in the government: promote their own economic and political interests that will help them
retain power.
People outside the government: more concerned with the outcome of the economic policies
implemented.
2. Ideas: an important influence on policy. It is assumed that individuals are self-seeking and rational and that they
are unable to assess the outcomes of all the choices available to them.
Ideology allows an individual to decide what they should do to remain consistent with their basic values
and beliefs.
3. Institutions: There are political rules that include the Constitution and define how leaders are chosen and how a
new policy can be implemented. Institutions help structure incentives facing individuals and groups within the
economy.

Types of Political Economies

1. SOCIALISM:
The production and distribution of goods and wealth are maintained and regulated by society, rather than a
particular group of people.
Whatever is produced by society is done so because of those who participate, regardless of status, wealth or
position.
Socialism aims to bridge the gap between rich and power, where one or more individuals don't have most of the
power and wealth.
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2. COMMUNISM:
Karl Marx
Capitalism has created a division between rich and poor.
He believed in shared resources, including property, and that production and distribution should be overseen by
the government.
Classless society
3. CAPITALISM:
Profit as a motive for advancement.
The idea behind capitalism is that private individuals and other actors are driven by their own interests—they
control production and distribution, set prices, and create supply and demand.

SOCIALISM X COMMUNISM
- both stress bridging the gap between rich and poor, and that society should relegate equilibrium among all
citizens. But there are inherent differences between the two. While resources in a communist society are owned
and controlled by the government, individuals in a socialist society hold property. People can still purchase
goods and services under socialism, while those who live in a communist society are provided with their basic
necessities by the government

History and Development of Political Economy

-
18th century
-
Scholars during the period studied how wealth was distributed and administered between people. Some of the
earlier works that examined this phenomenon included those by Adam Smith and John Stuart Mill
- Antoine de Montchrestien coined the term “Political Economy” in his book Traité de l'économie politique.
ADAM SMITH
- Father of economics and political economy.
- He wrote about the function of a self-regulating free market in his first book, which was called "The Theory of
Moral Sentiments."6 His most famous work, "An Inquiry into the Nature and Causes of the Wealth of Nations"
(or "The Wealth of Nations") helped shape classical economic theory. It was also used as the foundation for future
economists.
JOHN STUART MILL
- combined economics with philosophy. He believed in utilitarianism—that actions that lead to people's goodwill
are right and that those that lead to suffering are wrong.

Levels and Choices

1. Macro-level or country analysis:

In this level, one can understand how the big decisions, for example, with respect to the selection of political
leaders or the allocation of budgets, are made.
Macro analysis might also consider how the highest-level political institutions function: what are the rules of the
game facing top political players? One might also expect a country’s history to shape prevailing ideologies and
ideas about how things should work and why.
2. Sector-level analysis:
It examines in more depth the forces shaping policy formation and decision-making at the level of an individual
sector or industry.
List of Sample questions for conducting sector-level political economy analysis
 Roles and responsibilities:
Who are the key stakeholders in the sector? What are the formal/informal roles and mandates of different players?
What is the balance between central/local authorities in provision of services?
 Ownership structure and financing:
What is the balance between public and private ownership? How is the sector financed (e.g. public-private
partnerships, user fees, taxes, donor support)?
 Power relations:
to what extent is power vested in the hands of specific individuals/groups? How do different interest groups outside
government (e.g. private sector, NGOs, consumer groups, the media) seek to influence policy? Historical legacies:
what is the past history of the sector, including previous reform initiatives? How does this influence current
stakeholder perceptions?
 Corruption and rent-seeking:
Is there significant corruption and rent-seeking in the sector? Where is this most prevalent (e.g. at point of delivery,
procurement, allocation of jobs)? Who benefits most from this? How is patronage being used?
 Service delivery:
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who are the primary beneficiaries of service delivery? Are particular social, regional or ethnic groups
included/excluded? Are subsidies provided and which groups benefit most from these?
 Ideologies and values:
what are the dominant ideologies and values which shape views around the sector? To what extent may these serve
to constrain change?
 Decision-making:
How are decisions made within the sector? Who is party to these decision-making processes? Implementation
issues: Once made, are decisions implemented? Where are the key bottlenecks in the system? Is failure to
implement due to lack of capacity or other political economy reasons?
 Potential for reform:
Who are likely to be the "winners" and "losers" from particular reforms? Are there any key reform champions
within the sector? Who is likely to resist reforms and why? Are there "second-best" reforms which might overcome
this opposition?' Source: DFID (2009) p. 12, itself drawing on work by ODI and World Bank.

3. Problem-driven analysis:
It starts from a particular problem that needs solving and proceeds to examine all the forces (actors and interests,
ideas, institutions) that have a bearing on it. According to DFID (2009) the World Bank developed this approach
to understand situations where policy reforms that were desirable from a growth or poverty reduction perspective
seemed to be continually blocked.

LESSON 2: ECONOMIC MODELS & PRINCIPLES

o What is “supply and demand”

Supply and demand is how economists track the dividing of resources and their value within a society. It has two
goals:
1. How much of a product do we have?
2. Is the demand for that product strong?
o What is the “law of supply”?
The law of supply asks: “How much of a good or service is a company willing to produce at a certain price?

