PE: WEEK 3

INEQUALITY
INTRODUCTION

- Economics impacts politics as much as politics impacts economics

- Democracy, political stability, and executive constraints are all more feasible in more equal
societies.

- Public policies towards redistribution and human capital can make societies more equal.
THE POLITICAL AND ECONOMIC CAUSES OF INEQUALITY

1. Which Variable Should be Used?

- Most studies on inequality focus on income, but the author thinks that it would be better to
use a measure of more permanent well-being, for example wealth or consumption.

- This data is difficult to obtain. Therefore, this study will be focused on income.
2. How to Measure Income Inequality?

- Requires transforming the distribution of income or wealth or consumption into a single

measure that can be used in standard empirical work.

POPULAR MEASURES:

1. Gini Coefficient: The difference between the 45‐degree line and the Lorenz curve that
shows the cumulative distribution of income

2. The share of total national income possessed by various sub‐groups of the population

e.g. The share of total wealth owned by the richest 5 per cent of the population.

INEQUALITY OVER TIME

Kuznets (1955) Curve:

- Income inequality first rises and then falls as countries get richer.
- This curve points to the initial period of industrialization as the point of development where
inequality is maximized

- Also reflects political factors:

- There are few public efforts to redistribute during early industrialization.
- During this period, traditional private providers of charity (churches, charities, families) are
expected to look after the bottom end of the income distribution.

- As industrialization proceeds, governments Started taking a more active role in redistribution

Development increases redistribution for 3 reasons:

1. Development is associated with greater government size, probably due to increasing

governmental competence

2. Development is associated with greater education and political skill on the part of poorer
citizens

3. Development transforms a dispersed agrarian workforce into clustered industrial workers

who can readily be organized.

United States: Significant increase in inequality since 1975

- The period of rising inequality in the USA appears to have been driven by rising demand for
more skilled workers.

- This is a result of a number of changes:

- Skill-based technological change
- Increasing trade and globalization
- The decline of manufacturing, and unions.
Rising inequality within the US: The impact of economic changes that lead to inequality is
determined by a political filter

- The same economic changes happened in multiple states. Yet, inequality in the US is higher.
This indicates that politics played a role

- Political factors contributing to inequality in the US:

1. Less progressive taxation in the USA made it easier for Americans to become rich and
increased the incentives for Americans to acquire large fortunes

- How is Europe doing, in contrast?

1. Stronger unions in Europe increased equality there among the many European workers
whose salaries are determined by collective bargaininG

INEQUALITY ACROSS COUNTRIES

- Inequality is a result of changing returns to skills and government responses to those

changing returns to skills

- Therefore, differences in inequality across countries reflect differences in the distribution of

skills

Development -

a Redistribution

skill
inequality inequality
-
- The bigger the differences between the level of skill of individuals within the country, the
bigger the inequality

Why are skill inequalities so different between countries?

- Patterns of national inequality appear to pre‐date the era of large‐scale government

schooling

1. Religious Impact

- Cultural and religious causes are probably the first causes of inequality across countries.
- Protestant communities worked to create widespread education so that everyone would
read the Bible impacted education
Religion
2. Ethnicity

- Europeans who came to the New World had a significant educational advantage over the
natives they conquered, at least in terms of skills that became valuable in developed
economies. Colonialism

3. Government policies towards schooling and redistribution

- Social welfare reduces inequality

- Initial inequality leads to less redistribution
or don't
p
Why do governments invest in their children or redistribution?

- 2 factors:
1. Ethnic heterogeneity

- Ethnic and racial fractionalization limits the tendency to redistribute income either because
people are less willing to support transfers to those who are ethnically different, or because
ethnic differences provide a means of demonizing policies that help the poor

2. Political institutions

- Majoritarianism induces governments to cater to the needs of the median voter or voters in
swing districts who may or may not be particularly poor.
D Helps
redistribution !
- Proportional representation should at the least focus more attention on marginal classes,
who may desire redistribution
wealthy !
Attract wealthy
your state is
people so

- Federalism limits redistribution because out‐migration of capital and the wealthy serves as a
break on the tendency to redistribute income, except if the government actually wants the
rich to flee because the rich represent its electoral opponents

- Checks and balances are another force that has tended to restrict the growth of welfare
states.
THE IMPACT OF INEQUALITY ON POLITICS

Inequality might impact political outcomes in 3 different ways:

1. Rising economic inequality should impact the level of post‐tax inequality because of an
increased preference for redistribution by the median voters

- Redistribution will be popular when the mean income is higher than the median income
- Greater inequality will lead to greater preferences for redistribution
—> Studies show, that more inequality leads to less redistribution rather than more because in
unequal societies the poor lack the resources to push their political agenda.

2. Higher inequality might reduce redistribution and public good provision because economic
resources determine not only preferences, but the ability to influence political outcomes as
well

- More unequal societies have less public policing because rich private individuals invest in
private policing and choose not to support public safety.

- Inequality changes the power with which the rich and poor can impact political outcomes.
According to this view, as the rich become richer, they acquire a greater ability to influence
policy and achieve the policy goals that they want.

3. Economic inequality might influence the whole structure of political institutions (like
democracy) themselves.

- If the judicial system is sufficiently weak, so that the expected penalty facing a judge who
accepts a bribe is small, then the ability to bribe will determine the outcome in court

- Subversion will be more likely in societies where different actors have unequal access to the
resources needed for subversion

- Stable democracy is much more common in highly equal societies

- Inequality is correlated with dictatorship as well as corruption
AMERICAN EXCEPTIONALISM

- Why is the USA less equal than Europe, and why has it never developed a full-fledged
welfare state?

- Economic, political, and sociological factors:

1. Economical factors: Higher levels of economic opportunity within the US. Americans
believe they live in an open society, and that the poor are lazy. They don’t believe you can
be trapped in poverty.

2. Sociological factors: High levels of ethnic fractionalisation; America is a nation of

immigrants and kidnapped slaves
3. Political factors: Political institutions: In Europe there is proportional representation, in
America - majoritarianism. Additionally, federalism in the US gave power of welfare to the
states, seems to have checked the rise of welfare spending as states limit redistribution to
keep rich people in and poor people out. Similarly, checks and balances are weaker in
Europe, also check the growth of redistribution. Historically, America was more stable than
Europe (in terms of revolutions, wars, and civil wars) so less privileged groups couldn’t
change those institutions to their liking.

BELIEFS ABOUT INEQUALITY

Why do Americans and European have such different beliefs about the nature of inequality in
their countries?

- Beliefs about inequality reflect political power of the left and right working through
indoctrination and the formation of beliefs

—> Right‐wing leaders find it in their interest to convince people that the poor are cheats and
wastrels and that money spent on welfare is useless spending on morally deficient individuals.

THOMAS PIKETTY

A DIBATE WITHOUT DATA?

Data
• Distribution of Wealth Debate

• Historically based on prejudice and lacking factual data.

• Importance of intuitive knowledge in understanding wealth and

income levels.

• Film, literature, and novels (e.g., Jane Austen, Honoré de

Balzac) provide insights into wealth distribution, inequality, and
its impact on society.

• Novels offer a vivid portrayal of inequality's effects, surpassing

statistical or theoretical analyses.

• Distribution of Wealth Concerns

• Not solely an issue for economists, sociologists,

historians, or philosophers. He should give
a shit too

• Relevance to everyone.

• Visible inequality inspires varied political judgments.

• Subjective and psychological dimension to inequality

shapes political conflict.
 • Democracy's importance in addressing
these conflicts.

• Systematic Study of Distribution days

:
1 v2/3/4/
• The need for systematic and methodical study.

• Lack of precise sources, methods, and concepts

leads to opposing views on inequality trends.

• Expert analysis cannot end political conflict but can

inform democratic debate.

• Social scientific research is tentative but can redefine

debate terms, expose preconceived notions, and
encourage critical scrutiny.

• Role of intellectuals and social scientists in this

context.

• Historical Overview of Distribution Research

• Long reliance on limited established facts and

theoretical speculations.

• The need for a more comprehensive and data-driven

approach.

MALTHUS, YOUNG, AND THE FRENCH REVOLUTION

• Context of Distribution Concerns

• Emergence of classical political economy in late 18th and early 19th centuries.

• Key questions centered around distribution due to radical transformations caused

by demographic growth, rural migration, and the Industrial Revolution.

• Uncertainty about how these changes would impact wealth distribution, social
structure, and political stability in European society.

• Thomas Malthus

• Published "Essay on the Principle of Population" in 1798.

• Identified overpopulation as the primary threat to society.

• Relied on limited sources but used them effectively.

• Influenced by Arthur Young's travel diary.

• Arthur Young's Influence

 • English agronomist who extensively traveled in France in 1787–1788, just before
the French Revolution.

• Described poverty in the French countryside.

• France's rapid population growth during the 18th century contributed to stagnant
agricultural wages and increased land rents.

• Demographic changes added to the growing dissatisfaction with the aristocracy

and the existing political regime.

• Young's Prejudices and Concerns

• His account contained nationalist prejudice and misleading comparisons.

• Worried that mass poverty could lead to political upheaval.

• Favored the English political system as a model for harmonious development.

• Overdetermined by his fear of revolution in France.

• Malthus's Radical Conclusions

• Published his famous Essay in 1798 with even more radical views than Young's.

• Feared the influence of new French political ideas in Britain.

•
• Advocated halting welfare assistance to the poor and strict scrutiny of poor
people's reproduction to prevent overpopulation and resulting chaos.

• Reflective of the pervasive fear among European elites in the 1790s.

• Distribution of Wealth and Political Implications

• Discussion of wealth distribution often intertwined with politics.

• The fear of political upheaval and revolution influenced the views of both Malthus
and Young.

• Class Prejudices and Interests

• Difficult for individuals to escape contemporary class prejudices and interests

when discussing wealth distribution and societal change.

RICARDO: THE PRINCIPLE OF SCARCITY

• Background on Economic and Social Transformations

• Late 18th and early 19th centuries saw significant economic and social changes.

• Witnessed as impressive and even traumatic by contemporaries.

 • Many held dark or apocalyptic views regarding wealth distribution and class
structure.
• Influential economists like David Ricardo and Karl Marx shared such views.

• David Ricardo

• Published "Principles of Political Economy and Taxation" in 1817.

• Concerned with the long-term evolution of land prices and land rents.

• Limited access to statistics but had intimate knowledge of capitalism.

• Emphasized the scarcity of land relative to other goods as population and output
grew.

• Predicted rising land prices and rents, leading to a growing share of income for
landlords.

• Proposed a steadily increasing tax on land rents as a solution.

• Ricardo's Prediction and Its Outcome

• Ricardo's prediction did not fully materialize.

• Land rents remained high for a time but declined as agriculture's share in national
income decreased.

• Lack of foresight regarding technological progress and industrial growth.

• He couldn't imagine humanity being free from the "alimentary imperative" (basic
need for food).

• Significance of the Scarcity Principle

• The scarcity principle posited that certain prices could rise significantly over
decades, potentially destabilizing societies.

• The price system, while coordinating economic activities, operates without limits
or morality.

• Relevance to the 21st Century

• Emphasizes the importance of the scarcity principle in understanding wealth

distribution today.

• Examples: Urban real estate prices in major world capitals, oil prices.

• Extrapolating trends from 1970-2010 to 2010-2050 or 2100 could lead to

economic, social, and political imbalances within and between countries.

• Restoring Equilibrium through Supply and Demand

• Supply and demand can restore equilibrium when goods are insufficient or prices
are high.
 • People may adjust by moving to rural areas or adopting alternative transportation.
• Such adjustments may be complex and take time.

• Accumulation of claims by landlords and oil well owners during this process may
lead to extensive ownership.

• Implication of Ricardo's Scarcity Principle

• Extreme changes in relative prices can lead to a lasting divergence in wealth

distribution.

• This is a key implication of the scarcity principle.

• However, the future is uncertain, and outcomes may vary.

• Conclusion

• The interplay of supply and demand doesn't guarantee wealth distribution

equilibrium.

• Understanding the scarcity principle is crucial for assessing contemporary global

wealth distribution.

MARX: THE PRINCIPLE OF INFINITE ACCUMULATION

• Changing Economic and Social Realities

• Marx's "Capital" published in 1867, amid profound changes from Ricardo's time.

• Focus shifted from concerns about land prices and feeding a growing population
to understanding industrial capitalism's dynamics.

• Misery of the Industrial Proletariat

• Despite economic growth, industrial workers lived in squalid conditions.

• Urbanization and low wages exacerbated the problem.

• Visible in literature (e.g., Germinal, Oliver Twist, Les Misérables) and early labor
laws.

• Wage Stagnation and Capital Growth

• Historical data suggests wages stagnated until the second half of the 19th
century.

• This stagnation occurred despite accelerating economic growth.

• Capital's share of national income, including industrial profits and land rents,
increased.

• Impact of Economic and Political Shocks

 • The period 1870–1914 saw at best a stabilization of inequality at high levels,
marked by increasing wealth concentration.
• Major shocks like World War I were needed to reduce inequality.

• Birth of Communist and Socialist Movements

• Industrial development and misery led to early communist and socialist

movements.

• Central argument: What was the point of industrial growth if workers' conditions
remained dire?

• Marx's Contribution

• Marx published "The Communist Manifesto" in 1848, predicting revolution.

• Marx aimed to provide a scientific analysis of capitalism's economic processes.

• Analyzed internal contradictions of capitalism.

• Distinguished himself from bourgeois economists and utopian socialists.

• Principle of Infinite Accumulation

• Marx's central conclusion: "principle of infinite accumulation."

• Capital tends to accumulate and concentrate in fewer hands without natural

limits.

• Predicted apocalyptic end to capitalism due to either declining returns on capital

or increasing capital's share of income.

• Outcome and Legacy

• Marx's prophecy did not fully materialize.

• Wages began to rise in the last third of the 19th century.

• Communist revolution occurred in Russia, but advanced European countries

explored social democratic avenues.

• Marx underestimated the role of technological progress and productivity growth.

• Marx's analysis, despite limitations, remains relevant today.

• Relevance of the Principle of Infinite Accumulation

• Low growth rates can't counterbalance the logic of infinite accumulation.

• Accumulated wealth can reach levels that destabilize society.

• High private wealth in wealthy countries since the 1980s and 1990s reflects
Marx's principles.
FROM MARX TO KUZNETS, OR APOCALYPSE TO FAIRY TALE

• Shift in Economic Theories

• Transition from 19th-century apocalyptic predictions (Ricardo and Marx) to 20th-

century optimism (Kuznets).

• Kuznets believed income inequality would naturally decrease in advanced

capitalist development phases.

• Kuznets's Theory

• Proposed in 1955, Kuznets's theory focused on the postwar years (Trente

Glorieuses, 1945-1975).

• Believed that economic growth would benefit everyone, and inequality would
stabilize at an acceptable level.

• Optimism reflected in the phrase: "Growth is a rising tide that lifts all boats."

• Statistical Foundation

• Kuznets's theory was the first to rely on a robust statistical apparatus.

• Historical series of income distribution statistics became available in the mid-20th

century.

• Data from US federal income tax returns (from 1913) and Kuznets's national
income estimates were crucial.

• Importance of Data

• Data availability was essential to measure income inequality and its evolution over
time.

• Progressive income tax adoption (around World War I) provided statements of

income.

• Kuznets's calculations demonstrated a significant reduction in US income

inequality between 1913 and 1948.

• Kuznets's Findings

• Income inequality decreased in the US during the specified period.

• The top decile's share of annual national income dropped from 45-50% to
30-35%.

• This reduction amounted to nearly 10 percentage points, significantly impacting

the poorest 50% of Americans.
 • Kuznets's work had a profound influence on postwar economic debate.

• Objective Data and Documentation

• Kuznets's data, though imperfect, was a significant improvement, providing

objective evidence.

• Detailed documentation of sources and methods allowed for reproducible

calculations.

• Kuznets brought good news of decreasing inequality, a contrast to earlier

predictions.

• Impact on Economic Debate

• Kuznets's work marked a shift in economic thinking, supported by empirical data.

• Objective data replaced theoretical speculation.

• Income inequality became a central topic in postwar academic and international

discussions.

THE KUZNETS CURVE: GOOD NEWS IN THE MIDST OF THE COLD WAR

• Kuznets's Awareness

• Kuznets acknowledged that the compression of high US incomes between 1913

and 1948 was mainly a result of accidental events, particularly the Great
Depression and World War II.

• He warned against hasty generalizations when analyzing his data.

• Origin of the Kuznets Curve Theory

• In December 1954, during a meeting of the American Economic Association,

Kuznets presented an optimistic interpretation of his findings from 1953.

• This presentation gave rise to the theory of the "Kuznets curve."

• According to this theory, income inequality follows a bell curve during

industrialization and economic development: it first increases and then decreases.

• Kuznets suggested that internal economic development logic might also lead to
decreasing inequality as economies progress.

