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What Is Political Economy

What political economy is

Definition of Political Economy

What is political economy Political economy is an interdisciplinary field of knowledge that studies the interrelationship between political processes and economic activity. In contrast to “pure” economic theory, which often abstracts from the political context, political economy recognizes that e...

Historical origin of the term The term “political economy” appeared in the 17th century and initially designated the science of managing the economy of the state. The word “political” comes from the Greek “polis” — city-state, and “economy” — from “oikos” (household) and “nomos” (law), that is, l...

The classical political economists — Adam Smith, David Ricardo, John Stuart Mill — did not separate economics from politics. For them, the study of production, distribution, and exchange was inseparable from the analysis of social classes, state policy, and international relations. Smith wrote no...

Modern understanding Today, political economy encompasses several interconnected lines of inquiry:

Power and the Distribution of Resources

Power and the distribution of resources At the center of political economy lies the question of power — the ability of some actors to influence the behavior, decisions, and destinies of others. Power determines who gets access to resources, who sets the rules of the game, and who bears the costs ...

Concepts of Power in Political Economy Political economists distinguish several dimensions of power:

Structural power — the ability to shape the very structure of choices faced by other actors. For example, owners of capital possess structural power, since their investment decisions determine the level of employment and economic activity. Governments are forced to take business interests into ac...

Instrumental power — direct influence on the decision-making process through lobbying, funding electoral campaigns, personal connections with politicians. Large corporations hire armies of lobbyists, form industry associations, and use their influence to obtain favorable regulatory decisions.

Institutions, Efficiency, and Justice

·Reducing transaction costs. Clear property rights, reliable contracts, and an efficient judicial system reduce uncertainty and the cost of doing business. Entrepreneurs can focus on production rath...
·Shaping incentives. Institutions determine which types of activity are rewarded. If intellectual property rights are protected, there are incentives to invest in innovation. If property can be seiz...
·Coordinating expectations. Institutions help coordinate the behavior of many agents. Shared "rules of the game" allow partners’ behavior to be anticipated and enable long-term planning.
·Distribution of resources and power. Institutions determine who has rights to which resources and who makes what decisions. The electoral system influences whose interests are represented in politi...
·Critical junctures—wars, revolutions, crises that disrupt the status quo and create a window of opportunity for reform
·Gradual change—the accumulation of small shifts that over time transform the institution
·Import of institutions—borrowing models from other countries, often under pressure from international organizations
·For economic development: sustainable growth cannot be achieved without high-quality institutions. "Good" economic policy does not work in an environment with corrupt courts, vague property rights,...
·For reformers: institutional reforms are more difficult than technocratic solutions. They affect the interests of powerful groups and require political strategies for coalition-building.
·For investors: institutional analysis is a key element of country risk assessment. Formal laws may be excellent, but it is important to understand how they work in practice, the nature of the judic...

Institutions, efficiency, and justice Institutions—"the rules of the game" in society—occupy a central place in modern political economy. They determine how economic interaction is organized, which types of behavior are encouraged or punished, and who has the right to make decisions.

Institutions are stable patterns of social interaction, backed by formal rules and/or informal norms. Nobel laureate Douglass North defined institutions as "the constraints that structure human interaction."

Formal institutions are written rules: constitutions, laws, contracts, regulations. They are created and modified through explicit political decisions. Examples: property rights, electoral systems, tax codes.

Informal institutions are unwritten norms, traditions, cultural practices. They are formed through repeated interaction and passed down from generation to generation. Examples: business ethics, norms of reciprocity, corrupt practices.

Classical and Modern Political Economy

Classical Political Economy → Marxist Political Economy → The Neoclassical Break → The Revival of Political Economy → Modern Approaches → Practical Significance