SUPPLY– A STOCK OF RESOURCE / GOODS & SERVICES AVAILABLE TO CONSUMERS.

o What are the factors that determine the “supply”? P.I.G.T.O.E.S

P - Productivity (workers, machines, and/or assembly)
I - Inputs (change in the price of materials needed to make the good)
G - Government actions (subsidies, taxes, and regulations)
T - Technology (improvements in machines and production)
O - Outputs (price changes in other products)
E - Expectations (outlook of the future) – trends / projections of the economy, foreign exchange rates
S - Size of industry (number of companies in the industry)

o What is the “law of demand”?

The Law of Demand asks: “What is the willingness of consumers to buy a product at certain price?

CONSUMER’S DESIRE TO PURCHASE & PAY A PRICE FOR A GOOD/SERVICE

Factors that determine “demand” P.O.I.N.T

P - Price of other goods (substitute or complementary)
O - Outlook (consumer expectations of the future) - costumer preference
I - Income (normal goods versus inferior goods)
N - Number of potential costumers (population of market)
T - Taste (fads or trends)

THE CONSUMER COULD BUY MORE WITH LESS, SAVING THE REST OF THEIR MONEY FOR OTHER
NEEDS.

o So how do economists analyze the economy?

- First it is important to understand that Economics is a Social Science. Because of this there can be many variables
that can impact a particular outcome. So economists need to utilize the concept of Ceteris Paribus, which means
all else being equal.
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- What this means is that economic analysis minimizes the number of variables considered. The reason for this is
that limiting variables helps to provide a simplified model to explain certain economic circumstances.
Here are couple of models to show you how this works
1. Production Possibilities Curve or the PPC.
- What is PPC?
- PPC, simplifies an economy by only looking at two goods, but this simplification allows for a clear analysis of
opportunity cost.
Opportunity cost is the forgone benefit that would have been derived by an option not chosen.
COST: BENEFITS = OPPORTUNITY COST (COST BENEFIT ANALYSIS)
the costs and benefits of every option available must be considered and weighed against the others.

The Production Possibilities Curve can demonstrate the idea that decisions have trade-offs and opportunity costs. The
PPC is a graphic representation of an economic trade-off which can demonstrate the opportunity cost of a decision.

- It also provides a graphic representation of both efficient and inefficient allocation of resources, and unobtainable
production given the current factors of production.
The PPC can also demonstrate the level of efficiency an economy is operating at.
2. The Circular Flow Diagram
The Circular Flow Diagram is a simplified model that demonstrates how money and goods and services move
through the economy.
This simplified model of the economy will be important to understanding economic interactions and later the
course will help students in their understanding of how Gross Domestic Product (GDP) is calculated.

o Measures of national income

National Income or (NNPfc) is a sum of factor income earned by the nation in the form of monetary value from the
economic activities such as income from the production of final goods or providing services in a financial year. The level
of national income can determine the level of aggregate demand for goods and services.
It is the income earned by the nation in the form of money from the final goods and services (not intermediate goods)
produced in a financial year.
- generate monetary value in the economy such as manufacturing firms producing goods, farmers producing crops,
lawyers providing services, etc. However, national income can be calculated in both current and constant prices,
in which national income at a constant price is a real income, in contrast, national income at the current price is a
national monetary income.
NATIONAL INCOME – CONSTANT PRICE = REAL INCOME
NATIONAL INCOME – CURRENT PRICE – NATIONAL MONETARY INCOME

Formula for calculating National Income

C + GE + IN + X + FPnr – M - DPnnr
Where,
C = Consumption
GE = Government Expenditure
IN = Investments
X = Exports
FPnr = Foreign production by national residents
M = Imports
DPnnr = Domestic production by the non-national residents

Some of the important measures:

1. Gross Domestic Product (GDP)
GDP is the fiscal value of all the final goods and services produced within the nation’s domestic territory in a
financial year. The products or services produced outside the nation’s boundaries or domestic territory are not
considered while computing national income even if the producer or provider is a resident of the nation. However,
income earned by foreigners within the nation’s territory will be included while computing national income.
Therefore, GDP can be formulated as:
GDP = Goods and Services produced within nation
(+) income earned locally be foreigners
(-) income earned abroad by the Nationals
EXPORT IS NOT INCLUDED.

2. Gross National Product (GNP)

GNP is the monetary value of the goods and services produced by the normal residents of the country in a
financial year. While computing GNP territory of a nation is not relevant, i.e., resident of the nation, whether
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producing goods or providing services in a nation or outside nation, his income will be considered while
computing GNP. However, the income of a foreign company running inside a nation will not be considered while
computing GNP.

GNP = Goods and Services produced by resident within nation

(+) income earned abroad by the Nationals
(-) income earned locally by Foreigners
EXPORT AND IMPORT ARE INCLUDED

3. Net National Product (NNP)

it is the net monetary value of final goods and services produced or provided during a financial year.
Here, depreciation is the reduction in the value during the production process and for calculating the NNP
estimated value of depreciation gets subtracted from GDP.
NNP is the real measure of income.
it is measured at a market price, i.e., GNP at market price minus depreciation gives NNP at market price
(NNPmp), then add subsidies and deduct indirect taxes in NNPmp to get the national income or NNPfc.