• The Advanced Phase of Industrial Development

• The "advanced phase" of industrial development was believed to have started in

the late 19th or early 20th century in industrialized nations.

• The reduction of inequality observed in the United States between 1913 and 1948
was seen as an example of this phenomenon.
 • The theory implied that this trend would occur universally, even in underdeveloped
countries.

• Kuznets's Motivation and Cold War Context

• Kuznets's optimistic theory was presented in a context influenced by the Cold

War.

• He aimed to keep underdeveloped countries within the "free world" sphere of

influence.

• The theory of the Kuznets curve was, in part, a product of the Cold War
geopolitical climate.

• Importance of Kuznets's Data

• Kuznets's work in establishing the first US national accounts data and historical
series of inequality measures was crucial.

• High post-World War II growth rates in developed countries were significant, and
all social groups benefited from this growth.

• The optimism during the Trente Glorieuses era (1945-1975) contributed to the
popularity of the Kuznets curve theory.

• Critique of the Kuznets Curve Theory

• The theory had fragile empirical foundations.

• The observed reduction in income inequality in rich countries between 1914 and
1945 was primarily due to world wars and associated economic and political
shocks, not the tranquil process of intersectoral mobility described by Kuznets.

PUTTING THE DISTRIBUTION QUESTION BACK AT THE HEART OF ECONOMIC

ANALYSIS

• Significance of Income Inequality: Income inequality has been a significant issue

since the 1970s, particularly in wealthy nations, with the United States experiencing a
concentration of income similar to levels from the previous century.

• Understanding Inequality Trends: It is crucial to understand why and how income

inequality decreased in the interim, given the recent surge in inequality.

• Global Impact: The rapid growth of poor and emerging countries, such as China, may
play a role in reducing global income inequality, akin to the impact of developed
countries' growth from 1945 to 1975.

• Anxiety in Emerging and Wealthy Nations: The growth of emerging nations has
caused concern in both these nations and the wealthy countries, raising questions about
the distribution of wealth and income.
 • Market Disequilibria: Recent decades have witnessed significant imbalances in
financial, oil, and real estate markets, which cast doubt on the notion of a naturally
"balanced growth path" as described by economists like Solow and Kuznets.

• Ownership of Wealth in the Future: There are uncertainties about who will own global
wealth in the coming decades, with possibilities ranging from traders, top managers, and
the superrich to oil-producing countries or financial institutions in tax havens.

• Historical Parallel: The current situation resembles the early nineteenth century when
economists faced significant changes in global economies, and the distribution of wealth
remained uncertain.

• Credit to Nineteenth-Century Economists: Nineteenth-century economists are

credited for placing the distributional question at the core of economic analysis and
addressing long-term trends, despite not always providing satisfactory answers.

• Reevaluating Growth Balance: The assumption of automatic balance in economic

growth is questioned, emphasizing the need to revisit the issue of inequality in economic
analysis.

• Neglect of Wealth Distribution: The distribution of wealth has been overlooked by

economists for too long, partly due to optimistic conclusions by Kuznets and the
prevalence of simplistic mathematical models with "representative agents."

• Call for Comprehensive Historical Data: To make inequality central to economic

analysis again, there's a need to gather extensive historical data to understand past and
present trends, identify underlying mechanisms, and gain insights into the future.

5. Carbon Capitalism and Global Capital

Accumulation
- The Intergovernmental Panel on Climate Change (IPCC) attributes rising global temperatures
to human activities such as fossil fuel combustion and deforestation.

- Climate scientists stress the urgency of departing from "business as usual" to preserve the
conditions necessary for life on Earth.

- Capitalism, which has prevailed globally since the late 15th century, has profoundly shaped
human interactions with the environment and the structure of material exchange.

- It's crucial to directly explore how capitalism's historical era relates to global climate change,
as it forms the underlying context influencing social development.

- Karl Marx employed a metabolic analysis to study environmental problems of his time.
- This analysis involved assessing the metabolism of natural systems, relationships between
organisms and their surroundings, and material exchanges within these relationships.

- Marx's metabolic analysis serves as a tool for studying the empirical reality of the nature-
society relationship.
JEVONS PARADOX: Improvements in efficiency actually increase the use of natural resources
under capitalist relations, therefore, diminishing the potential for developing ecological
sustainability based on technological fixes.

METABOLISM AND THE MATABOLIC RIFT

- Metabolic analysis draws upon the historical development of the concept within the natural
sciences, as well as how Marx used it to study environmental problems.

- German physiologists in the 1830s and '40s adopted the term "metabolism" to describe
material exchanges within the body related to respiration.

- Justus von Liebig, a German chemist, extended the concept to metabolic processes in
relation to tissue degradation and the analysis of organisms.

- In the mid-1800s, agricultural experts in several countries raised concerns about soil nutrient
loss due to transferring food and fiber from rural areas to cities in capitalist agriculture.

- Liebig identified British agricultural methods as detrimental, as they depleted soil nutrients.
- Marx, inspired by Liebig, used metabolism to describe the dynamic interchange between
humans and nature, emphasizing the essential relationship between them.

- He believed that maintaining this metabolic interaction was crucial for human survival,
emphasizing the need for a sustainable social metabolism.

- Labor was seen as the process through which humans interact with nature, impacting
natural processes while being influenced by them.

- Marx recognized parallels between Liebig's critique of modern agriculture and his own
critique of political economy.

- Marx noted that the metabolic interaction of humans with nature serves as the “regulative
law of social production.

- Capitalist agriculture is unable to maintain the conditions necessary for the recycling of
nutrients.

- It therefore creates a rift in our social metabolism with nature.

- The development of capitalism continues to intensify the rift in agriculture and creates rifts in
other realms of the society–nature relationship; eg. Artificial fertilisers

- Capitalism grows —> Food production increases —> Production spreads to infertile soil —>
more fertilisers used —> deepening of the rift

- Attempts to address the metabolic rift, particularly related to soil, have created more
problems and failed to solve the primary issue, as production remains focused on capital
accumulation.

- Marx argued that a "systematic restoration" of this metabolic relationship, through a system
of associated producers, was necessary to govern and regulate the material interchange
between humans and nature —> More organised approach; This would involve a system
where people who produce things work together in a way that considers and takes care of
 the natural world. In essence, Marx proposed a coordinated system where both human
needs and nature's needs are balanced and taken care of properly.

- Marx’s conception of the metabolic rift under capitalism illuminates social-natural relations
and the degradation of nature in a number of ways:

1. The decline in the natural fertility of the soil due to the disruption of the soil nutrient cycle”
while transferring nutrients over long distances to new locations

2. New scientific and technological developments, under capitalist relations, increase the
exploitation of nature, intensifying the degradation of the soil, expanding the rift

3. The nutrients transferred to the city accumulate as waste and become a pollution problem

METABOLIC RIFT: Refers to an ecological rupture in the metabolism of a system. The natural
processes and cycles (such as the soil nutrient cycle) are interrupted. The interruption of a
natural system.

- Also entails the division of nature, which is tied to the division of labor, as the world is
subdivided to enhance the accumulation of capital.

- Marx’s metabolic analysis can be extended to the carbon cycle and global climate change
Historical context: The era of global capitalism, which to a large extent is the primary force
organizing the social metabolism.

THE FORMATION OF THE BIOSPHERE AND THE STRUCTURE OF THE CARBON CYCLE

Formation of the Biosphere and Carbon Cycle:

• Earth's atmosphere evolved over time.

• Biosphere concept introduced by Vernadsky in 1926.

• Haldane and Oparin proposed the materialist hypothesis of life's origins.

• Life transformed Earth's conditions, creating the atmosphere.

• Life exists in the sky, soil, and oceans.

• Human activities reshape the planet as a geological force.

Evolution and Gas Composition:

• Gas composition results from biological processes.

• Ancient Earth had less oxygen, dominated by anaerobic bacteria.

• Early bacteria produced methane and carbon dioxide.

• Evolution led to photosynthesis without oxygen release.

Emergence of Oxygen-Producing Bacteria:

• Blue-green bacteria evolved, using sunlight to split water.

• Oxygen accumulation caused toxic reactions.

• Blue-green bacteria regulated oxygen levels.

Energy and Life on Earth:

• Solar energy sustains life.

• Plants convert solar energy into chemical energy.

• Animals obtain energy by consuming plants.

• Fossil fuels store past life's energy.

Carbon Cycle and Gas Composition:

• Carbon moves through air, soil, water, and life.

• Carbon is essential for all life.

• Oceans absorb and limit carbon dioxide.

• Carbon enters via photosynthesis and cycles through food chains.

Stability of Atmospheric Gases:

• Earth's atmosphere is mostly nitrogen and oxygen.

• Trace gases, including greenhouse gases, regulate temperature.

Historical Studies on Climate Transformation:

• Ancient scholars noted human influences on climate.

• Early scientists studied heating and proposed the greenhouse effect.

• Tyndall found gases like carbon dioxide contribute to the greenhouse effect.

• Arrhenius suggested changes in gases influenced climate.

Importance of Understanding Carbon Cycle:

• Understanding the carbon cycle is vital.

• It involves natural carbon movement.

Human-Induced Changes to Carbon Cycle:

• Over 400,000 years, carbon cycle and climate were stable.

 • Recent carbon accumulation, driving climate change, is primarily human-caused.

• Understanding the carbon cycle helps identify social forces behind carbon dioxide
accumulation.

THE EXPANSION OF CAPITALIST PRODUCTION AND THE ACCUMULATION OF CARBON

DIOXIDE IN THE BIOSPHERE

- People learned how to use fire, which resulted in the release of solar energy into the
atmosphere.

- It was not until the rise of capitalism that anthropogenic carbon dioxide emissions greatly
expanded in scale through the burning of coal and petroleum, exploiting the historic stock of
energy

- The concentration of carbon dioxide in the atmosphere has increased dramatically,

overwhelming the ability of natural sinks to absorb the additional carbon

- Global changes in atmospheric composition occur from anthropogenic emissions of

greenhouse gases, such as carbon dioxide that results from the burning of fossil fuels and
methane and nitrous oxide from multiple human activities.

- Often industrialism is identified as the principal factor behind global warming, but this
position fails to recognize that industrialism is embedded within Capitalism

- Jason Moore argues that the birth of capitalism was pushed forward, in part, by
environmental contradictions and crises in feudalism, namely a metabolic rift particular to the
structure of feudal agricultural production.

- Liebig and Marx documented the reemergence of a soil crisis in Europe in the 1800s.
- This crisis spurred global guano trade for European field fertilization and the subsequent rise
of artificial fertilizers, despite their environmental drawbacks like dead zones.

- Urban conditions were influenced by rural transformations, including the concentration of

land among fewer landholders.

- The metabolic rift in soil nutrient cycles expanded with the division between urban and rural
areas.

- Capitalism's development led people to leave the land and seek work in cities, driven by
market forces.

- Capitalism's development of technology played a crucial role in this transition.

- Machines replaced human labor, fostering further technological innovations in production.
- Parts of nature were transformed into fuel for the new machines.
- Production took place on an enlarged scale, demanding more energy to sustain operation
- Pushed labor productivity to historically unprecedented levels
- Deepened the exploitation of nature and labor
- The drive to accumulate capital fueled the development of industrial productive forces,
which at the same time created a growing need for raw materials mined from the earth to
power the machines

- An expansion in productivity and technological development under capitalism increases the

quantity of energy throughput that is required to expand the accumulation of capital

- By mining the earth to remove stored energy (past plants and animals) to fuel machines of
production, capitalist production has “broken the solar-income budget constraint, and this
has thrown [society] out of ecological equilibrium with the rest of the biosphere

- The accumulation of capital remains the primary objective in capitalist economies.

- Ceaseless economic growth
- To sustain this process, capital requires constant access to, and an increasingly large supply
of, natural mate- rials (such as petroleum).

- As the economic system grows under capitalism, the throughputs of materials and energy
increase and capital incorporates ever-larger amounts of natural resources into its
operations.

- The law of value remains central to understanding capitalism and the ecological crisis
LAW OF VALUE: The value of a commodity is determined by socially necessary labor time, or
the amount of time "required to produce an article under the normal conditions of production,
and with the average degree of skill and intensity"

- Nature is treated under capitalism as a “free gift” to the property owner.

- As Marx put it, land (nature) and labor together con- stitute “the original sources of wealth.”
Yet, nature’s contribution is absent from capitalist value accounting.

- There is no drive to maintain the social metabolism in relation to the natural metabolism (a
measure of sustainability) under capital. Capital cannot operate under conditions that require
the reinvestment of capital into the maintenance of nature. Short-term profits provide the
immediate pulse of capitalism.

- The burning of fossil fuel is the primary source of greenhouse gases. Carbon dioxide is the
most abundant greenhouse gas.

THE JEVONS PARADOX: A DILEMMA FOR ECOLOGICAL MODERNIZATION

- Capital and neoclassical economists typically assert that capitalist development will lead to
improved technologies and efficient raw material usage, and that this will decrease
emissions and environmental degradation.
- They argue there is an “environmental Kuznets curve” for many types of environmental
impacts

ENVIRONMENTAL KUZNETS CURVE: Suggests that environmental impacts, such as pollution,

increase in the early stages of development within nations as an industrial economy is
established, but level off and eventually decline as economies “mature,” because
environmental quality is a luxury good, affordable only by the affluent.
ECOLOGICAL MODERNIZATION THEORY: Such theories contend that radical ecological
reform does not require radical social reform—the institutions of capitalist modernity can avert
a global environmental crisis without a fundamental restructuring of the social order.

- Believe that capitalism is fully able to respond to climate change through pursuing socio-
technical innovation, without challenging the prevailing political-economic structure.

CARBON EFFICIENCY: Economic output per unit of carbon emissions

- Greater efficiency in resource use often leads to increased con- sumption of resources.91
This relationship has become known as the Jevons Paradox.

- We need to connect this fact—that rising efficiency is associated with rising consumption, at
least in the case of coal—with the drive for the accumulation of capital, which entails the
continued material consumption of transformed nature to fuel its operations.

- Gains in the efficiency of the use of fossil fuel have typi- cally resulted in the expansion of
their use in industrialized capitalist nations. As a result, carbon emissions generally increase
with modernization and its concomitant “improvements” in technology and gains in
efficiency.

- Capitalism, at this stage of its development, depends upon massive quantities of fossil fuel
to continue to operate at the current scale of production, to say nothing of an increasing
scale of production.

THE DISRUPTION AND FLOODING OF CARBON SINKS

- It is important to understand what happens to carbon when it enters the atmosphere.

- As carbon accumulates in the atmosphere it blocks and absorbs infrared radiation,
effectively preventing the radiation from escaping into space.

- Higher concentrations of carbon dioxide increase the temperature of the atmosphere and the
oceans.

- Oceans and forests serve as natural sinks, absorbing large quantities of carbon dioxide
(sinks)

- The creation of a rift at one point in a cycle (that is, the accumullation of carbon dioxide in
the atmosphere) can generate system-wide crises

- The circulation of carbon and the stabilization of it within certain parameters depend on the
availability of carbon sinks and their ability to absorb carbon dioxide

- The capacity of those sinks is limited. In the long run the capacity of the ocean to absorb
carbon dioxide will likely decrease.

- The removal of forests changes a sink of carbon dioxide into a source of it

GLOBAL INEQUALITIES, PER CAPITA EMISSION ALLOWANCES, AND BIOSPHERIC CRISIS

- Ecological imperialism has resulted in the appropriation of the global commons—the

atmosphere and oceans, which are used as sinks for waste—and the carbon absorption
capacity of the biosphere, primarily to the benefit of a relatively small number of countries at
the center of the capitalist world economy

- The IPCC estimated that at least a 60 percent reduction in carbon emissions from 1990
levels is necessary to reduce the risk of further climate change

ECOLOGICAL CONSEQUENCES, BIOSPHERIC CRISIS, AND REDRAWING THE MAPS

- Global climate change is causing extreme weather patterns, such as hurricanes, floods, and
droughts. It is affecting glaciers, ice caps, soil nutrients, species extinction, biodiversity and
ocean currents.

- Rising sea levels

WHY NATIONS LEAD OR LAG IN ENERGY

TRANSITIONS
By: Jonas Meckling, Phillip Y. Lipscy, Jared J. Finnegan, Florence Metz

- Russian invasion of Ukraine produced price spikes in energy markets

- Many suggest that the war in Ukraine may accelerate transitions away from fossil fuels and
reduce greenhouse gas (GHG) emissions.

- Some governments are prioritising green energy, others double down on fossil fuels

WHY DO COUNTRIES RESPOND DIFFERENTLY TO THE CRISIS?

