Lecture notes: The basics

Two different worlds

a world of politics

a world of economics

international political economy is a combination of the two

LSE, “International Political Economy”

IPE at LSE

interactions of markets and policy

  • economics neglects politics and vice-versa

international finance, causes of financial crisis in 2008

  • trade and investment
  • environment

IPE with institutions

  • security and political economy
  • economic sanctions
  • politics explains timing

a lot of political propaganda

Other topics

  • the discipline of neoclassical economics
  • the nature of the market
  • method of comparative statistics
  • intellectual limitations
  • economists and public policy
  • comparisons of economics and political economy
  • distribution of wealth and economic activities
  • national autonomy
  • the politics of international regimes
  • theory of hegemonic stability
  • governance of the global economy

Clifton L. Ganus, Capitalism

More on Clifton L. Ganus, Jr here.

a few quotes

“In order to better understand the advantages of our way of life.”

“So that Communism or Socialism never becomes established in America.”

what is capital?

capital as raw material, but as productive resources, energy and technology

money at work producing things — capitalists are the ones in charge of the process

capitalism as a system for producing new wealth

different kinds of capitalism

  • state capitalism
  • monopoly capitalism

American capitalism as quite unique

three great pillars

private ownership of property

  • home ownership –
  • this is the target of Communists

the profit motive –

  • stimulus that brings private ownership to life – investing profits – everyone can be involved – all Americans can participate – we all look for profits – desire for learning – this is part of all human behavior

the open market

  • competitive markets – competition breeds technological developments and lower prices – the difference between early cars and recent models – the free market produced this – Henry Ford

American capitalism

is far more productive than all other systems — unprecedented way of producing wealth – unique in human history

“Socialism is good”

Sonmez, “Can Turkey’s New Economic Plan Restore Foreign Investor Confidence?” Al-Monitor, 2023

Meanwhile, the program forecasts that the country’s current account deficit will fall to $30 billion over three years. This, too, is ambitious, not least because this year’s gap could hardly be limited to $42.5 billion as the program projects.

**Current Account**: The current account is a key component of a country’s balance of payments (BOP). It measures the flow of goods, services, income, and current transfers between a country and its trading partners. The current account can be broken down into several components:

1. **Goods**: This covers the trade of tangible items, often referred to as “trade in goods” or “merchandise trade.” This includes things like machinery, food, and raw materials.

2. **Services**: This pertains to the trade of intangible items, often referred to as “trade in services.” Examples include tourism, banking, and software services.

3. **Income**: This refers to earnings from investments and labor. For instance, if citizens of Country A own assets (like property or businesses) in Country B, and they earn income from those assets, that income would be recorded here.

4. **Current Transfers**: These are one-way transfers of assets, where nothing is received in return. Examples include remittances sent by foreign workers to their home countries, or international aid grants.

**Deficit in the Current Account**: A current account deficit means that a country is importing (buying) more goods, services, income, and current transfers from the rest of the world than it is exporting (selling). In other words, the total value of imports exceeds the total value of exports.

**Why does it have a deficit?** Several factors can contribute to a current account deficit:

1. **High Domestic Consumption**: If a country’s residents are consuming more than they produce, they will need to import the difference.

2. **Strong Currency**: A strong domestic currency can make imports cheaper and exports more expensive, leading to an increase in imports and a decrease in exports.

3. **Lack of Competitiveness**: If a country’s goods and services are not competitive on the global market, it might struggle to export.

4. **Economic Growth**: Faster economic growth compared to trading partners can lead to increased imports. As income rises, consumers may demand more imported goods and services.

5. **Investment Surges**: If a country is an attractive destination for investment, it might import more capital goods.

It’s essential to note that a current account deficit is not inherently “bad.” It can indicate that a country is an attractive place for foreign investment or that it’s going through a phase of economic growth and expansion. However, sustained and large deficits might indicate structural economic problems and can lead to vulnerabilities, especially if financed by short-term capital flows or excessive external borrowing.

  • Reduced Import Capacity: A country needs foreign currency to pay for imports. Depleting reserves can reduce a country’s ability to import vital goods like oil, machinery, or even basic necessities.
  • Potential for Financial Crisis: In extreme cases, rapid depletion of reserves, especially if accompanied by large short-term debt obligations, can lead to a balance of payments crisis. This may necessitate drastic measures like imposing capital controls or seeking bailouts from international organizations.
  • Policy Tightening: To restore confidence and stabilize the economy, governments might introduce tighter monetary policies (like higher interest rates) or fiscal austerity measures, which can slow down economic growth and lead to higher unemployment.

Inflation

Exchange rates

Foreign investments

Turkey at Trading Economics

Why is Turkey’s inflation so high?

“Analysts and economists say the policies Turkey has adopted are an outgrowth of Erdogan’s worldview – a combustible mix of Islam and paranoia, combined with a poor understanding of economics.”
“The big problem basically is that Erdogan refuses to raise interest rates,” says Gallia Lindenstrauss, a senior research fellow at the Institute for National Security Studies in Tel Aviv. “One reason is religious objections. Another is that he believes there’s a world interest rate lobby that’s seeking to weaken Turkey, and that rate rises are only good for the lobby. Another is that [he believes] his policies will increase exports and spur economic growth that will compensate the public for inflation.”
The “interest rate lobby” has been a bugbear of Erdogan’s for some time and explains why he is so determined to wean the Turkish economy off foreign capital. It carries antisemitic overtones, which have never been articulated by the president himself. However, they do surface in the pro-Erdogan media, which speaks, among other things, of a coalition of Jewish financiers allied with the Catholic Opus Dei and the Illuminati (the mythical secret society often cited by conspiracy theorists).
Liam Peach, a senior emerging markets economist at Capital Economics in London, says reducing Turkey’s reliance on foreign capital will be a Herculean task. The country suffers low rates of savings, and runs persistent and sizable current account deficits that need to be covered with outside investment.
“The only real hope investors have in Turkey,” says Peach, “is a change when the election happens next year – a new party comes into power with a more credible economic policy.”