 NNP at Market Price

NNPmp = GNPmp (-) Depreciation

 NNP at Factor Cost

NNPfc = (-) indirect taxes (+) subsidies

Methods of Measuring National Income

- Income generated by various economic activities by the individuals is the national income of the country. For
measuring it, some methods are adopted, they are explained below in detail:
Methods of Measuring National Income
- Value Added Method
- Expenditure Method
- Income Method
 VALUE ADDED METHOD
- Otherwise known as the Product Method is a procedure of measuring national income based on the contribution
made by all the industries within the territory of the country within a year.
- the difference between the value of output (selling price) and the intermediate consumption (Purchase price)
is the value-added (Profit) in the price of a product
Example:
X ltd purchased a material A for P50 and sold it @ P80 to the consumer. In the above example P80 will be the value
of output, P50 is intermediate consumption, and the difference amidst them, i.e., (80-50) =P30 is a value-added

- Every channel adds value (profit) to the product such as the manufacturer sells the product to the wholesaler after
adding value.
Gross value added at a domestic product – GDPmp
Net Factor Income from Abroad – NFIA
Net Indirect Tax – NIT
National Income – NNPfc

NNPfc = GDPmp (-) Depreciation (+) NFIA (-) NIT

 INCOME METHOD
a process of calculating national income by considering the factors income of an economy.
- the factor income of every section of and the economy is summed up and then by adding the Net Factor
Income from Abroad, National Income is determined.
In this method, national income is measured on the basis of income received by a factor of productions such as
1. Compensation to employees - It includes wages and salary in cash, wages and salary in kind and employers’
contribution.
2. Operating Surplus – It includes Rent, interest, profit (Corporate tax, retained earnings and dividend).
3. Mixed-Income – It includes self-employed income such as home tuition income, income from the property.
Add the three factors above, then get NPDc /Net Domestic Product then we add net factor income from abroad in it to
obtain NNPfc / Net national product / income of a country or national income.
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NNPfc = NDPfc (+) NFIA

 EXPENDITURE METHOD
- measures the national income by measuring the expenditures at the final consumption stage, expenditures under it
are:
1. Private final consumption expenditure
- It includes domestic final consumption expenditure plus if any final consumption expenditure by non-profit
institution run by household.
2. Government final consumption
- It includes the expenditure made by the government in a year.
3. Gross domestic capital formation
- it is an expenditure in the formation of assets, i.e., on fixed assets and current assets. When expenditure is made
on a fixed asset, it is known as Gross Fixed Capital Formation, and when expenditure is made on a current asset,
it is known as Change in Stock.
4. Net Export
- Exports minus (-) Imports of a nation within the year. To calculate NNPfc / net national product/income of the
country add all 4 expenditures in GDPmp then add net factor from abroad and subtract net indirect tax and
depreciation.

NNPfc = GDPmp (-) Depreciation (+) NFUA (-) NIT

LESSON 3: POLITICAL ECONOMIC THEORIES

1. Classical political economic theory

Classical economics, also known as classical political economy is a school of thought in economics that flourished,
primarily in Britain, in the late 18th and early-to-mid 19th century.
The Main thinkers are:
(1) Adam Smith – He marked the beginning of classical economics in his book The Wealth of Nations in 1776.
(2) David Ricardo
(3) Thomas Robert Malthus
(4) John Stuart Mill