1. Varied access to fossil fuels resources

2. Varied political sources that enable transformational change in energy and climate policy

POLITICAL OPPORTUNITIES AND CONSTRAINTS FOR POLICY-MAKERS ACROSS

DIFFERENT COUNTRIES TO ACCELERATE THE TRANSITION TO CLEAN ENERGY

Energy transitions impose adjustment costs on businesses and consumers, creating economic
winners and losers:

SUPPLY-SIDE POLICIES: Primarily put visible costs on businesses

Eg: Fuel economy standards or renewable energy deployment standards

- Disadvantaged businesses—such as fossil fuel producers and energy-intensive indus- tries—

have strong incentives to lobby against such policies
DEMAND SIDE POLICIES: Impose costs most directly on consumers

Eg: Gas or carbon taxes

- Consumers may express their displeasure by voting against incumbent politicians.

—> Some countries have stronger institutions to manage such opposition to change than
others.

Governments can pursue energy transitions through one of three pathways:

1. INSULATION: policy-makers are shielded from political opposition

2. COMPENSATION:policy- makers ease the burden of adjustment for business and

consumers

3. MARKETS:policy-makers step back and markets drive change

-Market-based transitions are often subject to volatility, reversal, and price fluctuations.

INSULATION

- Policy-makers enjoy varying degrees of insulation from policy backlash depending on

bureaucratic and electoral institutions.

Autonomous bureaucracies: characterized by strong mandates, high levels of expertise, low

levels of political appointees, and an administration staffed with elite civil servants recruited
meritocratically and with an expectation of long-term employment

Proportional electoral rule (seats allocated in a legislature proportional to votes shares) tend
to better insulate politicians from voter backlash than majoritarian rules (“winner-takes-all,”
whereby a candidate receiving the highest vote share in a district represents the district)

COMPENSATION

- A compensation path seeks to secure the support of businesses and consumers that stand
to bear the costs of policy change.

- Political institutions affect the feasibility of compensatory policies.

- Corporatist institutions grant enduring, privileged policy-making access to major
associations representing business and labor interests, facilitating stable bargaining
arrangements.

- Countries with such institutions can strike long-term compensatory deals that ease the
burden of energy transitions for economic losers.
- Countries with established welfare state institutions that offer generous social safety nets
can more credibly commit to compensating individuals facing economic dislocation and high
energy prices

- Countries with weak welfare states and pluralist state-business relations, in which many
groups compete for influence, tend to see frequent policy reversals and reliance on ad hoc,
short-term measures

MARKETS

- A transition path through markets is effectively the absence of policy reform that imposes
direct costs on producers and consumers.

- Instead, governments rely largely on markets to transform the energy sector.

- This pathway is common in countries whose institutions allow opponents to more easily
block costly energy policies.

- In such countries, insulation from voters and business is limited because of majoritarian
electoral rules and weak bureaucracies.

- Compensation is difficult owing to small welfare states and pluralist state-business relations.
- Policy responses to crises tend to focus on short-term stopgap measures and foreign policy
solutions that reduce domestic adjustment costs.

LESSONS FOR POLICY

1.

- Policy-makers that can in principle rely on mechanisms of insulation or compensation need

to purposefully leverage both. If they have autonomous agencies, they can delegate policy
design questions to those bureaucracies. They also need to be sensitive about how to
bundle compensation packages to mobilize political support.

- Countries that can absorb costly policy in- vestments are thus better able to invest in the
deployment of frontier technologies that are not yet cost-competitive with fossil fuel
technologies.

2.

- Countries that tend to pursue market-driven transitions rely largely on first-mover countries
—those with the capacity to absorb costly policy action—to help bring down the cost of
clean technologies through policy for follower countries. But once clean technologies are
cost-competitive, market-driven transitions can accelerate rapidly.

- Governments that lack mechanisms of insulation and compensation can—at a minimum—

support energy transitions by easing regulatory barriers to the deployment of clean
technologies, such as simplifying permitting of renewable energy plants and grid
infrastructure.
3. Policy-makers that cannot pursue insulation or compensation can still pursue policies whose
costs are relatively diffuse and less visible, and thus less politically salient. This relates in
particular to public investments in research and development (R&D) and clean energy
deployment. These costs are spread across all taxpayers and not directly visible to voters and
industry as they would be through a carbon price or regulation

Useful Insight From Mainstream Economics

Why does the economic system tends to place the environment at risk?

—> Understanding the sources of environmental problems:

- Perverse incentives
- Created by:
1. Externalities

2. Public goods

3. Free access to common property resources

4. Resource extraction under private ownership

- Literature on perverse incentives is underadvertised by a profession dedicated to providing

ideological support for the dominant economic system of our age (Capitalism), and these
perverse incentives are rarely interpreted as reason for concern.

Mainstream economic theory teaches that:

1. The problem with externalities is that the buyer and seller have no incentive to take the
external cost or benefit for others into account when deciding how much of something to
supply or demand.

2. The problem with public goods is that nobody can be excluded from benefiting from a
public good once any- one buys it, and therefore everyone has an incentive to “ride for
free” on the purchases of others

3. Market forces will tend to produce too much of goods whose production and/or
consumption entail negative externalities, too little of goods whose production and/or
consumption entail positive externalities, and much too little, if any, of public goods.

—> The laws of the marketplace will lead to inefficient allocations of productive resources
when public goods and externalities come into play because important benefits or costs go
unaccounted for in the market decision-making procedure

EXTERNALITIES AND PROFESSOR PIGOU

- Mainstream economics explains why markets can be relied on to allocate scarce productive
resources efficiently.
ADAM SMITH: Popularised the idea of a beneficent “invisible hand” at work in capitalist
economies

- Reasoned that sellers would keep supplying more of a good as long as the price they
received covered the additional costs of producing them = The market supply curves would
be the same as suppliers’ marginal cost curves

- Buyers would keep demanding more of a good as long as the satisfaction they got from an
additional unit was greater than the price they had to pay for it = Market demand curves
would be the same as buyers’ marginal benefit curves

MARGINAL BENEFIT: The maximum cost a consumer will pay for an additional good or service

But if market price keeps adjusting until the quantity suppliers want to sell is the same as the
quantity buyers want to buy, this means that every unit that benefits buyers more than it costs
producers to make will get produced, and no units that would cost more to produce than the
benefits buyers would enjoy from them will be produced

—> When the price adjusts to make both sellers and buyers happy, the stuff that's good for
buyers and worth selling gets sold, and the stuff that's not worth it doesn't get sold.

- The market will lead us, as if guided by a beneficent invisible hand

A.C. Pigou: Distinguished between private costs to sellers and costs to society as a whole, or
between private benefits to buyers and benefits to society as a whole

EXTERNAL COSTS associated with producing something: costs borne not by the seller but by
some- one else—then the marginal social cost (MSC) of producing something will be greater
than the marginal private cost (MPC).

MARGINAL COST: the cost added by producing one additional unit of a product or service.

EXTERNAL EFFECTS: When If parties other than the buyer of a good are affected when it is
consumed, either positively or negatively

—> When a buyer consumes a good—then the marginal social benefit (MSB) that comes from
consuming the good is different from the marginal private benefit (MPB) to the buyer alone.

- Neither sellers nor buyers have any incentive to take consequences for third parties into
account

• Negative Externalities: When external effects are negative (e.g., pollution from a
factory), the market tends to encourage the production and consumption of the good or
service causing the negative consequences because those negative effects are not
factored into the prices. This leads to an overproduction of goods that harm third parties.

• Positive Externalities: Conversely, when external effects are positive (e.g., education
benefiting society as a whole), the market tends to underproduce the good or service
because the benefits to third parties are not considered in the pricing mechanism. This
leads to an underproduction of goods that benefit society.

—> Adam Smith’s vision of the market assumes externalities don’t exist
- This assumption is now challenged, often in the context of environmental externalities
HUNT AND D’ARGE: Externalities are the rule rather than the exception, and therefore markets
often work as if they were guided by a “malevolent invisible foot” that keeps kicking us to
produce more of some things and less of others than is socially efficient.

- No empirical evidence on the exceptionality of externalities

Theoretically:

- Maneuvering to appropriate a greater share of the value of goods and services produced by
externalizing costs and internalizing benefits without compensation are also ways to
increase profits.

- Producers driven by competitive pressure

- This behaviour serves private interest at the expense of social interest
- There is every reason to expect that competition for profit will drive buyers and sellers to
seek out ways to externalize costs onto large numbers of disempowered third parties who
are relatively easy marks, creating significant allocative inefficiencies in the process.

WHAT DOES IT HAVE TO DO WITH POLLUTION:

- Pollution is a negative externality

- While it may be efficient to pollute to some extent—when the benefits from the goods or
services produced along with the pollution exceed the costs of producing them including the
damage from the pollution—markets will predictably lead us to pollute beyond this point.

- Besides producing cement, cement factories emit particulates that cause urban air pollution.
- Besides producing electricity, utility companies emit sulfur dioxide that causes acid rain.
- Besides producing fruits and vegetables, modern agri- culture produces pesticide runoff that
contaminates groundwater and rivers.

—> We should consume so as not to pollute, and the environment certainly is better off
because many who have become aware of the environmental consequences of their choices
take those effects into account. But it is important to realize that a market system provides no
incentives for people to engage in green consumerism

PUBLIC GOODS AND THE FREE RIDER PROBLEM

PUBLIC GOODS: A good produced by human economic activity that is consumed, to all
intents and purposes, by everyone rather than by an individual consumer. Nobody can be
excluded from consuming a public good

- There are preferences related to public goods. One can prefer pollution reduction over
national defence
What incentive there is for a buyer to pay for a public good?

1. No matter how much I value the public good, I only enjoy a tiny fraction of the overall or
social benefit that comes from having more of it since I cannot exclude others who do not
pay for it from benefiting as well.

- Social rationality demands that an individual purchase a public good up to the point where
the cost of the last unit she purchased is as great as the benefits enjoyed by all who benefit,
in sum total, from her purchase of the good.

- When an individual buys public goods in a free market, she has no incentive to take the
benefits others enjoy when she purchases public goods into account when she decides how
much to buy. Consequently, she demands far less than is socially efficient, if she purchases
any at all.

2. Each potential buyer of a public good has an incentive to wait and hope that someone else
will buy the public good: free ride.

- If we believe that payments should be related to the degree to which someone benefits,
there is an incentive for individuals to pretend they benefit less than they do.

- Market demand predictably underrepresents the true social benefits that come from
consumption of public goods.

- Reducing pollution, or acting to protect the environment in any way, is providing a public
good.

- Markets provide incentives for individuals to express their desires for private goods in the
marketplace by offering to buy them since otherwise they cannot benefit. But markets
provide no incentives for individuals to express their desires for public goods in the
marketplace by offering to purchase them.

Problem of GREEN CONSUMERISM in market economies: The problem is that markets

penalize those who practice green consumerism and reward those who do not, which means
that socially beneficial campaigns encouraging green consumption must always swim
upstream in market economies.

—> There are a number of cheap detergents that get my wash very clean but cause
considerable water pollution. “Green” detergents, on the other hand, are more expensive and
leave my white bedsheets more gray than white, but cause less water pollution. Whether or not
I end up making the socially responsible choice, because pollution reduction is a public good
the market provides too little incentive for me to make the socially efficient choice.

THE TRAGEDY OF THE COMMONS

COMMON POOL RESOURCE: A common property resource, which nobody owns yet all are
free to use. Some agent, even if not a private owner, may have the right to deny access to the
pool.

- Natural resource economists study this phenomenon as a “perverse incen- tive” that leads
to “overexploitation” of the commons under a system of free access.
EXAMPLE:

The example illustrates the concept of the "tragedy of the commons" in the context of salmon
fishing off San Juan Island in Washington State. In this scenario:

• There are twelve salmon fishermen, each with their own boat.

• It costs $100 per day in fuel and wages to operate a salmon fishing boat.

• The catch of salmon in Friday Harbor is small compared to the total catch in the Salish
Sea, so the price of salmon is independent of the number caught by the twelve
fishermen.

• However, as more boats go out to fish in the same school of salmon, they interfere with
each other, causing a decline in the number of salmon caught per boat.

The key points of the example are as follows:

• Free Access: All fishermen have free access to the fishing area, meaning there are no
restrictions preventing them from going out to fish if they choose to do so.

• Revenue and Costs: Each fisherman calculates their expected revenue based on the
number of boats they anticipate will fish that day. The revenue depends on the number of
boats, as indicated in Table 4.1.

• Profit Maximization: Fishermen are profit-maximizing individuals who compare their

expected revenue to the cost of fishing for the day ($100 per boat). If the expected
revenue is at least as high as the cost, they decide to go out and fish.

• Tragedy of the Commons: As more boats go out, the expected revenue for each boat
decreases because they interfere with each other's catch. At some point, the expected
revenue falls below the cost of $100 per boat.

• Overexploitation: The last few fishermen who arrive at the dock realize that they won't
cover their costs with their expected revenue because too many boats are already
fishing. Despite this, some may still decide to go out, but their presence doesn't increase
total revenue anymore (marginal revenue becomes zero). This overexploitation leads to
too many boats fishing each day, depleting the resource (salmon) beyond sustainable
levels.

In summary, the tragedy of the commons is illustrated in this example by the overuse and
depletion of a common resource (salmon) when individual actors (fishermen) act in their self-
interest without considering the collective impact on the resource. As more boats enter the
fishing grounds, the resource becomes overexploited, and the expected revenue for each
fisherman falls below their operating costs, resulting in an inefficient allocation of resources.
This situation underscores the need for resource management and regulations to prevent
overuse and ensure the sustainability of common-pool resources.

CLIMATE CHANGE PREVIEW

- Market create perverse incentives for businesses and households to engage in too many
activities with negative external effects and too few activities with positive external effects.

RESOURCE EXTRACTION AND RATES OF TIME PREFERENCE

- Decision-making by private owners of natural resources under the pressure of market

competition often leads to decisions based on a rate of time dis- count that is higher than
can be justified for social decision-making purposes.

- When this is the case, resources are extracted faster than would be socially efficient.
- Since I might be dead next year, and i will most probably be dead in a 100 years, it is rational
for a mortal being to discount well-being in the future compared to well-being now.

- For example, if I discount a dollar’s worth of benefits next year by 10 percent compared to a
dollar’s worth of benefits right now, my personal rate of time discount is 10 percent.

- Since mortal humans presumably make decisions based on their individual interests, it
would also appear that the rate of time discount individuals will use when comparing present
and future costs and benefits will be higher than the rate of time discount humans should
use as a species that hopes to survive many generations.

EXAMPLE:

• Ownership and Extraction Timing: The text presents a scenario where an individual
owns a mineral deposit that can be extracted either this year or next year. If the owner
knows they will be alive for both years and intends to exploit the deposit personally, they
should wait to extract ore until it's more valuable next year.

• Consideration of Mortality: However, if the owner does not expect to live past the
current year, the question arises of whether they should extract all the ore immediately
since they won't benefit from extraction next year.

• Private Enterprise Market Economy: In a private enterprise market economy, the answer
is "no" to immediate extraction. Instead, the owner should consider selling the deposit to
someone who will live for two years and can implement a more efficient, two-year
extraction plan.

• Avoiding Overexploitation: The text highlights that ownership, combined with the ability
to sell the resource to individuals with longer time horizons, can prevent overexploitation.
If the owner sells the deposit to someone who can make the most profitable long-term
use of it, there is no incentive for overexploitation due to individual mortality.

• Resource Pricing: It suggests that the price of a natural resource should reflect its most
valuable use over time, and users should adopt socially useful patterns of exploitation to
justify the price paid for the asset.

• Conclusion: Many natural resource economists argue that, contrary to initial

appearances, even when natural resources are privately owned, there is no perverse
incentive to extract them faster than is efficient, as long as these assets can be bought
and sold. This approach aligns individual interests with the sustainable and efficient use
of natural resources.
In essence, the text emphasizes the role of ownership and the ability to trade natural resource
assets in mitigating the potential negative impacts of individual mortality on resource
exploitation. It underscores the importance of efficient resource allocation in market
economies.

Two reasons conspire to make the rate of time discount that is sensible for private resource
owners to use when deciding how fast to extract the resources they own significantly higher
than the rate of time discount that society can justify for itself on ethical grounds:

1. Future market failure: the greater degree of market failure in futures markets means that
market economies treat goods today as more valuable “birds in the hand” and goods in the
future as less valuable “birds in the bush” even though future generations will value their
birds as much as we value ours today.

2. A rate of time discount that is too high: If future generations are going to enjoy greater
economic well-being than we do, then the same amount of economic well-being delivered
now should count for more than if it is delivered later. According to this logic, a social rate
of time discount equal to the rate of growth of per capita net national economic welfare is
perfectly fair.

The text discusses the concept of net national welfare (NNW) and its relation to economic
growth, profits, and natural resource extraction. Here are the main points:

• Definition of NNW: NNW is defined as the value of all goods and services produced,
minus the depreciation of capital (both natural and human-made), and minus the total
costs associated with harmful external effects of production.