more on Turkey:

 

 

Interview with IMF Managing director Kristalina Georgieva

Outlook for the global economy

  • 2023 more difficult than we anticipated
  • inflation

a more expensive dollars

  • countries fall into recession
  • they take up loans in dollars and get into trouble

pandemic, war and inflation crisis

Policy

  • “monetary policy, tightening, has to be complemented by responsible fiscal policy”
  • “fiscal policy must be targeted to the most vulnerable parts of society”
  • “if monetary policy puts the foot on the brake and fiscal policy puts the foot on the accelerator, that is a recipe for a very bad ride.”

Like the UK during the previous government

  • getting their act together now

Big economies entering into long-term recession

  • slowdown in China and Europe
  • more resilient US economy
  • but US interest rates are not peaking yet — there might be more economic problems

the financial sector functions better today

concerned about fragmentation

  • increases the cost of what we produce

emerging markets

  • 25% are already in distress
  • true for 60% of poorer countries

“a time of high risk and risk of policy mistakes, we must make sure not to suffer self-inflicted injuries”

Arab countries

Egypt

  • bleeding reserves to protect their currency

flexibility of interest rates

  • we don’t want the Egyptians to feel that their currency is disappearing —
  • but you can’t use reserves to defend the currency

we are very open to helping people

  • avoid giving benefits to wealthy people, give the money to the vulnerable

Lebanon

the politicians are not doing what we suggest — please help us to help you

Tunisia

they own their own program, this is always a good thing

the Gulf countries

  • power of women’s participation
  • young people too

these are engines of growth

they are no longer doing pro-cyclical policies

  • boosting spending when the revenues are high

IMF Podcasts, “Miles Kimball on Measuring National Well-Being”

GDP how economies are doing, but how are we doing?

  • national well-being index
  • not the same as GDP

GDP as accountability for government

  • but you need a better estimate of our lives

how much we are producing

  • originally a measure of the size of one’s military
  • nothing about mental health issues

no way to measure the ultimate things that people care about

things we produce/consume is just a part of this process

people running the US never understood how unhappy people were

  • “what gets measured gets treasured”

including children

  • including the well-being of foreigners too?

Other limitations, omissions

economists establishing themselves in positions of authority

  • you have to look at the history of religion in order to come up with something similar
  • economics is taught as mathematical truth — not like another social science

claims to objectivity — homo economicus

rests on the simplifying assumptions

  • rationality — self-interest
  • maximization
  • ordering of preferences — everyone knows what they want and they never change their minds
  • perfect information regarding prices

these assumptions are obviously incorrect as shown by psychologists

  • still they have colonized other social sciences
  • cf. rational choice theory

assumption that human beings are selfish and greedy

  • the economics of the family, etc.
  • a profound impact on our understanding of the world

a sort of ideal world

  • compare the role of theory — making a model that you can manipulate

heterodox economics

  • institutionalists
  • Marxists
  • feminists
  • Austrian
  • post-Keynesian
  • etc

The nature and origin of money

Teresa May: “there is no magic money tree”

  • but this isn’t true — there are — they are called banks
  • basically all money is credit — it is loans

85% of British MPs have no idea where money comes from

  • they think it is printed by the government

credit-creating theory of banking

  • bankers wave a magic wand and make money appear
  • rather than loans being based in deposits, deposits themselves are the results of loans

post-2008 crisis

  • austerity — Conservatives: we have to tighten our belts
  • almost all economists: the government is not a family with a budget
  • but this is never admitted by politicians or discussed in media

central banks don’t control the money supply

  • they set the interest rate
  • money is not diverted from the private sector, it is added to the existing supply

the issue, iow

  • is money a finite resource or a flexible?
  • a physical commodity or credit, a social arrangement, circulating IOUs

best: a combination of the two

  • but different periods have come down on one side or the other

Labour Party under Corbyn:

  • four-day work week
  • universal basic income
  • Green Industrial Revolution
  • “Fully automated luxury communism”

Middle Ages:

  • everyone agreed that money was an abstraction

European expansion:

  • money comes to be equated with gold and silver
  • quantity theory of money

QTM money is wrong

  • if you double the amount of money in a country, it will no affect inflation as long as the rich get it and make golden toilets
  • what matters is spending

tightening the money supply — raising the interest rates

  • recession
  • 1 in 12 goes hungry in Britain

“the market is always right in the end”

  • that is, when the market is right, the end is declared to have arrived

Taxation

how income tax came to be the way to finance the state

  • it institutionalized a bias against government
  • everyone wants lower taxes
  • but there are so many other ways in which government can be financed

Hayekian mistake:

  • that macro-economics can be based on micro-assumptions
  • but there are emergent properties — states are not families
  • there is such a thing as a collective good

basic economic data:

Interest rates

Inflation

demand and supply

people have more money in their pockets

everyone won the lottery

too much money chasing too few goods

but also supply

what if supply is limited?

supply-chain issues

disruptions because of Covid

eg. bicycles — prices going way up

the war in Ukraine

  • gas prices going up

corporate greed

federal reserve

increase interest rates

  • first to banks
  • and the banks to everyone else

reducing spending by making money more expensive

supply shocks would resolve itself

inflation should go away on itself — no need to do anything

team transitory — inflationistas

too much money or not enough stuff?

risk of painful disruption

supply issues are far more difficult to control

they can’t stop the war in Ukraine

expectations of inflation

  • workers demand more money
  • vicious cycle