- produced a theory of market economies as largely selfregulating systems, governed by natural laws of production
and exchange (famously captured by Adam Smith's metaphor of the invisible hand). . Smith argued that the
wealth of any nation was determined not by the gold in the monarch's coffers, but by its national income. This
income was in turn based on the labor of its inhabitants, organized efficiently by the division of labor and the use
of accumulated capital, which became one of classical economics' central concepts. In terms of economic policy,
the classical economists were pragmatic liberals, advocating the freedom of the market, though they saw a role for
the state in providing for the common good. Smith acknowledged that there were areas where the market is not
the best way to serve the common interest, and he took it as a given that the greater proportion of the costs
supporting the common good should be borne by those best able to afford them. He warned repeatedly of the
dangers of monopoly, and stressed the importance of competition. In terms of international trade, the classical
economists were advocates of free trade, which distinguishes them from their mercantilist predecessors, who
advocated protectionism.
2. Marxist political economic (MPE) theory
- Marxism is a social, political, and economic theory originated by Karl Marx, which focuses on the struggle
between capitalists and the working class. Marx wrote that the power relationships between capitalists and
workers were inherently exploitative and would inevitably create class conflict.
- Marxist Political Economy (MPE) denotes a range of political economy perspectives that are broadly connected to
and in the tradition of the writings (notably The Communist Manifesto, Grundrisse and Capital) and insights of
Karl Marx. Generally, MPE comprises an integrative analysis of the economy, society and politics. These three
fields are considered as interdependent structures that evolved historically. The analysis of class struggle,
involving the exploitation of labor by capital within the capitalist mode of production, is fundamental to the
understanding of dynamics within this analysis. From this perspective, capital and labor represent two
antagonistic classes. The former is primarily characterized by ownership of the means of production, while the
latter comprises free wage laborer in a double sense. They are free from control over the means of production and
free – compared with the feudal system – to sell their labor power. Capital is central to this and is primarily
organized to ensure the profitability of invested money. This is why the famous notion of capital as money which
begets money is formalized as M–C–M’. An integrative economic analysis, in this context, involves moving
beyond a sole focus on the functioning of the economy. Thus, under capitalist conditions, labor is not only
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exploited but also faces alienation. This means that wage laborer are not the directors of their own work. Instead,
s/he is employed in the capitalist mode of production, performing specialized tasks in commodity production,
without owning the products. Moreover, the capitalist mode of production is not limited to an isolated sphere in
society but structures the latter in various ways. For example, through the process of commodification, social
relations that were formerly untainted by market logic, are transformed into commercial relationships,
relationships of exchange, and relationships of buying and selling. MPE has the explicit aim to change the current
state of economic and societal organization, with an emancipatory perspective to establish a more just society by
overcoming capitalism. Although this school of thought is generally marginalized in economics faculties at large,
it has gained renewed attention over the past decade. Much of the interest is due to Marx’s analysis being relevant
to the analysis and explanation of the global financial crisis of 2007/2008; it has also been relevant to various
other crisis movements that are linked to the economic system and seem to converge with it, e.g. the climate
crisis. Moreover, new forms of protests and social movements, and intensifying social conflicts in the presence of
crisis, have also created both a need and a challenge for radical academic analysis.
o Terms, Analysis, Conception of Economy
MPE perceives the economy as a continual process of transformation of nature and society by production. The mode of
production is the historical form in which the two core dimensions of any economic organization of society are united.
These two central elements are the productive forces – phenomena that enable production, like technology and
infrastructure – and the relations of production, referring to the class-based organization of production, distribution and
consumption in society. Accordingly, MPE argues that the socio-economic character of different societies in history is
characterized by the specific mode of production, like slavery, feudalism or capitalism. The historical configuration of
productive forces and relations of production is a crucial point of departure for MPE. Particular emphasis is given to the
analysis of class struggles and the different forms of exploitation of labor power, as well as to contradictions and crisis.
Thus, the economy is not conceived as a neutral platform of exchange and cooperation, but as historical and political
constitution primarily characterized by asymmetric power relations, ideology and social conflicts. To understand the
contemporary world economy, proponents of MPE claim that Marx’s core analysis of the capitalist mode of production in
the eighteenth and nineteenth century remains a useful starting point. ‘Commodities’ are at the core of Marx’s analysis of
the capitalist mode of production; they are defined as products or services sold on markets and produced by human labor
power. The peculiar characteristic of commodities is their dual character – they exhibit both use value and exchange
value. The capitalist mode of production is primarily defined by the neglect of the use value, while the exchange value –
potentially translating into higher return on investments – is paramount. Thus capitalist societies do not primarily produce
for the needs of the population but for the sake of realizing a high exchange value – simply put, profit. MPE argues that
this profit is rooted in the exploitation of labor power, more specifically the wage laborer. Capitalists only pay the workers
the wage they need to reproduce their labor power even if workers generate a higher value. This surplus value is then
appropriated by capitalists and then reinvested. The amassing of money as capital in the hands of the capitalist class is
also defined as capital accumulation. It presents the core dynamic of the capitalist mode of production and thus implies a
structural imperative of the capitalist economy to grow. Yet, as was mentioned above, the capitalist mode of production is
not free from contradictions and from an MPE perspective crisis play a prominent role as recurrent patterns in capitalist
development. Generally speaking, crises emerge from various contradictions that exist in the basic constitution of the
capitalist mode of production, but more specifically consist of a specific conjuncture of tendencies and triggers. Thus,
each economic or financial crisis has links to the general contradictions of capital and to specific political, ideological and
cultural circumstances. Different lineages of MPE also

stress the importance of different aspects of contradictions and many argue for multiple causation, including, for example,
credit insufficiency, scarcities of or political difficulties with labor supply, resistance or inefficiencies in the labour
process, excess capital and wages squeezing profits. Currently, many MPE scholars argue that the tendency of the
overaccumulation of capital since the 1970s is key to understanding the various financial and economic crises of the past
decades throughout the globe. In this situation too much money capital is searching for profitable investment
opportunities. Since investments in financial assets have become increasingly profitable in the past decades, money capital
is disproportionately subtracted from industrial production and employed as fictitious capital. This form of money capital
is fictitious because it is without any material basis in commodities or productive activities. Although not generating any
surplus value in the labor process, fictitious capital can reproduce itself (M–M') through the representation of a claim on
the realization of future surplus value. While these investments may be profitable for some money holders, the general
economy suffers from rising economic inequality, lack of effective demand (which is temporarily supported by credit-
funded consumption), and recurring inflation of asset prices that translate into ‘bursting bubbles’. A prime example for
this process is the global financial crisis of 2007–2008 which was triggered by excessive derivatives trading (fictitious
capital) in subprime mortgages.

3. Liberalist Theory / Liberalism

- Economic liberalism is a political and economic ideology based on strong support for a market economy and
private property in the means of production. Economic liberals tend to oppose government intervention in the
market when it inhibits free trade and open competition, but support government intervention to protect property
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rights and resolve market failures. Economic liberalism has been generally described as representing the
economic expression of classical liberalism.
- As an economic system, economic liberalism is organized on individual lines, meaning that the greatest possible
number of economic decisions are made by individuals or households rather than by collective institutions or
organizations. An economy that is managed according to these precepts may be described as liberal capitalism or
a liberal economy.
- Economic liberalism is associated with markets and private ownership of capital assets. Historically, economic
liberalism arose in response to mercantilism and feudalism. Today, economic liberalism is also considered
opposed to non-capitalist economic orders such as socialism and planned economies. It also contrasts with
protectionism because of its support for free trade and open markets.
The general tenor of economic liberalism is succinctly captured in the French phrase of the era, laissez-faire, or 'leave
people alone'. This theory maintained that people should be left alone because their self-interested activities in the
market were self-regulating, guided by natural economic laws that were far more conducive to social well-being than
the directives of state authorities.

Economic liberals commonly adhere to a political and economic philosophy which advocates a restrained fiscal policy
and the balancing of budgets, through measures such as low taxes, reduced government spending, and minimized
government debt. Free trade, deregulation of the economy, lower taxes, privatization, labor market flexibility, and
opposition to trade unions. Economic liberalism follows the same philosophical approach as classical liberalism and fiscal
conservatism.