• Overestimation of NNP: Per capita net national product (NNP) has increased in the first
world over the past 200 years. However, NNP overestimates the well-being of the nation
because it doesn't consider the depreciation of natural capital or the production of
harmful waste as side effects of economic growth.

• Discounting the Future: The text argues that using the growth rate of per capita NNP as
the basis for discounting the future is not appropriate because it overlooks the negative
impacts on well-being caused by environmental degradation and harmful waste.

• Comparison with Profit Rates: To determine the correct discount rate for private owners
of natural resources, the text suggests comparing the rate of growth of NNW per capita
with the average rate of profit in the economy. If the profit rate exceeds the growth rate of
NNW per capita, private resource owners are incentivized to extract resources too
quickly.

• Profit Rates and Bargaining Power: The rate of profit is influenced not only by economic
growth (NNP) but also by how the profits are divided between employers and employees.
The greater the bargaining power of employers, the more profit rates can exceed
economic growth rates.

• Positive Profit Rates: In real-world capitalist economies, profit rates are always positive
because they operate between the extremes of workers receiving no wages (zero profit)
and workers receiving the entire surplus (zero profit). Even if economic growth is zero,
positive profit rates persist.
 • Declining NNW Growth and Rising Profit Rates: Over the past thirty years, two
significant trends have been observed: increasing environmental degradation and
growing power of capitalists relative to workers. These trends lead to a decline in the rate
of growth of per capita NNW compared to NNP and an increase in the normal rate of
profit compared to economic growth.

• Over-Extraction of Resources: Due to competitive conditions, private owners of natural

resources tend to extract them much faster than what is socially efficient. This has been
happening for some time.

In summary, despite the fact that individual humans are mortal while the human species
continues, private resource owners have been extracting natural resources at a pace that may
not be ethically justified. This over-extraction is driven by market competition, thinner future
markets, and the increasing power of capitalists in the global economy.
PE: WEEK 4
Neoliberalism: Oversold
TWO MAIN PLANKS OF NEOLIBERAL AGENDA:

1. Increased competition achieved through deregulation and the opening up of domestic

markets, including financial markets, to foreign competition.

2. A smaller role for the state, achieved through privatization and limits on the ability of
governments to run fiscal deficits and accumulate debt.

- Widespread global trend toward neoliberalism since the 1980s

BENEFITS OF NEOLIBERALISM:

- The expansion of global trade has rescued millions from abject poverty.
- Foreign direct investment has often been a way to transfer technology and know-how to
developing economies.

- Privatization of state- owned enterprises has in many instances led to more efficient
provision of services and lowered the fiscal burden on governments.

ASSESSMENT OF THE NEOLIBERAL AGENDA IN TERMS OF TWO POLICIES:

1. CAPITAL ACCOUNT LIBERALISATION: Removing restrictions on the movement of capital

across a country’s borders

2. AUSTERITY: Policies to reduce fiscal deficit and debt levels

—> Conclusions:

1. The benefits in terms of increased growth seem fairly difficult to establish when looking at a
broad group of countries.
2. The costs in terms of increased inequality are prominent. Such costs epitomize the trade-
off between the growth and equity effects of some aspects of the neoliberal agenda.

3. Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the
sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay
attention to the distributional effects.

OPEN AND SHUT?

- Capital account liberalisation = financial openness

Benefits of capital account liberalisation:

1. It can allow the international capital market to channel world savings to their most
productive uses across the globe.
2. Developing economies with little capital can borrow to finance investment, thereby
promoting their economic growth without requiring sharp increases in their own saving

HAZARDS OF CAPITAL ACCOUNT LIBERALISATION:

1. Impact of flows, such as portfolio investments, banking and debt inflows—seem neither to
boost growth nor allow the country to better share risks with its trading partners

2. Economic volatility and crisis frequency; raises odds of a crash

3. Financial openness has distributional effects, appreciably raising inequality. Moreover, the
effects of openness on inequality are much higher when a crash ensues
4.

—> The growth and risk-sharing benefits of capital flows depend on which type of flow is being
considered; it may also depend on the nature of supporting institutions and policies.

—> Controls to limit short-term debt flows that are viewed as likely to lead to—or compound—
a financial crisis are heavily practiced today.

SIZE OF THE STATE

- Curbing the size of the state is another aspect of the neoliberal agenda. This can be
achieved through:

1. Privatization of some government functions

2. Constrain on government spending through limits on the size of fiscal deficits and on the
ability of governments to accumulate debt.

Public debt:

- Economic theory provides little guidance on how to deal with it

- IMF fiscal policy advice: concerned with the pace of debt reduction
Arguments in support of paying down debt in countries where there is little real prospect of a
fiscal crisis:

1. Although large adverse shocks such as the Great Depression of the 1930s or the global
financial crisis of the past decade occur rarely, when they do, it is helpful to have used the
quiet times to pay down the debt.

2. Rests on the notion that high debt is bad for growth—and, therefore, to lay a firm
foundation for growth, paying down the debt is essential.

AN ADVERSE LOOP

- Openness and austerity are associated with increasing income inequality

- Inequality can lower both the level and durability of growth
- Policymakers should be more open to redistribution
WHAT I KEYNESIAN ECONOMICS?
BASICS

The central tenet of this school of thought is that government intervention can stabilize the
economy

JOHN MAYNARD KEYNES

- British economist
- Revolutionised economic thinking; Overturned the then- prevailing idea that free markets
would automatically provide full employment

- Key point of Keynesian theory: The assertion that aggregate demand—measured as the sum
of spending by households, businesses, and the government—is the most important driving
force in an economy.

- Keynesian economists justify government intervention through public policies that aim to
achieve full employment and price stability.

THE REVOLUTIONARY IDEA

- Keynes argued that inadequate overall demand could lead to prolonged periods of high
unemployment
- An economy’s output of goods and services is the sum of four components:
1. Consumption

2. Investment

3. Government purchases

4. Net exports ( the difference between what a country sells to and buys from foreign
countries)

- During a recession, strong forces often dampen demand as spending goes down:
Eg.

- People get scared so they spend less on things that are not necessary
- There is weakened demand
- Less investment spending by businesses as they respond to weaker demand
- This puts the task of increasing output on the shoulders of the government.

—> State intervention is necessary to moderate the booms and busts in economic activity,
otherwise known as the business cycle.
3 PRINCIPLE TENANTS OF KEYNESIAN ECONOMICS:

1. Aggregate demand is influenced by many economic deci- sions—public and private.

Private sector decisions can some- times lead to adverse macroeconomic outcomes, such
as reduction in consumer spending during a recession. Keynesian economics supports a
mixed economy guided mainly by the private sector but partly operated by the government.

2. Prices, and especially wages respond slowly to changes in supply and demand, resulting in
periodic shortages and surpluses, especially of labor.

3. Changes in aggregate demand, whether anticipated or unanticipated, have their greatest

short-run effect on real output and employment, not on prices. Keynesians believe that,
because prices are somewhat rigid, fluctuations in any component of spending—
consumption, investment, or government expenditures—cause output to change. If
government spending increases, for example, and all other spending components remain
constant, then output will increase.

STABILISING THE ECONOMY

- Keynes advocated so-called countercyclical fiscal policies that act against the direction of
the business cycle.

- EG: Keynesian economists would advocate deficit spending on labor-intensive infrastructure

projects to stimulate employment and stabilize wages during economic downturns.

- They would raise taxes to cool the economy and prevent inflation when
there is abundant demand-side growth.

- Keynes argued that governments should solve problems in the short run rather than wait for
market forces to fix things over the long run, because, as he wrote, “In the long run, we are
all dead.”

KEYNESIANISM EVOLVES

- Keynesian economics dominated economic theory and policy after World War II until the
1970s.

- Then stagflation came and Keynesian economy had no policy response to that
- The global financial crisis of 2007–08 caused a resurgence in Keynesian thought. It was the
theoretical underpinnings of economic policies in response to the crisis by many
governments, including in the United States and the United Kingdom.
Friedman
Chapter : The Relation Between Economic Freedom
and Political Freedom
- It is beloved economics and politics are separate and unconnected
- This idea is often manifested through the advocacy of democratic socialism, which
supporters believe that the features of Russian economic arrangements and individual
political freedom can be combined

THESIS: Such a view is a delusion, there is a close connection between economics and
politics, only certain combinations of economics and politics are possible, a society that is
socialist cannot also be democratic in the sense of guaranteeing individual freedom.

2 ROLES OF ECONOMIC ARRANGEMENTS IN PROMOTION A FREE SOCIETY

1. Freedom in economic arrangements is a freedom in itself

Eg: The citizen of UK after WWII couldn’t go to the US because of exchange controls -
deprivation of a freedom. A citizen of the US couldn’t enter Russia because of his political
views - also deprivation of freedom.

2. Economic freedom is a means towards achieving political freedom

- Economic arrangements have an impact on the dispersion of power. Competitive capitalism

promotes political freedom because is separates economic power from political power and
in this way enables the one to offset the other.

HISTORICAL EVIDENCE:

- There is no example of a politically free society that has not used something comparable to a
free market.

- Political freedom came with the development of a free market capitalism

- A free market is not a sufficient condition for political freedom (eg. Fascist Italy)
- But even in such states there is more freedom then in states that combine both economic
and political totalitarianism

THE RELATIONSHIP BETWEEN ECONOMIC AND POLITICAL FREEDOM IS NOT UNILATERAL

- 19th century
- Bethan and Philosophical Radicals
- They believed that political freedom is a means to economic freedom
- They argued that if a political reform would give the bulk of the people the vote they would
vote for laissez faire

ENGLAND AFTER WW2

- Control of engagements law

- It would have involved centralised allocation of individuals to occupations
- Applied in negligible number of cases and then ended altogether
- Marked a shift in policy with an emphasis on the free market
FREEDOM AS A VALUE

- Two sets of values that a liberal will emphasise:

1. The values that are relevant to relations among people

2. The values that are relevant to the individual in the exercise of his freedom

THE PROBLEM OF SOCIAL ORGANISATION

- The liberal sees men as imperfect

- The problem of social organisation is a negative problem (prevent bad people from doing
bad) and a positive one (enable good people to do good)
- Problem of how to coordinate economic activities of a large number of people
- Reconciliation of widespread interdependence with individual freedom
- Both parties to an economic transaction benefit from it, provided the transaction is bi-
laterally voluntary and informed

COMPETITIVE CAPITALISM = FREE PRIVATE ENTERPRISE EXCHANGE EONOMY: A working

model of society organised through voluntary exchange

- Society consists of a number of independent households

- Each households uses the resources it controls to produce goods and services that it
exchanges for goods and services produced by other households

- Incentive to produce for others

- Specialisation of labour
- Cooperation without coercion
- Money has been introduced to facilitate exchange
IN THE COMPLEX MONEY- EXCHANGE ECONOMIC MODEL:

- Cooperation is strictly individual and voluntary provided:

1. The enterprises are private, so that the ultimate contracting parties are individual and
2. The individuals are effectively free to enter or not to enter into any particular exchange, so
that every transaction I strictly voluntary

MOST DIFFICULT PROBLEMS IN A MARKET ECONOMY:

1. MONOPOLY: Inhibits effective freedom by denying individuals alternatives to the particular

exchange

2. NEIGHBORHOOD EFFECTS: Effects on third parties for which it is not feasible to charge or
recompense them

- Everyone is protected from coercion by another. A seller is protected from coercion from a
customer because there are other customers he can deal with. Sample with employers,
employees etc.

ROLE OF THE GOVERNMENT

- Free market does not eliminate the need for a government

- It is essential to determine the rules of the game and to enforce them
- The market reduces the amount of issues that must be decided through political means
- Reduces government participation

—> It is easier to decentralise economic power than political power

HOW CAN A MARKET WORK TO PERSERVE POLITICAL FREEDOM?

- In a capitalist free society you have the right to advocate socialism

- How could be the freedom to advocate capitalism be preserved in socialism?
1. You would need money for a campaign, which would be a problem cause nobody is rich
under socialism. You would have to get a number of people to chip in, but that would
require for them to already be persuaded. The problem is how to initiate a campaign. In
capitalism you just need to persuade a couple wealthy people; persuade them that the
newspaper, book, whatever will be profitable.

2. You would need to persuade government owned press to publish your writing. In capitalism
you just sell it to the Wall Street journal or something.

- Churchill was not permitted to talk on the British radio cause it was a
gov. ,monopoly and his position was too controversial

WHAT PROTECTIONS DID INDIVIDUALS HAVE UNDER FALLS ACCUSATIONS UNDER

MCCARTHYISM?
- Their fundamental protection was the existence of a private market economy in which they
could earn a living

- If government employment was the only possibility, they would have a problem finding a job
later

- Free market is impersonal - you don’t know if he wheat for your bread was grown by a
fascist, a homosexual, a raging anarchist or by a commie

- Minority groups should be concerned with strengthening capitalism because they can easily
become objects of enmity of the majority - yet, most opponents of the free market come
from minority groups and attribute their maladies to the market

CHAPTER 2: THE ROLE OF GOVERNMENT IN A

FREE SOCIETY
- Under liberalism, the only appropriate means to a goal are free discussion and voluntary
operation

- Any form of coercion is inappropriate

- We must employ political channels to reconcile some differences - you an i may heave
different opinions as to how much should be spent on national defence
- If the government decides upon something that people feel deeply about, it might disrupt
the society

- The wider the range of activities covered by the market, the less the government needs to
get involved; no need to achieve agreement on certain things.

- The fewer the things you need to agree upon, the greater the likely hood of maintaining a
free society

- Unanimity is impossible to be achieved on every issue, that’s why we have majoritarianism.

But if it is an issue the minority feels strongly upon, or even a constitutional matter, we
require an essential consensus

GOVERNMENT AS RULE-MAKER AND UMPIRE

- A good society needs to subscribe to the rules of the game established by the government
- It needs a means I’d arbitrating different interpretations of these rules (lawyers)
- It needs means of enforcing compliance
- There is a need for a broad underlying consensus as to the rules

BASIC ROLE OF GOV. IN A FREE SOCIETY: To provide the means whereby we can modify the
rules, to mediate differences among us on the manning of the rules, and to enforce compliance
writhe the rules on the part of those few who would otherwise not play the game

- Anarchy is impossible because people are not perfect

- Freedoms can be conflicting; one man’s freedom bust be limited to protect the other’s
- Problem in how to resolve those conflicts between men
ACTIONS THROUGH GOVERNMENT ON GROUNDS OF TECHNICAL MONOPOLY AND
NEIGHBORHOOD EFFECTS

- The role of the government is to do things that the market cannot do on its own: to
determine, arbitrate and enforce the rules of the game

- We might also want to do some things through the government simply because it is simpler
- This happens in cases where voluntary exchange is either too costly or impossible
- Two classes of such cases: monopoly and neighbourhood effects
MONOPOLY

- Exchange is voluntary only when alternatives exist

- Monopoly implies the lack of alternatives
- Inhibits freedom of exchange
- Usually it arises from gov support or collusive agreements among individuals
- It may also arise because it is technically more efficient to have a single producer (technical
monopoly)

- When a monopoly naturally emerges in a free market, there are only three alternatives:
private monopoly, public monopoly, or public regulation

- Private monopoly - the best choice. This is because the society is rapidly changing, and
both public monopoly and public regulation will be less responsive to those changes.

NEIGHBOURHOOD EFFECTS: When actions of individuals have effects on other individuals for
which it is not feasible to charge or recompense them.

- It is difficult to know when neighbourhood effects are sufficiently large to justify particular
costs in overcoming them

- It is also hard to distribute those costs

- Every gov intervention to mitigate a neighbourhood effect may result in in the creation of a
new one

ACTION THROUGH GOVERNMENT ON PATERNALISTIC GROUNS

- Freedom applies as an objective only to responsible individuals

- Crazy people and children excluded
- Madmen are taken care of by the gov due to neighbourhood effects related to the fact that i
benefit from another man taking care of the crazy

- Children taken care of my parents

—> Government supplements private family and private charity

CHILDREN

- At the same time they are consumer goods and potentially responsible members of the
society

- Individuals have the freedom to use their economic resources to buy things for the kids
- Services and products for children as a specific form of consumption

—> There is some need for a measure of paternalism

THINGS THAT THE GOVERNMENT CAN DO

1. Maintain law and order

2. Define property rights

3. Serves as means of modifying property rights and other rules

4. Adjudicates disputes about the interpretation of the rules

5. Enforces contracts

6. Promotes competition

7. Provides a monetary framework

8. Engages in activities to counter monopolies and neighbourhood effects

9. Supplements private charity and the private family

CHAPTER 12: THE ALLEVIATION OF POVERTY

- Economic growth of the west reduced poverty
- However, many people still under the conditions some of us label as poverty
- The more state welfare the less private charity
- Private charity is inefficient because it is a neighbourhood effect
- This justifies gov action to alleviate poverty
- But how much and how?
- How much? However much we are willing tog impose on ourselves in taxes for that purpose
- Negative income tax as a solution (may turn into a subsidy)
- Disadvantage of the negative income tax:
- Its political implications. It establishes a system under which taxes are imposed on some to
pay subsidies to others. Those people have a vote. We therefore have to rely on their self-
restraint and good will

LIBERALISM AND EGALITARIANISM

- Men have an equal right to freedom but they are different in a sense that they can do with
that freedom whatever they want

- Equality of rights and equality of opportunity on the one hand

- Equality of outcome and material equality on the other
- Egalitarians will defend taking from some to give to others

CHAPTER 14: CONCLUSION

LESS GOVERNMENT INTERVENTION!