Arguments in favor of economic liberalism were advanced during the Enlightenment, opposing mercantilism and
feudalism. It was first analyzed by Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations(1776)
which advocated minimal interference of government in a market economy, although it did not necessarily oppose the
state's provision of basic public goods. In Smith's view, if everyone is left to his own economic devices instead of being
controlled by the state, the result would be a harmonious and more equal society of ever-increasing prosperity.]This
underpinned the move towards a capitalist economic system in the late 18th century and the subsequent demise of the
mercantilist system.
 Private property and individual contracts form the basis of economic liberalism. The early theory was based on the
assumption that the economic actions of individuals are largely based on self-interest (invisible hand) and that
allowing them to act without any restrictions will produce the best results for everyone (spontaneous order),
provided that at least minimum standards of public information and justice exist. For example, no one should be
allowed to coerce, steal, or commit fraud and there should be freedom of speech and press.
 Initially, the economic liberals had to contend with the supporters of feudal privileges for the wealthy, aristocratic
traditions and the rights of kings to run national economies in their own personal interests.

Position on state interventionism

Economic liberalism opposes government intervention in the economy when it leads to inefficient outcomes. They are
supportive of a strong state that protects the right to property and enforces contracts. They may also support government
interventions to resolve market failures.

Historian Kathleen G. Donohue argues that classical liberalism in the United States during the 19th century had distinctive
characteristics as opposed to Britain:
At the center of classical liberal theory in Europe was the idea of laissez-faire. To the vast majority of American
classical liberals, however, laissez-faire did not mean no government intervention at all. On the contrary, they were more
than willing to see government provide tariffs, railroad subsidies, and internal improvements, all of which benefited
producers. What they condemned was intervention in behalf of consumers.

The liberal ideology stems from the concept of labor and exchange and the use of land, labor, and capital to produce
durable goods. Liberal economists believe that economics can benefit everyone, and that society can progress with the
improvement in the standard of living. They think that the wants of the community rather than of individuals are most
important for decision-making. They also believe in equal opportunity for everyone and are concerned with the structure
of civil society.

4. Neoliberal Economic Theory

Neoliberalism is contemporarily used to refer to:
a. A market-oriented reform policies such as "eliminating price controls, deregulating capital markets, lowering
trade barriers" and reducing, especially through privatization and austerity, state influence in the economy
b. A policy model that encompasses both politics and economics and seeks to transfer the control of economic
factors from the public sector to the private sector.
c. Related to laissez-faire economics, a school of thought that prescribes a minimal amount of government
interference into the economic issues of individuals and society.
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 Proposes that continued economic growth will lead to technological innovation, expansion of the free market, and
limited state interference
 Enhances the workings of free market capitalism and attempt to place limits on government spending, government
regulation, and public ownership
 Associated with the leadership of Margaret Thatcher–the prime minister of the U.K. from 1979 to 1990 and leader
of the Conservative Party from 1975 to 1990–and Ronald Reagan, the 40th president of the U.S. (from 1981 to
1989)
 Associated with policies of austerity and attempts to cut government spending on social programs.

KEY TAKEAWAYS
• The policies of neoliberalism typically supports:
a) Fiscal austerity / Reduction in government spending
b) Deregulation c) free trade d) privatization
• There are many criticisms of neoliberalism, including its tendency to endanger democracy, workers’ rights, and
sovereign nations’ right to selfdetermination.
• Neoliberalism is sometimes confused with libertarianism. However, neoliberals typically advocate for more government
intervention into the economy and society than libertarianism.
For example, while neoliberals usually favor progressive taxation, libertarians often eschew this stance in favor of
schemes like a flat tax rate for all taxpayers. In addition, neoliberals often do not oppose measures such as bailouts of
major industries, which are anathema to libertarians.

o Liberalism vs. Neoliberalism

- At its core, liberalism is a broad political philosophy; it holds liberty to a high standard and defines all social,
economic, and political aspects of society, including–but not limited to–the role of government. The policies of
neoliberalism, on the other hand, are more narrowly focused. They are primarily concerned with markets and the
policies and measures that influence the economy.
Criticism of Neoliberalism
There are many criticisms of neoliberalism.
a. Free Market Approach to Public Services Is Misguided.
- One common criticism of neoliberalism is that advocating for a free market approach in areas such as health and
education is misguided because these services are public services. Public services are not subject to the same
profit motivation as other industries. More importantly, adopting a free market approach in the areas of health and
education can lead to an increase in inequality and the underfunding of resources (health and education) that are
necessary for the long-term health and viability of an economy.
b. Monopolies.
The adoption of neoliberal policies in the Western world has been concurrent with a rise in inequality in both
wealth and income. While skilled workers may be in a position to command higher wages, low-skilled workers
are more likely to see stagnant wages. Policies associated with neoliberalism tend to encourage the presence of
monopolies, which increase the profits of corporations at the expense of any benefits to consumers.
c. Increased Financial Instability.
Contrary to what proponents of neoliberalism typically claim, capital deregulation has not necessarily helped
economic development. Rather, capital deregulation has led to an increase in financial instability including wider
economic shocks that, at times, have sent shockwaves around the world. In fact, an International Monetary Fund
(IMF) report into neoliberalism reveals that an increase in capital flows has been a factor in the increased risk of
adverse economic cycles.
d. Inequality.
Neoliberal policies have been proven to increase inequality. And this inequality can hinder the long-term growth
prospects of an economy. On one end of the spectrum, those who earn a low income have limited spending
power. At the same time, those who become richer have a higher propensity to save; in this scenario, wealth
doesn't trickle down in the way that proponents of neoliberalism claim that it will.
e. Globalization.
Finally, neoliberalism's emphasis on economic efficiency has encouraged globalization, which opponents see as
depriving sovereign nations of the right to self-determination. Neoliberalism's naysayers also say that its call to
replace government-owned corporations with private ones can reduce efficiency: While privatization may
increase productivity, they assert, the improvement may not be sustainable because of the world’s limited
geographical space. In addition, those opposed to neoliberalism add that it is anti-democratic, can lead to
exploitation and social injustice, and may criminalize poverty.
5. Neoclassical approach
a. A broad approach that attempts to explain the production, pricing, consumption of goods and services, and
income distribution through supply and demand.
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b. Integrates the cost-of-production theory from classical economics with the concept of utility maximization
and marginalism - the value of a good or service is determined through a hypothetical maximization of utility
by income-constrained individuals and of profits by firms facing production costs and employing available
information and factors of production based on rational choice theory
c. Concerned with the efficient allocation of limited productive resources
d. Considers the growth of the resources in the long term, which will allow for expanding the production of
goods and services
e. Integrates the cost of production theory from classical economics with the concepts of utility maximization
and marginalism.

Classical economics states that the cost of production drives the value of a good or service. Neoclassical economics
emphasizes demand as a key driver of the value of a product or service.

According to E. Roy Weintraub, neoclassical economics rests on three assumptions:

1. People have rational preferences between outcomes that can be identified and associated with values.
2. Individuals maximize utility and firms maximize profits.
3. People act independently on the basis of full and relevant information.

Key Concepts of Neoclassical Economics

Neoclassical economics is primarily concerned with:
1. The efficient allocation of limited productive resources.
2. It also considers the growth of the resources in the long term. The growth will allow for expanding the production
of goods and services.
3. It emphasizes that market equilibrium is the key to an efficient allocation of resources. Market equilibrium should
be one of the primary economic priorities of a government.

Neoclassical economics also developed studies about utility and marginalism.

A. Utility measures the satisfaction received by consuming goods and services. It states that people’s decision-making
over consumption depends on their evaluation of utility. People allocate their incomes to maximize their levels of utility.
Thus, utility is a key factor driving the value of a product or service.
B. Marginalism explains the change in the value of a product or service with an additional amount. Combining the two
concepts brings us to the “marginal utility.” Marginal utility refers to the change in utility as a result of an increase in
consumption. The law of diminishing marginal utility states that as the quantity consumed increases, the marginal utility
decreases.
The marginal utility can even turn negative beyond a certain level of quantity. Thus, the total utility maximizes at the
quantity where the marginal utility equals zero.

Criticisms Against Neoclassical Economics

a. Unrealistic assumptions. One of the most common criticisms of neoclassical economics is its unrealistic
assumptions. The assumption of rational behaviors ignores the vulnerability and irrationality in human nature. •
Behavioral economics focuses on studying irrational behaviors in economic decision-making. The study provides
empirical evidence of human behaviors in an economy. It is also argued whether utility or profit maximization is
the only goal of an individual or company.
b. Overdependence on its mathematical approaches. Neoclassical economics is criticized for its over-dependence
on its mathematical approaches. Empirical science is missing in the study. The study, overly based on theoretical
models, is not adequate to explain the actual economy, especially on the interdependence of an individual with the
system. It can also lead to normative bias.
c. Overdependence on complex, unrealistic mathematical models. Neoclassical economics is also considered
overly dependent on complex, unrealistic mathematical models. The complex models are not applicable to
describe the real economy. In response to the criticism, American educator and economist Milton Friedman
claimed that a theory should be judged by its ability to predict. The complexity of the model or realism of the
assumptions is not a standard to judge a theory.

6. Keynesian economics
Keynesian economics is…
• A macroeconomic economic theory of total spending in the economy and its effects on output, employment, and
inflation.
• Advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy
out of the depression
• A macroeconomic economic theory of total spending in the economy and its effects on output, employment, and
inflation
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• Developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great
Depression
• Considered a "demand-side" theory that focuses on changes in the economy over the short run - sharply separate the
study of economic behavior and markets based on individual incentives from the study of broad national economic
aggregate variables and constructs
• Advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy
out of the depression -- the concept that optimal economic performance could be achieved—and economic slumps
prevented—by influencing aggregate demand through activist stabilization and economic intervention policies by the
government.

KEY TAKEAWAYS
• Keynesian economics focuses on using active government policy to manage aggregate demand in order to address or
prevent economic recessions.
• Keynes developed his theories in response to the Great Depression, and was highly critical of previous economic
theories, which he referred to as “classical economics”.
• Activist fiscal and monetary policy are the primary tools recommended by Keynesian economists to manage the
economy and fight unemployment.
• In his book, The General Theory of Employment, Interest, and Money and other works, Keynes argued against his
construction of classical theory, that during recessions business pessimism and certain characteristics of market
economies would exacerbate economic weakness and cause aggregate demand to plunge further.

For example, Keynesian economics disputes the notion held by some economists that lower wages can restore full
employment because labor demand curves slope downward like any other normal demand curve. Instead he argued
that employers will not add employees to produce goods that cannot be sold because demand for their products is
weak. Similarly, poor business conditions may cause companies to reduce capital investment, rather than take
advantage of lower prices to invest in new plants and equipment. This would also have the effect of reducing overall
expenditures and employment.