ECONOMICS FOR INCLUSIVE PROSPERITY (EFIP):

Economics after Neoliberalism: Introducing the EfIP
Project
CONTEMPORARILY WE LIVE IN A WORLD OF:

- Inequality
- Volatile and oligarchic politics
- Inefficiencies in key sectors
- Ongoing climate change

1. THE ROLE OF ECONOMISTS

- The tools of economics are critical to developing a policy framework for what we call
“inclusive prosperity.

- The inclusive” modifier demands both that we consider the whole distribution of outcomes
- We also consider prosperity broadly, including nonpecuniary sources of well-being, from
health to climate change to political rights.
- A collective effort by a group of economists (the EFIP network)
- Neoliberalism— or market fundamentalism, market fetishism, etc.—is not the consistent
application of modern economics but its primitive, simplistic perversion.

- Economists study markets and believe in the power of incentives

CAPITALISM AND DEMOCRACY

PRECURSORS FOR THE CONTEMPORARY LITERATURE

Why the poor don’t soak the rich?

Przeworski and Wallerstein (1982): Any attempt at radical redistribution, or socialism, they
argue, would be met by massive disinvestment and possibly violence by the upper classes.

- Conversely, the rich might consent to democracy and redistribution because the costs of
repression or the threat of revolution would otherwise be too high.

- “Class compromise,” in other words, could be an equilibrium.

CAPITALISM VARIES BETWEEN STATES IN TERMS OF:

- inequality
- social spending
- redistribution
- structure of social protection

TWO APPROACHES TO STUDY THIS VARIANCE:

1. Model of redistribution by Meltzer and Richard’s (1981)

- Built on the idea that since the median voter tends to have below-average income he or she
has an interest in redistribution.

- With a proportional tax and flat rate benefit, and assuming that there are efficiency costs of
taxation, Downs’s median voter theorem can be applied to predict the extent of
redistribution.

- The equilibrium is reached when the benefit to the median voter of additional spending is
exactly outweighed by the efficiency costs of such spending.

- This implies two key comparative statics: spending is higher (a) the greater the skew in the
distribution of income, and (b) the greater the number of poor people who vote.
- B) suggests that an expansion of the franchise to the poor, or higher voter turnout among the
poor, will shift the decisive voter to the left and therefore raise support for redistribution.

DEMOCRATIZATION WILL THEREFORE LEAD TO REDISTRIBUTION

2. The second approach focuses on the role of political power, especially the organizational
and political strength of labor

- Two variants of the approach:

2.1: POWER RESOURCES THEORY: Focuses on the size and structure of the welfare state,
explaining it as a function of the historical strength of the political left, mediated by alliances
with the middle classes

2.2: NEO-CORPORATIST THEORY: Focuses on the organization of labor and its relationship to
the state—especially the degree of centralization of unions and their incorporation into public
decision-making processes

Limitation: Both variants have come under attack for not paying sufficient attention to the role
of employers.

- Example: Employers did not simply oppose social policies, but in fact played a proactive role
in the early formation of such policies

DEMOCRACY AND PARTISANSHIP

PARTISANSHIP: Strong loyalty to a political party

ROBIN HOOD PARADOX: That theory prescribes that countries with very low levels of
development will have relatively equal distributions of wealth. As a country develops, it
necessarily acquires more capital, and the owners of this capital will then have more wealth
and income, which introduces inequality.

- If centerleft governments simultaneously promote pre-fisc income equality and redistribution,

partisanship may not only explain distributive outcomes but solve the Robin Hood paradox.1

WHY DOES PARTISANSHIP MATTER?

1. Wittman’s (1973) model of probabilistic voting:

- If two parties represent constituencies with distinct interests on any set of issues, and if they
face uncertainty about the election outcome, the platforms that maximize the
implementation of the parties’ preferred policies will be away from the median.

2. Political parties, to be electorally successful, have to appeal to core constituents who

provide the money and activists required to run effective electoral campaigns

3. Citizen-candidates” models
- Assume that candidates cannot commit to anything other than their own preferred policies
- With two candidates and costs of running, the equilibrium is away from the median voter
because otherwise one citizen would not find it worthwhile to enter the race

- With strategic voting this divergence can be quite large because voters may not want to
switch from an existing candidate to a more moderate entrant in the fear that this may cause
the least preferred candidate to win.

RUBINSTEIN BARGAINING THEORY: Implies that parties will split their policy differences.

- The threat to break off negotiations and initiate bargaining with another party cannot easily
be used by the median party to get its way.

- The reason is that if there are any costs of switching (which may simply be the cost of a
delay), the new bargaining partner has no incentive to offer a bargain that is better than the
original minus the cost of switching.

—> Partisanship can’t explain why some countries are dominated by center- left governments
and others by center-right governments.

- Government partisanship does vary significantly across democracies

MULTIPLE DIMENSIONS AND COALITIONAL POLITICS

- Distributive politics is inherently multidimensional

- It is hard to understand why politicians should constrain themselves to contest a single
policy instrument such as the proportional tax/flat rate benefit in the Meltzer–Richard model

Espina-Andersen (1990): First to recognize the importance of multidimensional distributive

politics

- Distinguished three different “worlds” of welfare capitalism—each associated with a distinct

tax-benefit structure:

1. Social democratic type: progressive taxation is coupled with flat rate benefits

2. Liberal type: Means-tested benefits are targeted to the poor

3. Conservative type: benefits are tied to income and occupation

- The structure of benefits is associated with, and perhaps causes, different social divisions
and political patterns: the poor against the middle class in the means tested, insiders versus
outsiders in the conservative, and public against private sector in the social democratic.

Model of transfer spending by Dixit and Londregan’s (1996, 1998):

- Assuming probabilistic voting, if two parties do not know individual voter preferences but do
know the distribution of such preferences by groups, and if loyalty to different parties varies
across groups, vote-maximizing parties will concentrate transfers on the groups with the
most “swing” voters.

Roemer’s (1997, 2001) model:

- People have intrinsic preferences on some ascriptive dimension such as race or religion, in
addition to preferences over redistribution.

- When a second dimension is introduced, however, the right party can appeal to poor
religious or racist voters, and the left party is forced to respond by attracting more wealthy
anticlerical or anti-racist voters.

- As this “exchange” of voters takes place, the two constituencies will tend to become more
similar in terms of income.

- The original pro-welfare coalition is thus broken apart by appeals to commonalities on

another, non-economic, dimension.

- If people feel altruistic only towards people of their own race, they will not redistribute to a
minority that constitutes a disproportionate share of the poor.

- Elites that oppose redistribution can use the “race card” to undermine support for
redistribution

Austen-Smith and Wallerstein (2003) Model:

- In their model people have “race-blind” preferences and are simply trying to maximize their
net income.

- Yet the mere existence of a second dimension (here affirmative action) can cause a
legislative coalition in favor of redistribution to break up.

- The reason (loosely speaking) is that the rich in the majority can offer a bargain to the
minority that strengthens affirmative action but reduces redistribution to the poor.

DEMOCRATIC INSTITUTIONS

- Focus on the role of institutions

- The approach has been highly successful in explaining cross-national differences in
economic policies and outcomes.

1. ELECTORAL RULES (Carey and Shugart)

- The electoral system shapes the incentives of politicians either to toe the party line or to use
their influence over public policies to cultivate a personal following.

- The incentives for politicians to campaign on a broad party platform depends on the ability
of parties to control politicians’ reelection chances.
- The best-known means to accomplish such control is a closed party list system where a
candidate’s rank on the list determines that candidate’s likelihood of re-election.

- By contrast, in systems where candidates are chosen through primaries, such as elections
to the US Congress, political parties cannot directly control who gets on the ballot and
politicians have a stronger incentive to pursue their own agendas and appeal to location-
specific interests.

- Systems that encourage politicians to cultivate a personal following will lead to a targeting of
public money to local projects and narrowly defined groups.

2. ELECTORAL FORMULA (Persson and Tabellini)

- In majoritarian systems, they argue, if middle-class swing voters are concentrated in

particular districts, parties have an incentive to ignore completely other districts that are
leaning one way or the other ideologically.

- These districts are “safe” and therefore not worth fighting over.
- Money flows to swing votes in middle-class districts.
- In single-district PR systems, by contrast, there are no safe districts so politicians cannot
ignore the loss of support among other groups by concentrating transfers on the middle
class.

- The result is greater dispersion of spending across classes (or more spending on broad
public goods).

3. ELECTORAL SYSTEMS (Iversen and Soskice)

- When parties representing different classes have to form coalitions to govern, as is typically
the case under PR, the center and left have an incentive to get together to soak the rich.

- This is not true in two-party majoritarian systems where parties are coalitions of classes.
- Assuming that the right cannot engage in regressive redistribution, incomplete platform
commitment therefore puts the median voter at risk and the center-left at an electoral
disadvantage.

4. FEDERALISM (Brennan and Buchanan’s)

- Competition between local governments for mobile sources of revenue undermines the
ability of predatory governments to impose excessive taxation.

- Federalism may undermine the welfare state and lead to under-provision of social welfare or
a “race to the bottom”

- Federalism makes it harder to pass new legislation because it has to be ratified in two
legislative assemblies.

- But while federalism does appear to be associated with smaller governments, there is in fact
a striking amount of variance across federalist states
—> To account for this variation, Rodden has proposed to distinguish between federalist
systems with different fiscal institutions. If local spending is locally financed, tax competition
puts a damper on spending, but if local spending is financed through central or
intergovernmental grants, local politicians have little incentive to contain spending.

VARIETIES OF CAPITALISM

- Dominant approach to the study of cap- italism as an economic system builds on new
institutional economics and is known as the “varieties of capitalism” (or VoC) approach

- VoC approach assumes that economic institutions are designed to help firms and other
economic agents make the best use of their productive assets

- When an economy is characterized by heavy investment in co-specific assets, economic

agents are exposed to risks that make market exchange problematic.

- A precondition for such an economy to work efficiently is therefore a dense network of

institutions that provide information, offer insurance against risk, and permit continuous and
impartial enforcement of complex contracts.

- Another central feature of the VoC approach is the idea that an institution has to be
understood in relation to other institutions.

- Institutional complementarity means that the effectiveness of one institution depends on the
design of another.

- The VoC approach generalizes the idea and argues that all major institutions of capitalism
are complementary to each other

- Combination of institutions: two dominant types:

1. Liberal Market Economies (LMEs)

2. Coordinated market economies (CMEs)

- Each is characterized by the extent to which institutions protect and encourage investment
in assets that assist firms in pursuing particular product market strategies.

- The VoC argument in explanation of the welfare system: Companies and industries that are
highly exposed to risk will favor a social insurance system where cost and risk are shared,
leading employers to push universalistic unemployment and accident insurance.
PATHS OF ECONOMIC AND POLITICAL
DEVELOPMENT
A THEORETICAL FRAMEWORK:

—> Summary of argumentation

1. ECONOMIC INSTITUTIONS: Economic institutions matter for economic growth because

they shape the incentives of key actors in society.

- They influence investments in physical and human capital and technology, and the
organization of production.

- Differences in economic institutions are the major source of cross- country differences in
economic growth and prosperity.

- They determine economic performance and distribution of resources

2. Economic institutions are endogenous.

- They are determined as collective choices of the society, in large part for their economic
consequences.

- Different economic institutions lead to different distributions of resources.

- There will typically be a conflict of interest among various groups and individuals over the
choice of economic institutions.

- Whichever group has more political power is likely to secure the set of economic institutions
that it prefers.

3. There are conflicting interests over the distribution of resources and therefore indirectly over
the set of economic institutions.

- Why do the groups with conflicting interests not agree on the set of economic institutions
that maximize aggregate growth?

- Individuals who have political power cannot commit not to use it in their best interests
4. The distribution of political power in society is also endogenous

- 2 components of political power:

1. de jure (institutional): refers to power that originates from the political institutions in society.

2. de facto political power

5. A group of individuals, even if they are not allocated power by political institutions may
nonetheless possess political power

- They can revolt, use arms, hire mercenaries, co-opt the military, or use economically costly
but largely peaceful protests in order to impose their wishes on society.

- This type of political power as de facto political power, which itself has two sources:
1. depends on the ability of the group in question to solve its collective action problem

2. depends on its economic resources, which determine both their ability to use (or misuse)
existing political institutions and also their option to use force against different groups.

6. Political institutions and the distribution of resources are the state variables in this dynamic
system because they typically change relatively slowly, and more importantly, they determine
economic institutions and economic performance both directly and indirectly.

- Political institutions allocate de jure political power, and those who hold political power
influence the evolution of political institutions, and they will generally opt to maintain the
political institutions that give them political power.

2 sources of persistence in the behavior of the system:

1. Political institutions are durable, and typically, a large change in the distribution of political
power is necessary to cause a change in political institutions

2. When a particular group is rich relative to others, this will increase its de facto political
power and enable it to push for economic and political institutions favorable to its interests.

- The framework also emphasizes the potential for change:

- Shocks: Including changes in technologies and the international environment, that modify
the balance of (de facto) political power in society can lead to major changes in political
institutions and therefore in economic institutions and economic growth.
A THEORY OF DEMOCRACY

- Key aspect of democracy: relative political equality

- In a non-democratic society, the elite is ruling but the people have some power today; they
can protest or threaten with a revolution

- They do not know however if they will have the same power tomorrow
- In a democracy, in contrast, citizens have a consist ant degree of power
- If the citizens of a non-democracy use their power today, and change the system into a
democracy, they secure their political power tomorrow.

- Transition to democracy, or more generally a change in political institutions, emerges as a

way of regulating the future allocation of political power.

TRANSITORY NATURE OF POLITICAL POWER

- Citizens have it today but may not have it tomorrow

- Creates a demand for a change in political institutions.
- Transitions to democracy take place when the elite controlling the existing regime change
political institutions and extend voting rights.

- Why would they do so?

1. The first option for the elite is to give them what they want today: adopt economic
institutions or policies favorable to the majority. They promise to do the same tomorrow.
That might not seem to be a credible promise in the eyes of the people. A credible promise
means that the decision should not be theirs, but placed in the hands of groups that
actually prefer such institutions. They have to transfer political power to the citizens.

——> That is precisely what a transition to democracy does: it shifts future political power
away from the elite to the citizens, thereby creating a credible commitment to future pro-
majority policies and institutions.

2. The second option for the elite is to use force and repression. Nevertheless, repression is
both costly and risky for elites. It leads to the loss of life and the destruction of assets and
wealth and, depending on the international climate of opinion, it may lead to sanctions and
international isolation. Moreover, repression may fail which could cause a revolution, the worst
possible outcome for the elite. Finally, to use repression the elite has to have a strong military,
but such a military is itself a threat to elites

—> Democracy arises when concessions are not credible and repression is not attractive
because it is too costly.
- A theory of democratization is of course not sufficient to understand why some countries are
democratic while some others are ruled by dictatorships.

- Many countries become democratic, but eventually revert back to a non-democratic regime
as a result of a military coup.

THEORY OF DEMOCRATIC CONSOLIDATION

- A democracy is consolidated if the set of institutions which characterize it endure through

time.

- To change economic institutions and policies in a credible way the elite need political power.
- When there is a situation with the military on the side of the elite and sufficient turbulence to
allow a military takeover, the elite might support or sponsor a coup to change the balance of
power in society.

- A coup is their way of increasing their de jure political power so that they can pursue the
policies they like.

- In other words, a coup enables the elite to turn their transitory de facto political power into
more enduring de jure political power by changing political institutions.

COMPARATIVE STATISTICS

GOOD ECONOMIC INSTITUTIONS: Those that provide security of property rights and relatively
equal access to economic resources to a broad cross-section of society.

How do they emerge?

1. Political institutions that place checks on those who hold political power, for example, by
creating a balance of power in society, are useful for the emergence of good economic
institutions.

2. Good economic institutions are more likely to arise when political power is in the hands of a
relatively broad group with significant investment opportunities.

3. Good economic institutions are more likely to arise and persist when there are only limited
rents that power-holders can extract from the rest of society, since such rents would
encourage them to opt for a set of economic institutions that make the expropriation of
others possible. Suggests that the structure of the economy may be important for good
economic institutions.

—> Political institutions are essential both because they determine the constraints on the use
of (de facto and de jure) political power, and also because they determine which groups hold
de jure political power in society.