Keynesian Economics and the Great Depression

Keynesian economics is sometimes referred to as "depression economics," as Keynes's General Theory was written
during a time of deep depression not only in his native land of the United Kingdom but worldwide. The famous 1936
book was informed by Keynes’s understanding of events arising during the Great Depression, which Keynes believed
could not be explained by classical economic theory as he portrayed it in his book. Other economists had argued that
in the wake of any widespread downturn in the economy, businesses and investors taking advantage of lower input
prices in pursuit of their own self-interest would return output and prices to a state of equilibrium, unless otherwise
prevented from doing so.

Keynes believed that the Great Depression seemed to counter this theory. Output was low and unemployment
remained high during this time. The Great Depression inspired Keynes to think differently about the nature of the
economy. From these theories, he established real-world applications that could have implications for a society in
economic crisis. Keynes rejected the idea that the economy would return to a natural state of equilibrium. Instead, he
argued that once an economic downturn sets in, for whatever reason, the fear and gloom that it engenders among
businesses and investors will tend to become self-fulfilling and can lead to a sustained period of depressed economic
activity and unemployment. In response to this, Keynes advocated a countercyclical fiscal policy in which, during
periods of economic woe, the government should undertake deficit spending to make up for the decline in investment
and boost consumer spending in order to stabilize aggregate demand. Keynes was highly critical of the British
government at the time.

The government greatly increased welfare spending and raised taxes to balance the national books. Keynes said this
would not encourage people to spend their money, thereby leaving the economy unstimulated and unable to recover
and return to a successful state. Instead, he proposed that the government spend more money and cut taxes to turn a
budget deficit, which would increase consumer demand in the economy. This would, in turn, lead to an increase in
overall economic activity and a reduction in unemployment.

Keynes also criticized the idea of excessive saving, unless it was for a specific purpose such as retirement or
education. He saw it as dangerous for the economy because the more money sitting stagnant, the less money in the
economy stimulating growth. This was another of Keynes's theories geared toward preventing deep economic
depressions. Many economists have criticized Keynes's approach. They argue that businesses responding to economic
incentives will tend to return the economy to a state of equilibrium unless the government prevents them from doing
so by interfering with prices and wages, making it appear as though the market is self-regulating.
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On the other hand, Keynes, who was writing while the world was mired in a period of deep economic depression, was
not as optimistic about the natural equilibrium of the market. He believed the government was in a better position than
market forces when it came to creating a robust economy.

LESSON 4: TYPES OF POLITICAL ECONOMIC IDEOLOGIES

o economic ideology is…

A. A set of views forming the basis of an ideology on how the economy should run. It differentiates itself from
economic theory in being normative rather than just explanatory in its approach, whereas the aim of
economic theories is to create accurate explanatory models to describe how an economy currently
functions.
B. It inherently takes a specific and detailed economic standpoint.
C. It is distinct from an economic system that it supports, such as capitalism, to the extent that explaining an
economic system (positive economics) is distinct from advocating it (normative economics).[2]The theory of
economic ideology explains its occurrence, evolution, and relation to an economy.

Types of Economic Ideologies

1. Capitalism
- a broad economic system where the means of production are largely or entirely privately owned and operated
for profit, where the allocation of capital goods is determined by capital markets and financial markets.
- There are several implementations of capitalism that are loosely based around how much government
involvement or public enterprise exists. The main ones that exist today are mixed economies, where the state
intervenes in market activity and provides some services; laissez faire, where the state only supplies a court, a
military, and police; and state capitalism, where the state engages in commercial business activity itself.
Variations:
A. Laissez-faire
- Laissez-faire, or free market capitalism, is an ideology that prescribes minimal public enterprise and government
regulation in a capitalist economy. This ideology advocates for a type of capitalism based on open competition
to determine the price, production and consumption of goods through the invisible hand of supply and demand
reaching efficient market equilibrium.
- In such system, capital, property and enterprise are entirely privately owned and new enterprises may freely
gain market entry without restriction. Employment and wages are determined by a labor market that will
result in some unemployment. Government and judicial intervention are employed at times to change the
economic incentives for people for various reasons. The capitalist economy will likely follow economic growth
along with a steady business cycle.
B. Social market
- The social market economy (also known as Rhine capitalism) is advocated by the ideology of social liberalism.
This ideology supports a free-market economy where supply and demand determine the price of goods and
services, and where markets are free from regulation. However, this economic calls for state action in the form
of social policy favoring social insurance, unemployment benefits and recognition of labor rights.
C. Social Democracy
- an ideology that prescribes high public enterprise and government regulation in a capitalist economy. It
espouses state regulation (rather than state ownership of the means of production) and extensive social welfare
programs. Social democracy became associated with Keynesianism, the Nordic model, the social liberal
paradigm and welfare states within political circles in the late 20th century. Social democrats are concerned with
reforming and humanizing capitalism through the framework of a welfare state.
D. Casino capitalism
- is the high risk-taking and financial instability associated with financial institutions becoming very large and
mostly self-regulated, while also taking on high-risk financial investment dealings. This has been a driving motive
by investors in the quest for profits without production; it provides a speculation aspect that offers prospects for
a quicker and more speculator returns for people, wealth, and inside assumptions of the factors likely to affect
asset price movements. Typically, this does not add to the collective wealth of an economy, as it can instead
create economic instability. Casino capitalism falls alongside the idea of a speculation-based economy where
entrepreneurial activities turn to more paper games of speculative trading than actually producing economic
goods and services.
E. Neo-capitalism
- an economic ideology that blends elements of capitalism with other systems and emphasizes government
intervention in the economy to save and reconstruct companies that are deemed a risk to the nation. The
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ideology's prime years are considered by some economists to be the 10 years leading up to 1964 after the Great
Depression and World War II. After World War II, countries were destroyed and needed to rebuild and since
capitalism thrives in industrializing countries. These countries most affected by the war saw a growth in
capitalism. Neo-capitalism differs from regular capitalism in that while capitalism highlights private owners, Neo-
capitalism emphasizes the role of the state in sustaining the country as a provider and a producer and condemns
private companies for lacking in their role as a provider and producer for their country.
- Critics of neo-capitalism claim that it tends to suppress the reserve army of labor which may lead to full
employment, as this can undermine one of the main basics that make capitalism work. Other critics state that if
neo-capitalism was put into place, it would become immediately corrupt.
2. FASCISM
- an economic system promotes the pursuit of individual profit while promoting corporations through
government subsidies as the primary tool of economic progress as long as their activities are in line with the
goals of the state. In fascist economies, profits or gains are individualized while losses are socialized; these
economies are often compared to the third way due to being heavily corporatized.
- Fascist economies of the mid 20th century such as Italy and Germany often used bilateral trade agreements,
with heavy tariffs on imports and government subsidized exports to developing nations around the world. While
economically fascism is oriented towards self-sufficiency, politically fascist countries of the mid20th century
were oriented to war and expansion; two seemingly contradictory motives. The goals of fascist nations was to
create a closed economic system which is self-reliant, but is also ready and prepared to engage in war and
territorial expansion. Fascist economies can then be seen as state capitalist.
3. SOCIALISM
- any of the various ideologies of economic organization based on some form of social ownership of the means of
production and cooperative management of the allocation of resources. Socialist systems can be distinguished
by the dominant coordination mechanism employed (economic planning or markets) and by the type of
ownership employed (Public ownership or cooperatives).
- In some models of socialism (often called market socialism), the state approves of the prices and products
produced in the economy, subjecting the market system to direct external regulations. Alternatively, the state
may produce the goods but then sell them in competitive markets.
Variations:
a. Democratic socialism
- that calls for democratic institutions in the economy. These may take the form of cooperatives, workplace
democracy or ad hoc approach to the management and ownership of the means of production. Democratic
Socialism is a blending of socialistic and democratic ideas to create a political and economic Structure.
democratic socialists are committed to a systemic transformation of the economy from capitalism to socialism.
b. Marxism–Leninism
- calls for centralized planning of the economy. This ideology formed the economic basis of all existing Communist
states. Socialist doctrines essentially promote the collectivist idea that an economy's resources should be used in
the interest of all participants, and not simply for private gain. This ideology historically opposed the market
economy, and tended to favor central planning.
4. Communism
- the evolved result of socialism so that the central role of the state has 'withered away' and is no longer
necessary for the functioning of a planned economy. All property and capital are collectively owned and
managed in a communal, classless and egalitarian society. Currency is no longer needed, and all economic
activity, enterprise, labor, production and consumption is freely exchanged "from each according to his ability,
to each according to his needs"
- Communism is also a political system as much an economic one—with various models in how it is implemented
—the well-known being the Marxist Leninist model, which argues for the use of a vanguard party to bring about
a workers state to be used as a transitional tool to bring about stateless communism, the economic
arrangement described above. Other models to bring about communism include anarcho-communism, which
argues similarly to Marxist schools for a revolutionary transformation to the above economic arrangement, but
does not use a transitional period or vanguard party.
5. Anarcho-primitivism
- return humans to a pre-industrialized and precivilization state. From an economic standpoint, advocates of this
model argue the non-necessity of economic systems for human existence. Proponents of this ideology believe
that the entire history of human civilization took a wrong turn from hunter-gatherer systems into an agricultural
system and has led to human dependence on technology to support increasing populations, government
control, and culture. Population growth and the institutions created to support and control it are exploitative of
not only humans but also the environment. They argue that the more people live in a society, the more
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resources they will need. These resources must be taken from the Earth and therefore lead to environmental
exploitation.
- However, they claim that materialist exploitation can be seen throughout almost every society in the world
today. This materialism creates inequalities and exploitation such as class structure, the exploitation of humans
in the name of labor and profit, and most importantly environmental destruction and deterioration. This
exploitation has led to the increase in human population growth, activity, and development which they argue is
destroying the Earth's ecosystems. They emphasize coexisting with the natural world instead of destroying it, "a
world order on our planet where human civilization is brought into harmony with nature".
- They differ from other anarchist and green ideologies by opposing technological and industrial advancement as
it further propagates the exploitation of humans. "Technology is not a simple tool which can be used in any way
we like. It is a form of social organization, a set of social relations. It has its own laws. If we are to engage in its
use, we must accept its authority. The enormous size, complex interconnections and stratification of tasks which
make up modern technological systems make authoritarian command necessary and independent, individual
decision-making impossible." Anarcho-primitivists seek to revert the economic and government institutions of
civilization which they argue are authoritarian, exploitative, and abstract and return humanity to a way of living
which is harmonious with the natural world in which technology used mostly individually to create tools for
survival much like in primitive cultures and tribes where they argue there is little need for abstract things such as
an economy or government.