—> Democracies are characterised by greater political equality

- Bad economic institutions typically arise because they happen to concentrate resources in
the hands of some politically powerful group.

- The circumstances that give rise to good economic institutions will also tend to give rise to
democracy:
1. We would expect a society to be democratic when there are checks on the use of political
power or a balance of political power in society.

- A high degree of equality in the distribution of economic resources may lead de facto power
to be balanced.

2. Democracy will be facilitated when a broad group in society has good investment
opportunities.

3. Democracy will tend to arise when factor endowments and the structure of the economy are
such that there are only limited rents to be extracted with bad economic institution

-> ( This means that In a place where there aren't many chances for a
few powerful individuals or companies to get rich by taking advantage of
a broken economic system, democracy is more likely to emerge because
people won't be as motivated to keep a tight grip on power and control.
Instead, they may be more willing to share decision-making and political
power because there's less to gain from unfair practices in the economy.)

THE THEORY IN ACTION: HOW BRITAIN BECAME RICH AND DEMOCRATIC

1.0

- 1500: Britain a relatively backward society

- Ruled by an absolutist monarchy
- By the early 19th century became the richest nation in the world
- After 1832 a series of Reform Acts were passed which eventually culminated in a democracy
2.0

- Dramatic change in political institutions after the Glorious Revolution of 1688

- Increase in Parliamentary power
- Decrease in the power of the monarchy
- Led to much greater security of property rights, since people no longer feared predation by
the state.

- Merchants and landowners oriented towards sale for the market were represented in
Parliament

- By late 18th century: sustained economic growth

- The system still not a democracy
- Early 18th century: a string of industrialisation induced riots
- Reforms made to avoid a revolution
- Electorate expanded
- Democracy
INTERPRETATION

In the seventeenth century a series of political conflicts were won by those interested in
introducing political institutions which limited the de jure power of the monarchy. This change
in political institutions greatly improved economic in- stitutions. By reducing the risk of state
predation, property rights became more stable which encouraged investment. Also de jure
political power in the new system was in the hands of men with commercial and capitalistic
interests and this led to large induced changes in economic institutions, for instance in capital
and financial markets, that were important for further economic expansion.

The reason that these institutional changes arose in Britain (and not, say, in France or Spain)
appears to be twofold:

1. At the start of the early modern period Britain had political institutions which limited the
powers of the monarchs more than in other places

2. Various significant changes took place in the structure of the economy which greatly
strengthened the interest of various groups, particularly capitalistic farmers (the so-called
“gentry”) and merchants, in different economic institutions.

—> In essence, the extent of prosperity and democracy in a society is determined by its
institutional organization, and different societies get on different paths of economic and
political development as a consequence of historical shocks or critical junctures.

CHAPTER 38: AUTHORITARIAN GOVERNMENT

BY STEPHEN HABER

- The majority of the world’s governments have been authoritarian

- We understand authoritarian governments poorer than democracies:
Eg.

- Authoritarian governments enforce property rights more weakly

- Provide fewer public goods than democracies
- One would expect them to grow more slowly than democracies, but in fact, their average
rates of economic growth is the same as that of democracies

- Explanation: A subset of authoritarian countries performs extraordinarily well, pushing up an

otherwise low average.

—> But how can some of them grow this fast?

AN ORGANISATIONAL THEORY OF DICTATORSHIP

- Dictators are insecure because they face political entrepreneurs who lead organized groups.
- If dictators fear political entrepreneurs and the groups they lead, why don’t they simply
stamp them out?

ANSWER:

1. Dictators need an organized group in order to take power. Some of these groups, such as
the military, a political party, or a royal family, are formally constituted, have rules governing
their internal workings, and may already be part of a pre-existing government. Others, such
as a revolutionary movement, a military splinter group, or a federation of warlords, are less
institutionalized.

2. The dictator needs this launching organization, as well as the other organizations within the
state that the launching group permeates, because without them he cannot run the country.
This organization is made up of self-interested individuals. Its members therefore quickly
populate the formal organizations of the government—the courts, police, bureaucracy, and
legislature (if there is one). Thus, the dictator cannot simply declare the dissolution of the
launching group: it is integrated into the state.

- Those fears are not unfounded: coups take place twice as often in authoritarian states as in
democracies

- A newly launched dictator inherits an already developed economy; he can’t simply pursue
any strategy he desires because the pieces have been moved already

- Each pursued strategy generates a property right system

WHY ARE THERE SO FEW STATIONERY BANDITS?

OLSON’S STATIONERY BANDIT MODEL OF DICTATORSHIP:

- Explains economic growth under authoritarianism

- Here, dictators are assumed to face no threat to their survival, and thus operate as
“stationary bandits.“

- They therefore have long time horizons, giving them fiscal incentives to enforce property
rights universally, invest in public goods, and tax at the long-run revenue-maximizing rate.

- They then spend all tax revenues in excess of that necessary to enforce property rights and
create public goods on conspicuous consumption.

- Such stationary bandits are rather rare historically

- There are theoretical reasons why the benign despot/stationary bandit solution occurs so
rarely:
1. The stationary bandit model assumes that the dictator can see how the exercise of his
power in the short run diminishes his long-run accumulation of wealth

2. It assumes that dictators have infinite time horizons. The problem is, of course, that no one
lives forever. The older the dictator grows, the more he will discount the future, and as his
discount factor increases the more likely he will be to increase taxes and seize property

3. It assumes that the dictator’s allies—the leadership of the group that helped bring him to
power—are lacking in self-interest: the dictator may extract social surplus by keeping for
himself the difference between what he obtains from taxes and spends on public goods;
but his allies seek nothing more than the opportunity to compete on a level playing field
against everyone else in the economy.

THE LOGIC OF TERROR

- The most direct strategy to curb the launching organization is to terrorize its leader- ship
through murder, show trials, torture, and purges.

- KEY ELEMENT OF THE TERROR STRATEGY: It creates distrust. Members of the launching
organisation will give each other away to save their own skin. This makes it increasingly
difficult to coordinate actions against the dictator

3 REASONS WHY THE TERROR STRATEGY IS NOT FREQUENTLY USED:

1. It is a very high-stakes game that leaves little room for error and experimentation: the
dictator needs to be absolutely certain that he will quickly get the upper hand; if he fails to
do so, the leaders of the organization that he is terrorizing have every incentive to put aside
their differences and depose him.

2. A campaign of terror requires the creation of a specialized terror orga- nization, a secret
police. This organization itself, however, looms as a threat to the dictator—and thus its own
leadership must be terrorized.

3. Torture terror, and political murder not only undermine the organization that launched the
dictator; they undermine the ability of the government, which is populated by the
organization’s terrorized members, to function. Not surprisingly, the efficiency of
government in countries characterized by political terror tends to be notoriously low. If the
purge has been directed against the armed forces, the government’s ability to defend itself
from foreign invasion or internal rebellion is particularly damaged.

TERROR STRATEGY AND PROPERTY RIGHTS

- If the dictator succeeds in terrorizing the organization that launched him, he has uncon-
strained authority and discretion.

- He an virtually take whatever to secure his position

- This generates a problem for the dictator: the lack of secure property rights dampens
investment, thereby denying him the tax base he needs to run the country.
- This pushes the dictator to expropriate private assets: he needs resources to run the
government and the only ready source of funds is the stock of assets of the country’s private
wealth- holders.

CLASSES OF ENTERPRISES WHICH HAVE A LOW PROBABILITY OF EXPROPRIATION:

1. Enterprises that can escape detection by the government, because they do not require the
judicial system to enforce contracts, can hide income from taxation, and are able to evade
the registration of property sales.

- Those are usually small in scale

2. Those in which virtually all of the assets are in the form of human capital. They include firms
that provide medical, legal, and accounting services, as well as manufacturing firms that use
non-mechanized technologies operated by highly skilled craftsmen (diamond-cutting is a
classic example).

3. Those that have large amounts of physical capital, but the efficient operation of that capital
requires proprietary knowledge of markets or technologies. Investors in these enter- prises
know that the government can neither credibly threaten to expropriate them nor allocate their
property rights to another firm—because neither the government nor that firm can operate the
enterprise efficiently enough to yield tax income higher than that provided by the incumbent
investors.

THE LOGIC OF CO-OPTATION

- Strategy of co-opting the leadership of a launching organisation by buying its loyalty

- More common than terror
- They will only join a coup attempt if they think they can increase their earnings (factoring in
that they might die)

- The problem with this strategy, however, is that the source of rents and the government are
one and the same.

- This means that coup leaders can credibly promise to maintain the pre-coup rent-sharing
arrangements, which puts the dictator at risk.

- Most rent-sharing arrangements under stable authoritarian governments tend to have three
parties: the dictator, the leadership of the organized group that can sanction him, and a
group of investors who generate a stream of rents in privately owned enterprises.

- Over the short run, the allocation of property rights to a small group of people can create
impressive rates of economic growth.

- Over the long term, however, rent-sharing systems weigh on economic growth because:
1. The requirement that rents be generated and distributed through the political system means
that resources are misallocated: industries exist in which the country has no comparative
 advantage; monopolies and oligopolies exist in industries that should be characterized by
near-perfect competition; and opportunities are denied to entrepreneurs with the required
skills and assets, but without political access or protection

2. The rents necessary to sustain this system must come from somewhere: usually everyone
and anyone outside the coalition that effectively governs the country—the dictator,
investors in favored enterprises, and the leadership of the organization that can sanction
the dictator. This has negative distributional consequences, which limit the size and depth
of the domestic market.

THE LOGIC OF ORGANIZATIONAL PROLIFERATION

- The organized group that can sanction the dictator may also be undermined by creating yet
more organizations

- Goal of the strategy: To raise the cost of collective action within the launching organization
through either of two mechanisms:

1. It forces its leadership to coordinate with the leadership of the other, newly created,
organizations (which might otherwise come to the rescue of the dictator during a coup)

2. It raises the cost of coordination within the launching organization by aligning the incentives
of its membership with the leadership of another organization

Inequality and Democratization: A Contractarian Approach

Ben Ansell and David Samuels

INTRODUCTION

- Core idea behind modernization theory: economic development somehow generates

pressure to liberalize nondemocratic regimes

- New perspective in research: Not the LEVEL of wealth matters, but the DISTRIBUTION of
wealth on elites’ incentives to block or allow political liberalization.

REDISTRIBUTIVE THEORY OF DEMOCRATISATION: Suggest that regime change is

fundamentally driven by autocratic elites’ fear of the relative costs of redistribution under
democracy: As inequality increases, elites have more to fear from the future median voter in
terms of demands for increased taxation and social spending. In contrast, when inequality is
low, the median voter will demand less redistribution.

2 views:

1. Boix: Suggests that equality and democratization are positively related

2. A & R: Predict that an “inverted U” shape relationship exists between inequality and
democratization: Transitions are likeliest at moderate levels but unlikely at either very low or
very high levels of inequality
 CONTRACTARIAN APPROACH: Regime change is not a function of autocratic elites’ fear that
the poor and middle classes would expropriate their assets under democracy. It is instead a
function of politically disenfranchised yet rising economic groups’ struggles to obtain credible
commitments against expropriation of their income and assets by the autocratic governing
elite.

—> Property rights:

The more equal the distribution of land, the greater the number of freeholders who fear both
taxation and expropriation of their land or money by an autocratic elite. Under these
conditions, smallholders demand a more representative political system that protects their
property rights.
I
- Democratisation will be more likely to emerge when newly wealthy economic groups
accumulate an increasing share of national income, leaving the poor far behind. Under these
conditions, democratization will be associated with higher, not lower, income inequality.

8 LAND EQUALITY = DEMOCRATISATION

O The more equal the distribution of land, the greater the number of freeholders who fear both
taxation and expropriation of their land or money by an autocratic elite. Under these
conditions, smallholders demand a more representative political system that protects their
property rights.

8 INCOME INEQUALITY = DEMOCRATISATION

Under autocratic rule, this is precisely the situation in which rising economic groups have more
to lose through expropriation by the state—even as they also accumulate more resources to
invest in transforming the regime.

DEMOCRATISATION: DEMAND FOR REDISTRIBUTION OR DEMAND FOR PROTECTION

Boix: Suggests that autocratic elites fear the threat of redistribution less when the future
median voter has an income similar to their own. Therefore, under conditions of equality elites
have little to fear from democratization.

- Also more likely when elites have liquid assists - easier to shield
- Therefore, elites democratize when the threat of redistribution of their assets by the poor is
low.

A&R: Suggest that the relationship between inequality and democratisation looks like an
inverted U. This means that under high inequality elites fear redistribution and repress rather
than democratize. However, democratization is also unlikely under equality because there is
little demand for redistribution. Probability do democratisation will be high at the middling level
of inequality.

North: Democratisation occurs because occasion- ally “the players find it worthwhile to devote
resources to altering the more basic structure of the polity to reassign rights. This approach is
about whether all citizens, but particularly rising economic groups, can obtain impartial
protections against violations of contracts and property rights. Democracy is a way to “prevent
significant extraction of social surplus by the leader.

THE AUTHORS UNDERSTANDING OF THE RELATIONSHIP BETWEEN INEQUALITY AND

DEMOCRATISATION: Differs in 2 key ways:

1. In terms of which social actors are driving regime transitions and expropriating from each
other

- Democratisation is best understood as a struggle on the part of disenfranchised groups—

including a rising bourgeoisie—to obtain credible commitments against incumbent elites’
expropriation of their income and assets.

2. In terms of the nature of economic inequality.

- Distinguish between the political impact of land inequality versus income inequality.

—> Land inequality should be negatively associated with democratization. Because land is
more or less fixed in supply, high land inequality means the elite will be wary of higher taxation
or even expropriation of their fixed asset under democracy

—-> Inequality rather than equality generates pressures to liberalize

- Economic development under autocracy thus often means that new but
politically disenfranchised economic groups grow in size and wealth—
groups that that have relatively more to lose and that desire the
safeguards of contracts and property rights that democracy provides—
as income inequality increases.

A MODEL OF THE POLITICAL EFFECTS OF LAND AND INCOME INEQUALITY

- Democratisation tends to follow from increased income inequality deriving from industrial
sector growth.

- That is, under autocracy the growth of an urban middle class is associated with both rising
inequality and pressures for democracy. Inequality in land, however, has the reverse effect.

- Greater land equality means greater demand for expansion of democratic protections, to
eliminate the autocratic state’s caprice.

DISTINCTIVE FEATURES OF THE MODEL:

A) Assumes that autocracies are more expropriative than democracies, which means that the
tax system is regressive for all but the incumbent elite

B) Assumes inequality differs both within and across sectors of the economy

C) Examines the role of three groups: the elite, the bourgeoisie, and the masses.
PE LECTURE NOTES: QUIZ 2
LECTURE 11: CLIMATE CRISIS
TABLE OF CONTENTS

1. The Concept of Metabolic Rift

2. Capitalism and Ecology 01: Infinite Growth

3. Capitalism and Ecology 02: Externalities

4. Capitalism and Ecology 03: Inequality and

5. Oligarchy

6. Green Growth and Technological Fixes

7. The Logic of Direct Action

8. Effective Action and What Leads to Failure

THE CONCEPT OF METABOLIC RIFT

METABOLISM (Stoffwechsel): Exchange of matter and/ or energy

within an organic whole (e.g. an individual animal or an ecosystem)

Here:"complex dynamic interchange between human beings and

nature"

METABOLIC RIFT: the "irreparable rift in the interdependent process

of social metabolism'.

Origin: chemists studying capitalist agriculture: disrupts the soil nutrient

cycle, reducing soil fertility; new technologies speed this up; nutrients
transferred elsewhere where they cause pollution.

CAPITALISM AND ECOLOGY 01: PROFIT MAXIMISATION AND INFINITE GROWTH

Capitalism has an inherent drive to maximise profits and the economy as a whole is
driven to economic growth.

In reality, this growth requires increasing throughputs of matter and energy.

This tends to result in higher emissions of greenhouse gases, as well as other forms of
ecologically harmful pollution.

Capitalism also has no incentives to ensure a stable and sustainable metabolism with nature.

Our planet and its resources are finite in ways that mean that increasing throughputs
of matter and energy will eventually cause irreparable damage to our metabolism with nature.
As a result, capitalism has an inherent tendency to cause irreparable damage to our
metabolism with nature.

THE LINK BETWEEN GDP GROWTH AND POLLUTION?

Distinguish:
(a) growth of GDP;

(b) growth of throughputs of matter and energy

(c) increasing pollution

Does (c) follow with deductive

logical necessity from (a) or (b)?

Does (c) generally follow from (a) or (b)?

CAPITALISM AND ECOLOGY 2.0: EXTERNALITIES

EXTERNALITIES: An effect on any party other than the buyer or seller when a good or service is
produced, exchanged, and consumed

- Under capitalism, neither consumers nor sellers have an incentive to take other people’s interests into
account, but are instead incentivised to externalise costs to everyone but themselves.

- If parties other than the seller and consumer are affected by a good, the Marginal Social Benefit (MSB)
of consuming, it will be different than the Marginal Private Benefit (MPB) to the buyer on their own.

- This leads to Social Inefficiencies:

A) Producing too little goods with positive social externalities

B) Producing too much goods with negative social externalities

- Cannot be solved by making markets more competitive, reducing entry costs, etc. Why? Because
these don’t change the underlying incentive to ignore externalities. Can only be solved (for Hahnel)
long-term by replacing markets with some form of planning
CAPITALISM AND ECOLOGY 03: CAPITALISM AND OLIGARCHY

- Capitalism features a class division between (among others) owners (capitalists) and producers
(workers).

- The former have much greater control over economic institutions and society's wealth than other
classes.

- State action largely responds to the preferences of the ruling classes.

- Current empirical work (especially on the US and the Netherlands) finds that state action largely
responds to the top 10% (possibly far fewer) and special corporate interests. The rest have little to no
significant influence on ordinary policy-making.

- Since major ecological reforms threaten the short-term profits and power of capitalists and major
corporations, they arguably use their political power to prevent such reforms.

- This explains why governments have refused to take necessary action.

NOTE: This doesn't mean that nothing can be done. What it means is that there are powerful structurally
entrenched that oppose ecological reforms. Such interests have also opposed workers' movements, civil
rights movements, and others, which is why many argue that ecological movements should look to their
tactics of Direct Action

POSSIBLE EXPLANATIONS

- Election funding (but varies by country and plenty of counter-examples, e.g. Obama and energy
lobby).

- Class solidarity among layer of ruling elites (economic, political, military, etc.).

- Control over media, think tanks, etc.

- Social and paramilitary interventions

- International sanctions

- Threats of capital flight and strikes (+ "business confidence")

- Legal interventions

NOTE: regardless of much variation in preferred explanatory mechanisms, the problem

faced by many social movements remains similar: how to force the government to act in ways that are,
initially, contrary to the perceived interests of ruling elites

TECHNOLOGICAL FIXES:

- The Idea

- Jevon’s Paradox
ENERGY SOURCE EXAMPLE: PRICES vs. PROFITS

- Burning fossil fuels accounts for about 87% of CO2 emissions.

- Renewable energy sources like solar power are now cheaper energy sources than fossil fuels and
easily available most places.

- This gap is expected to increase because renewables, unlike fossil fuels, follow "learning curves":
"with each doubling of the cumulative installed capacity their price declines by the same fraction".

- Yet BP, Shell, and other corporation are continuing large-scale expansion in oil and gas, while
spending only a couple of percent of investment on renewables, much of which powers further oil
extraction.

- Why?
- They aren't profitable enough for major corporations: wind and solar make 4-6% or 5-8% ROE,
depending on estimates.

Take-aways:

(1) expected profits, not cost, is the most important driving factor for investment

(2) renewable energy sources are not profitable enough compared fossil fuels for major corporations to
transition (with necessary speed and scale)

(3) market prices and corporate mechanisms cannot be relied upon to address the climate crisis

GREEN GROWTH?

- Rests on the idea that GDP can be absolutely decoupled from resource use and carbon emissions.

- Widely promoted by the OECD, World Bank, and others.

- Critics argue that: No empirical evidence supporting this as feasible or likely.

- Rests on unfounded assumptions that don't hold globally.

- Evidence suggests that it's practically impossible.

THE FEASIBILITY OF DECOUPLING 01

"The empirical data suggest that absolute decoupling of GDP from resource use (a) may be possible in
the short term in some rich nations with strong abatement policy, but only assuming theoretical
efficiency gains that may be impossible to achieve in reality; (b) is not feasible on a global scale, even
under best-case scenario policy conditions; and (c) is physically impossible to maintain in the longer
term. In light of this data, we can conclude that green growth theory - in terms of resource
use.- lacks empirical support. We are not aware of any credible empirical models that contradict this
conclusion. “
THE LOGIC OF DIRECT ACTION

- Very abstractly ruling elites face a choice between 2 kinds of option:

A) Destroy the environment - Short-term payoff = 5

B) Save the planet - Short-term payoff = 4

- The situation faced by the ecological movements is:

- They can't change the fact of elites being driven by power and short-term profits (right now)

- They can't change the value of option (b) (right now).

- They can change the value of option (a).

- How? By reducing its payoff/increasing its costs through Direct Action/Civil Disobedience

KINDS OF ACTION AND THEIR EFFECTIVENESS

• Three main kinds of actions:

1. Voting, campaigning, calling elected officials. Does very

little.

2.Lawsuits. Can impose costs in terms of money and public

image, and shift terrain of struggle. Some effectiveness.

3. Direct Actions/Civil Disobedience that successfully

disrupt the profits and stability of powerful elites.
Examples: strikes, blockades, boycotts, divestment
campaigns, riots, etc.

• 3 works by changing the value of option (a). It imposes costs on

elites for sticking with option (a), giving them a powerful
incentive to pick option (b) instead.

A) Destry environment - New short term pay-off = 3

B) Save the planet - New short term pay-off = 2

EFFECTIVE DISRUPTION

Definition: disruption is simply "the application of a negative sanction" (Piven & Coward, Poor People's
Movements, p. 24)

When is disruption most effective? When it directly targets the profits and stability of specific ruling
elites.

Offers elites a choice: try to (;) ignore; (li) repress and coopt; or (li) give in to demands.

• To succeed, movements must make sure that the costs too high for (i) to be viable; to make sure that
(i) fails; so that (in) becomes elites' only option.
Evidence shows they are most likely to win if they target: corporations and state agencies.

Examples: labour organizing leading to the New Deal and social democracy; civil rights movement
leading to desegregation.

WHAT LEADS TO FAILURE?

- Repression (state, private/ corporate).

- Cooptation

- Dependence of state and corporate donors.

- Engaging in party politics.

- Forming new institutions that employ and pacify

organisers.

- Engaging in party politics.

- Compare and contrast: winning elections without a DA movement; DA movement without

engaging in elections.

- History of the labour movement and civil rights movement.

LECTURE 13: KEYNESIANISM AND THE LIBERAL

PARADIGM
MICRO vs. MACROECONOMICS

Microeconomics: concerned with how supply and demand interact in individual markets.

• The subject is typically a single market, consumers (consumer demand theory), or firms (production
theory).

• Applications are numerous and easily recognizable in the real world:

• Trade, industrial organization, labor markets, financial markets, etc.

• These can still involved government decision making:

• E.g., effects of minumum wage, taxes, price supports, market power for monopolies,
etc.

Macroeconomics: the study of the economy as a whole, and how it works.

• What people mean when they talk about “the economy.”

• Unit of analysis is often a nation.

• The government is a major player in macro, as are other governments.

• Deals with large, aggregate relationships:

• National income and national savings.

• National income in the long run

• Deviations from equilibrium and the short run and how to design policies to stabilize national
economies (i.e., large fluctuations in growth and prices).

• Recognizes failures of the market economy and the role of government in correcting them.

SOME BUILDING BLOCKS

• What is GDP?

• Often considered the best measure of how well the economy is performing.

• Two ways to look at GDP:

• 1. The total income of everyone in the economy.

• 2. The total expenditure on the economy’s output of goods and services.

• The market value of all final goods and services produced within an economy in a given period of time.

• Y = C + I + G + (X − M)

GDP = Consumption + investment +govt spending + net exports

TOOLS OF MACROECONOMICS

Fiscal policy tools

• Government spending

• Taxation

• Monetary policy tools

• Interest rates

• Expansionary (stimulating economic activity and increasing employment and inflation)

• Increase spending, decrease taxes, decrease interest rates

• Contractionary (dampening economic activity and decreasing employment and inflation)

KEYNESIANISM

Partially reconciled opposing views of capitalism:

•Efficiency of the market economy vs. its shortcomings, particularly episodes of massive unemployment.
•To Keynesians, aggregate demand is volatile and market economies experience inefficient
macroeconomic outcomes.

•Recessions when demand is low and inflation when demand is high.

•Therefore, government intervention through public policies that aim to achieve full employment and
price stability are justified.

KEYNESIANISM

•“If we discovered that space aliens were planning to attack, and we needed a massive build-up to
counter the space alien threat, and inflation and budget deficits took secondary place to that, this slump
would be over in 18 months.”

- Paul Krugman ---Nobel Prize winning economist, 2008.

KEYNESIANISM

According to Keynesian economics, state intervention is necessary to moderate the booms and busts in
economic activity.

Inadequate overall demand could lead to prolonged periods of high unemployment.

i
Unemployment

Primarily guided by the private sector but with activist government intervention to smooth business
cycles of utmost importance.

Pre-Keynesian view: government budgets should be balanced

COUNTERCYCLICAL ECONOMIC POLICIES

When the economy is running too hot and there is high inflation: - Goal :
Budget suphs

- Raise taxes to decrease consumption.

- Raise interest rates to decrease investment.

- This will typically create a budget surplus.

When there is a recession: >

-

Goal :
budget deficit

- Increase government spending (and deficits) to stimulate employment and stabilize wages.

- Reduce interest rates to increase investment.

- This will typically create a budget deficit.

Governments should do this proactively and in the short run, not wait to long-run equilibrium to
reappear.

- “In the long run, we are all dead.” –John Maynard Keynes
Does not mean government should constantly intervene, but should in times of crisis, and in proportion
to the crisis at hand.

KEYNESIANISM

Dream scenario for Keynesians is:

1. No business cycles (i.e., booms and busts).
2. Low and stable inflation.
3. Low unemployment
4. Trend of high productivity and real GDP per worker.

But goals 2 and 3 are in conflict.

And decision is not just academic.

After 1980s downturn, US Fed engaged in expansionary macroeconomic policy. Bundesbank, afraid of
inflation, did not.

CRITIQUES OF KEYNESIANISM

Austrian School of Economics

Business cycle is natural and government intervention only makes it worse.

1970s “stagflation”

High unemployment and high inflation? What now?

New classical economics

Keynesians, you’re too obvious.

Rational market actors therefore anticipate the changes and counteract them.

Today, some would argue there is a newer “consensus” in which households and firms have rational
expectations, but market failures that require government intervention also exist.

KEYNESIANISM COMES ROARING BACK

Great Depression

Keynes argued for reducing interest rates and using government spending on infrastructure. •2007-2008
financial crisis (aka Great Recession)

USA:

2008 Emergency Economic Stabilization Act

2009 American Recovery and Reinvestment Act (spending and tax cuts)

Interest rates cut to zero

Japan: Stimulus equal to 5% of GDP

EU stimulus plan and individual country plans

KEYNESIANISM COMES ROARING BACK?

The capacity of the state to implement Keynesian economic policies is dependent upon political will.

Example: 2009 American Recovery and Reinvestment Act (ARRA)

- 0 Republican members of the US House of Representatives and 3 Republican members

of the US Senate voted for.

CARES Act: Largest economic stimulus in US history.

AN ASIDE: THE POLITICAL BUSINESS CYCLE

How might Keynesian economic ideas be abused by politicians?

Politicians might increase government spending and decrease taxes before elections to improve the
economy, then decrease spending and increase taxes after elections.

This is called the “political business cycle.” (Nordhaus 1975)

Is the political business cycle real?

“There are… clear electoral effects on macroeconomic variables. However, at least for the opportunistic
model in developed countries, there is much less hard evidence than both the theoretical models and
the conventional wisdom about the prevalence of "election-year economics" would suggest.”

Alesina, Roubini, and Couhen(1997) find no empirical evidence for the political business cycle across a
sample of 18 OECD countries.

MILTON FRIEDMAN

Classical liberal

Won the Nobel Prize in Economics in 1976

For work on monetarism, not his ideas in Capitalism and Freedom.

But Capitalism and Freedom has arguably had a larger impact on political leaders, public opinion, etc.

Friedman sought to revive a market-liberal tradition to counter socialism, both in the extreme form of
Eastern European communism and in the more moderate form of the Western European welfare state.

“The advocacy of ‘democratic socialism’ … is a delusion.”

MILTON FRIEDMAN

Economic freedom as a critical component of freedom, and therefore one that should not be limited.

Example: the government “forcing” you to pay into a retirement fund is depriving you of your economic
freedom.

Capitalism is therefore a “necessary condition for political freedom” because it allows for freedom of
choice.

Absense of coersion in both economic and political matters is a defining characterstic of freedom for
Friedman.

“Underlying most arguments against the free market is a lack of belief in freedom itself.”

MILTON FRIEDMAN

How does capitalism provide freedom in Friedman’s view?

Reduces the number range of issues that must be decided through political means.
It serves as a check on political power.

It allows ideas to spread as long as you have the funds to spread them (i.e., makes dissent easier).

It allows individuals to earn a living regardless of other beliefs.

It reduces discrimination.

Consumer is protected from coercion by a seller because there are other sellers.

Employees protected from coercion by employers because there are other employers.

MARKET LIBERALS ACKNOWLEDGE ROLE OF GOVERNMENT

The consistent liberal is not an anarchist”

Not just Friedman

E.g., one of his predecessors and influences, Friedrich Hayek

The Road to Serfdom

Competition requires legal foundations and government regulations.

MILTON FRIEDMAN: ROLE OF GOVERNMENT

Determine, arbitrate, and enforce the rules of the game.”

Remember this? What are the ‘rules of the game’ of a society called?

For Friedman, capitalism requires that the government:

Prevents one individual for coercing another

Enforces laws and contracts

Protecting property rights

Manages money

MILTON FRIEDMAN: ROLE OF GOVERNMENT

We may also want to do through government some things that might conceivably be done through the
market but that technical or similar conditions render it difficult to do in some way.”

Monopoly

Neighborhood effects (i.e., externalities)

MONOPOLY

A market with an absence of competition.

Monopoly sells goods for which no close substitute exists and which they can therefore sell at a higher
price than would multiple firms in competition.

When a company has little to no competition and can therefore set its own terms and prices. Monopolies
can also price discriminate.

How does monopoly arise?

Abuse of market power

Prohibitive costs of entry

Ownership of all inputs •Collusion

NATURAL/TECHNICAL MONOPOLY

Sometimes it is technically more efficient to have a single producer.

Often arise due to high start-up costs.

Demand within a relevant market can be satisfied at lowest cost by one firm rather than more

Typical examples:

Public utilities such as water, electricity, railways, telecommunications, mail, etc.

Natural monopolies require regulation to avoid abusing market power and setting extreme prices.

NEIGHBORHOOD EFFECTS/ EXTERNALITIES

Friedman accepts need for government to regulate externalities:

But as usual, to the most limited possible degree.

“When government engages in activities to overcome neighborhood effects, it will in part introduce an
additional set of neighborhood effects by failing to charge or compensate individuals properly.

E.g., should tax or prohibit someone from polluting a river.

But he thinks, e.g., a nature reserve, could be privatized.

“If the public wants this kind of an activity enough to pay for it, private enterprises will have every
incentive to provide such parks.”

MILTON FRIEDMAN: WHERE GOVERNMENT HAS GONE TOO FAR IN ECONOMIC MATTERS

Price supports for agriculture

Tariffs Government control of output
Rent control
Minimum wage
Most regulation of industries
Control of what can be said on TV or radio
Government-run or mandated retirement programs
Licensensure requirements (e.g., liquor license)
Public housing Military conscription
National parks
Toll roads

DO MODERN ECONOMICS AGREE?

- Tarrifs

Local ordinances that limit rent increases for some rental housing units have had a positive impactover
the past three decades on the amount and quality of broadly affordable rental housingin cities that have
used them.”

- Most regulations on industries (another example is detailed banking regulations)

“Regulatingthe leverage and liquidity of non-bank financial intermediaries would substantially improve
financial stability.”

- Government-run mandated retirement programs

“There are net social benefits to adjusting retirement ages for state-financed pension systems upwards,
so that revised retirement ages better reflect longer life expectancies.”

MILTON FRIEDMAN: ROLE OF GOVERNMENT

Negative income tax

•Give people a % of the difference between their income and an income cutoff.

•E.g., if the income cutoff was set at €40,000, and the negative income tax percentage was 50%,
someone who made € 20,000 would receive € 10,000 from the government.

If they made € 35,000, they would receive $2,500 from the government. Friedman thought of this as a
better system than welfare.

• Just give people cash instead of conditional welfare benefits.

• •E.g, instead of Healthcare allowance (Zorgtoeslag), Rent benefit (Huurtoeslag), Children’s allowance
(kinderbijslag), Unemployment benefit (WW uitkering).

• •How does this differ from the modern-day idea of UBI?

• •With UBI everyone receives the same amount of money, regardless of income level.

MILTON FRIEDMAN: ROLE OF GOVERNMENT

Is it empirically supported?

Multimillion-dollar field experiments in the United States in the 1960s and 1970s were implement to
measure its effects on labor supply.

Experiments found that the effects of the negative income tax on labor supply may differ across places,
across groups and across time.
So, it’s not clear that it necessarily discourages work, which is often the biggest criticism of such a
policy.

WAS MILTON FRIEDMAN INFLUENTIAL?

We know Marx was influential: his ideas sparked revolutions.

In a way, so did Milton Friedman’s

Strongly influenced US president Ronald Reagan and British PM Margaret Thatcher

PRIVATISATION

UK 1980s

British Airways, British Telecom, British Gas, British Rail

Japan

Japan Rail, Nippon Telephone and Telegraph, Japan Post (ongoing)

In the United States

telecoms, railroads, electrical power generation and transmission, gas distribution, oil, coal, etc. mostly
privately owned already.

CHARACTERISTICS OF NEOLIBERALISM

In general, favor limiting the role of government in the economy and allowing market forces to operate as
freely as possible.

•Free market as the ideal

•Advocate for policies designed to remove barriers from markets.

D
•Ostry, Loungani, Furcerigive two primary components:

1. Increased competition

2. 2. Smaller role for the state.

CHARACTERISTICS OF NEOLIBERALISM

&
Ostry, Loungani, Furceriidentify three primary failures:

1. Did neoliberal policies actually lead to increased growth?

2. Increased inequality.
3. Increased inequality in turn hurts the level and sustainability of growth.

• IMF conclusion: inequality associated with economic instability, with shorter growth periods when
inequality is high. (short run)
 • •OECD conclusion: income inequality has a negative and statistically significant effect on medium-
term growth. (medium-to-long run) •

• Why?

• Weakens aggregate demand

• Worsens inequality of opportunity

• Less likely to make public investments that enhance productivity (e.g., public transportation,
infrastructure, and education).

ECONOMICS AFETR NEOLIBERALISM

Naidu, Rodrik, and Zucman (2020)

•“Provide an overall vision for economic policy that stands as a genuine alternative to the market
fundamentalism that is often—and wrongly— identified with economics.”
•Identify the following as key sources of growing inequality:

•Deregulation

•Financialization

•Dismantling of the welfare state

•Deinstitutionalization of labor markets

•Reduction in corporate and progressive taxation

•Pursuit of hyper globalization.

ECONOMICS AFTER NEOLIBERALISM

Argue that neoliberal policies ideas implemented in the 1980s of the are not supported by economic
theory or statistical evidence.

•“Neoliberalism is not the consistent application of modern economics but its primitive, simplistic
perversion.”

•Urge us to look at the data, as recent findings, have found that, e.g.:

• International trade produces large adverse effects on some communities

•Minimum wages do not reduce employment

•Financial liberalization produces crises rather than faster economic growth.

•“When an economist draws a supply-and-demand diagram on the blackboard, she may not list all the
institutional prerequisites that lie behind the two curves.”
Lect 14
DEMOCRACY AND ECONOMIC DEVELOPMENT

•How is it possible to combine capitalism and democracy?

•Capitalism produces inequalities
•Democracy redistributes power in an egalitarian fashion.
•Are the two in tension?
•Why don’t the poor “soak the rich.”
•The majority of voters are relatively poor, so shouldn’t they favor taxing the rich heavily and
redistributing their wealth downwards?
•How can we think about who gets how much?
•Marxist thought tells us that capitalism persists because lower classes are repressed. But what if
they’ve just managed to strike a democratic bargain?

Seminal theories
•Meltzer and Richard
•Average income tends to be right-skewed (i.e., greater than median income).
•Median voter is decisive.
•The rate of taxation is therefore determined by two factors: 1.Where median income is relative to the
mean. 2. Voter turnout among the poor (they more they vote, the higher are taxes).
•Greater inequality leads to greater taxes.

The model
•Individuals have different rates of productivity.
•Income = 1−𝑡𝑛𝑥+𝑟 •Where t is taxes, n is hours worked, x is productivity, and r is redistribution.
•Gross salary = 𝑛×𝑥
•𝑟=𝑡𝑦 •
Where t is taxes and y is mean income.
•r is a lump-sum payment that goes to everyone.
•Assumption: as t ⬆ n ⬇ , because workers start to work less.
•High x, taxes reduce income by a lot b/c 1−𝑡𝑛𝑥.
•Low x doesn’t lose much from increase in t but gains a lot from r.
•So high x wants low t, and low x wants high t.
Group chooses ideal tax rate of the median voter, which depends on the distribution of x.
•If the median voter doesn’t work, they set taxes at the maximum and receive the largest redistribution
payment.
•If median voter earns less than mean, they choose a tax rate that maximizes their income (as a function
of working + redistribution payment).
•If the median voter earns mean income or more, they set taxes at 0 (because they are necessarily worse
off through any redistribution).
If median income equals mean income, there is no taxation because the median voter is no better off
with taxation (they lose the same in tax as they gain from redistribution).
• Income distributions tend to look like this, so greater inequality leads to greater taxes. •Those who earn
less than the mean income pay less in taxes than they receive in redistribution, while everyone else pays
more than they get in return.
•So, the median voter wants a higher tax rate the higher mean income is relative to median.

Implications
•Tax rates always lower under autocracy than democracy
• In autocracy taxes are decided by a small, wealthy elite that will not want to tax away their own wealth.
•The higher mean income is relative to median, the higher are taxes and redistribution. •Inequality
impacts the tax rate andthe amount of redistribution.
•Low inequality means that there is little difference between the income of the median voter and mean
income, so little taxation and redistribution is demanded.
•High inequality means that the median voter earns far less than average, anddemands more taxation.
Meltzer and Richard criticisms
• Implies that since everyone receives the same amount in return the wealthy always incur losses from
any positive tax rate and therefore always prefer a tax rate of zero.
•Empirically untrue. Autocracies tax. Taxation can also be regressive, especially as a check on a new
powerful class.
•Growth in welfare states began after voting (really after the Great Depression and WWII), so how does
MR explain this?
•Robin Hood paradox
•More equal societies redistribute more (e.g., Sweden) and less equal societies redistribute less (e.g.,
USA).
•Assumptions necessary for median voter to be decisive.
1. Voters are fully informed
2. Voter preferences can be arrayed along one dimension (e.g., left to right)
3. Each voter has a single most-preferred outcome
4. Decisions are made by simple majority rule
•So, median voter theorem doesn’t hold in a lot of scenarios.
•E.g., when policy preferences are multi-dimensional (not just about income/redistribution). •Under
different kinds of electoral systems.
•When people vote ideologically rather than rationally according to economic interest.
•Does politics become less democratic as society becomes more unequal?

Capitalism and Democracy

•Arises when elite controlling the existing regime change political institutions and extend voting rights.
Why do they do this?
•Acemoglu and Robinson: “Democracy arises when concessions are not credible, and repression is not
attractive because it is too costly.”
•Elites faced with threat of revolution and taking of their power.
•“Concessions not credible” = concessions not good enough to dissuade populace from revolution.
•Transition to democracy shifts political power away from the elite to the citizens, thereby creating a
credible commitment to future pro‐majority policies and institutions.
•“Repression too costly”
•Leads destruction of assets and wealth and potentially sanctions.
• If repression fails, it can cause a revolution.

The case of the UK

•17thcentury UK political conflicts led to introduction of political institutions that limited the power of the
monarchy.
•Changes in political institutions greatly improved economic institutions, because those with political
power had commercial and capitalistic interests (e.g., political reformers wanted strengthened property
rights).
•Strong property rights and development of financial markets encouraged investment and additional
economic growth.
•Democracy àEconomic growth and capitalistic expansion.

Boix, Carles Democracy and redistribution

•Builds on Meltzer and Richard
•Autocratic elites fear democracy (and the redistribution that comes with it) less when the median voter
has income similar to their own.
•Democracy is therefore more likely to occur under relatively equal societies, as elites have little to lose.
•Secondary prediction: capital mobility matters
•Elites more likely to accept democracy when they have mobile assets that can’t be expropriated or
heavily taxed by the masses.
•In sum, elites allow democratication when the threat of the poor seizing and/or redistributing their
assets is low.
additions:
Additional predictions: •If poor disorganised(low resources): stable dictatorship •If poor powerful: civil
war (rich see it as worthwhile to repress) •If poor powerful and the rich see that (and so do not repress):
communism

Acemoglu and Robinson.Economic origins of dictatorship and democracy. 2006. •Same argument as
Boix with regard to asset specificity.
•“Inverted U” shaped relationship between inter-group inequality and likelihood of transition to
democracy.
•Like Boix, elites fear high cost of redistribution when inequality is high.
•But, in contrast to Boix, democratization also doesn’t occur under low inquality because there is no
demand for it --- everyone is happy under the status quo.
•Therefore, democratization occurs at middling levels of inequality.

Ansell and Samuels

•The middle class is the agent of democratization.
•Not about elites trying to protect against expected losses. •Industrialization brings about growing
inequality.
•A new middle class finds themselves under threat of wealth appropriation by autocracy.
•By pushing for democratic reform, they are pushing for the ability to rewrite tax and regulatory rules in
their favor to protect their wealth.
So, greater industrial inequality àhigher likelihood of democracy
•Greater intersectoral inequality also increase probability of bourgeois rebellion and democracy for three
reasons:
1. Probability effect àbourgeois richer than everyone else, making it more likely their revolution succeeds.
2. Taxation effect àThe more wealth the bourgeois have the less they want it expropriated.
3. Public goods effect àIndustrialization also makes society wealthier in absolutely terms, leading to
higher tax revenue and more public goods under a rules-based taxation system.
Exception is land inequality àlandowners support autocracy because it is a fixed asset that they don’t
want taxed or taken.
•High land inequality means the elite are wealthier than the new industrial capitalist class, making it less
likely a democratic revolution will succeed.
•Low land inequality implies the new capitalist class owns more land and doesn’t want it taxed or
appropriated by the autocracy.
•New capitalist class / bourgeoisie is more likely to push for democratization when land equality is low.
Democratization is therefore not as much about inequality and forceful redistribution for A&S as it is for
Boixand A&R.
•Instead, it is about the creation if institutions, laws, and norms, that protect a rising middle class (i.e.,
the bourgeoisie) from expropriation by elites.
•Pre-industrial societies tend to be uniformly poor and therefore relatively equal. •Industrialization means
that productivity of industry relative to land increases.
•As inequality increases with industrialization, new capitalist class wants rules to protect from
expropriation by the current ruling class.
•Political power as a means of protection.

But does capitalism require democracy?

•China’s GDP growth from 1979-1999 roughly 9% per annum.
•USA from 1870-1890 = 5%.
•Only postwar Japan and South Korea match this.
•In 1978, China encouraged the formation of private businesses, liberalized foreign trade and
investment, relaxed price controls, and invested in industry and education.
• Introduced profit incentives to rural collective enterprises, farms, businesses, and investors. •Granted
greater autonomy and property rights to farms and enterprises.
 •Millions left agriculture for both rural enterprises and urban businesses.
•Market-oriented reforms introduced profit incentives to rural enterprises and small private businesses.
•Encouraging FDI spurred investment and linked China with global markets.
•Massive increase in wealth and persistent increase in inequality.
•New rising capitalist class.
•Where is Ansell & Samuel’s democratization?
•What if institutions, laws, and norms, that protect a rising middle class from expropriation by elites are
grantedby an autocratic regime?
•People are happy if they are consistently getting richer.

Modernization and democracy

•Empirically, is there a relationship between development and likelihood of democracy? •Started with
Lipset(1959), who suggested that the more well-off a nation, the more likely it will sustain democracy.
Noticed correlation between per capita income and democracy. •Przeworski, Alvarez, Cheihub, and
Limongi(2003) say no.
• Increases in development (as measured by per capita income) do not increase the likelihood of
transitions to democracy, but doincrease the stability of pre-existing democracies.
•Boixand Stokes (2003) counterargument:
•There is a relationship when looking at longer time horizons (above only look at postwar period) or when
replacing per capita income with levels of income equality.
•Development facilitates greater equality which leads to democracy. Harkens back to Boix’soriginal
argument.
•Contested highly today, and difficult to argue that there is a causal effect of income per capita on
democracy.

Democracy and growth

•What about democracy and economic growth? Is economic growth higher in democracies? •We all
know about China’s extraordinary growth. We can also point to e.g., Singapore. •Correlation between
democracy and income.
•Acemoglu, Johnson, Robinson, and Yared(2005) find this correlation is notrobust to controlling for
factors that impact both income and political institutions. Disappears with minor statistical adjustment.
•Aghion, Alesina& Trebbi(2007) find the following:
•Democracy influences productivity growth in different sectors differently and this differential effect may
be one of the reasons of the ambiguity of the aggregate results.
•Political rights help advanced sectors grow, but don’t matter for low-tech industries. •Democracies have
much lower entry barriers than autocracies and are more rule-based, much makes taking entrepreneurial
risks more attractive.

Natural resources
•Is democratization less likely when a country has abundant natural resources (i.e., the “resource
curse”)?
•There is a correlation between authoritarianism and resource export-oriented economies. • Is this a
causal relationship?
• Probably not.
•Could be that dictators tend to invest in enterprises that are “difficult to expropriate because running
them requires proprietary knowledge of markets and technologies,” leading to large % of GDP in
resources. (Haber 2009)
•Dunning (2008) also challenges the “resource curse.”
• In a democracy, resource wealth can increase prosperity without the need to expropriate capital from
elites.
•Positive relationship between democracy and resource access in Latin America.

Theory vs. description

We have just seen a lot of complicated theoretical models, and they are clearly very contested.
•Why is this better than just accurately describing the state of the world and what happened? •Without
theory we can’t make predictions and we can’t prescribe solutions.
•We want to be able to explain the circumstances under which, e.g., democracy will arise and how it
relates to inequality.

The role of parties

•A number of explanations have been positited over the years.
•Moving beyond the median voter theorem.
•Parties have ideological preferences separate from the median voter.
•Parties play to the “selectorate” rather than the median voter.
•Empirically, there are differences between parties and countries tend to be dominated by center left or
center right parties.

Coalitional politics
•People care about more than just redistribution.
•Distributive politics is therefore multidimensional, not just centered around redistribution. •An example:
Roemer (1997, 2001)
•All you have to do is introduce a second dimension to break the basic Meltzer & Richard redistribution
structure.
•E.g., the right can appeal to poor but religious or racist voters. The left then responds by attracting
wealthy but non-religious or racist voters.
•The pure income-based coalition therefore breaks down and there is no longer a single pro-welfare left
and anti-welfare right.
•Implies that countries with more policy dimensions have less redistribution.
•Alesina and Glaeser (2004) test the logic in Roemer’s (1997, 2001) model empirically.
•Find that if people are altruistic only towards their own ethnic group, they will not redistrubute to a
disproportionately poor minority.
•Use this argument to explain the discrepancy in redistribution between Western Europe and the United
States.

Electoral systems •Carey and Shugart (1995)

•Electoral systems that encourage personalistic followings tend to target money to narrow groups.
•Example of Japan: single-non-transferable vote.
• 3-seat constituency, the 3 candidates receiving most votes all win office.
•This meant that candidates from the same party competed against each other.
•To differentiate themselves, candidates offer “pork,” like a “bridge to nowhere.”
• “Larger prizes go to the more supportive groups within a district, but across districts, they go to the
least supportive districts.” (Catalinac, Bueno de Mesquita, & Smith, 2020)
Electoral systems
•Carey and Shugart (1995)
Personn and Tabellini (1999, 2000)
•In first past the post systems where swing voters are concentrated in certain districts (like in the USA),
parties have an incentive to ignore “safe” districts and focus on the swing districts. •So, money flows to
the swing districts.
•What about proportional represenation (PR)? •Empirically, spend more on public goods and redistribute
more.
•Why? Multiparty coalition governments each want to spend on their own group, and so spending
increases overall.
•Center-left coalitions in PR also tend to tax higher

Varieties of capitalism
•We will talk about this more next week.
•Places firms at the center and argues there are two general “varieties” of capitalism, based on how
firms, investors, employees, suppliers, and customers coordinate.
1. Liberal market economies (LMEs) •Coordination occurs primarily through market mechanisms. •E.g.,
wages are set by market forces.
2. Coordinated market economies (CMEs) •High coordination between the above actors (and
government). •E.g., wages set by collective bargaining between employers' associations and trade
unions.
•Majoritarian systems tend to be LMEs, PR CMEs.

Example: the role of firms and workers

•Recent work suggests employers did not uniformly oppose social policies. Some played proactive role
in the formation of social policies ifincentives aligned.
•Iverson and Soskice (2001)
•Workers with specific skills face unemployment or a significant decline in income in the event of job
loss.
•These workers have strong incentives to support social policies that protect them against such
uncertainty.
• Firms will therefore lobby the state for protection against these risks to attract/retain workers.
•For general skills workers, costs of social protection weigh more prominently.
•Critique: Trade protection as social policy to protect against uncertainty.
•Generally supported by general/low-skilled workers, not high skilled.