·Labor theory of value — the value of a commodity is determined by the amount of labor expended in its production
·Laissez-faire — minimal government intervention in the economy promotes general welfare
·Comparative advantage (Ricardo) — international trade is beneficial for all countries, even if one country produces all goods more efficiently
·Class analysis — society consists of classes (landowners, capitalists, workers) with different interests
·Surplus value — the source of capitalist profit is the unpaid labor of the worker
·Class struggle — the history of society is the history of class struggles
·Base and superstructure — economic relations (base) determine politics, law, culture (superstructure)
·The tendency of the rate of profit to fall — internal contradictions of capitalism lead to its crisis
·Public Choice theory — applies economic methods to the analysis of politics. Politicians, bureaucrats, and voters are viewed as rational agents maximizing their own interests. Key topics: voting, l...
·International Political Economy (IPE) — an interdisciplinary field at the intersection of economics and international relations. Analyzes the interaction of states, markets, and international insti...
·Comparative Political Economy — compares economic systems and development trajectories of different countries. Studies the diversity of capitalism models (varieties of capitalism), political determ...
·Formal political economy uses game theory models to analyze political processes. Voters, parties, interest groups are modeled as strategic players. This allows for precise predictions but requires ...
·Historical political economy emphasizes the significance of historical context, path dependence, and critical turning points. It is skeptical of universal models and highlights the specificity of d...
·Critical political economy continues the Marxist tradition, analyzing power, inequality, and exploitation in global capitalism. It challenges the mainstream's claims to neutrality and underscores n...
·Behavioral political economy integrates advances in behavioral economics, accounting for cognitive limitations, heuristics, and psychological biases of actors.
·Critical thinking. Different theories explain the same phenomena in different ways. Understanding alternative approaches allows one to critically evaluate arguments and avoid ideological traps.
·Analytical toolkit. Each approach provides specific tools of analysis. Public choice is useful for understanding bureaucracy behavior, NIE — for analyzing institutions, IPE — for international rela...
·Normative self-determination. Political economy is inevitably associated with values. Familiarity with different traditions helps one realize their own normative assumptions and participate in publ...

Classical and modern political economy Political economy as a discipline has undergone a long process of development — from the classical works of Smith and Ricardo, through Marxist criticism, to modern approaches that combine economic models with political analysis. Understanding this evolution ...

Classical political economy (late 18th — mid 19th century) was the first systematic attempt at scientific analysis of economic life. Its founders — Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mill — laid the foundation of economic thought.

The classics did not separate economics and politics. Smith in "The Wealth of Nations" analyzes not only markets, but also the role of the state, justice, education. Ricardo was involved in practical politics and used his theory to justify free trade.

Karl Marx developed and radically reinterpreted the classical tradition. His political economy became a critique of capitalism as a system of exploitation.

Methodology of Political Economy Research

·Natural experiments — situations where changes in policy or institutions occur for reasons unrelated to the studied outcome. For example, colonial borders drawn with a ruler without regard for loca...
·Randomized experiments are increasingly used in the political economy of development. Random assignment of programs (for example, conditional cash transfers) among villages makes it possible to acc...
·Multiplicity of methods — the use of different approaches to test the same hypothesis. If results are robust under different specifications, data, and methods, this increases confidence in the find...
·Macroeconomic data — GDP, inflation, trade, investment — collected by national statistical offices and international organizations (IMF, World Bank, OECD).
·Political indices measure democracy (Polity, Freedom House, V-Dem), corruption (Transparency International), institutional quality (Worldwide Governance Indicators), economic freedom (Heritage Foun...
·Survey data — World Values Survey, Eurobarometer, Afrobarometer — provide information on citizens’ values, attitudes, and behaviors.
·Historical data — from population censuses to archival documents — allow for the analysis of long-term processes.

The methodology of political economy research Political economy as an interdisciplinary field of knowledge utilizes a variety of methodological approaches borrowed from economics, political science, sociology, and history. Understanding the methodological toolkit is necessary for the critical ana...

Positive and Normative Analysis A fundamental methodological distinction passes between positive and normative analysis. Positive analysis answers the question “what is” and “why,” seeking to objectively describe and explain observed phenomena. Normative analysis answers the question “what ought ...

Quantitative Methods Quantitative analysis occupies an important place in modern political economy. Econometric methods make it possible to identify causal relationships between political and economic variables, controlling for alternative explanations. Regression analysis is a basic tool for ass...

Qualitative Methods Quantitative methods have limitations: they show correlations and average effects well, but often do not reveal the mechanisms and context. Qualitative methods complement the picture. Comparative case analysis (case studies) allows for an in-depth examination of specific count...

Key Concepts and Terminological Framework

Institutions → Property Rights → Transaction Costs → Rent and Rent-Seeking → Collective Action and the Free Rider Problem → Information Asymmetry → Credible Commitment → Path Dependence → Veto Players → State Capacity

Political economy operates with a specific terminological framework, combining concepts from economic theory, political science, and sociology. Mastery of these terms is essential for understanding scholarly literature and conducting independent analysis.

Institutions are one of the central categories of modern political economy. In a broad sense, institutions are the "rules of the game" in society, structuring interactions among people. Douglass North, Nobel laureate and one of the founders of institutional economics, defined institutions as "hum...

Formal institutions are written rules: constitutions, laws, contracts, procedures. They are created deliberately and can be changed by decision of the authorities.

Informal institutions are unwritten rules: traditions, customs, norms of behavior, cultural attitudes. They evolve gradually and are often more stable than formal rules.

Historical Schools and Traditions

Historical schools and traditions

Mercantilism: The State and the Wealth of Nations

Historical Context → Key Principles of Mercantilism → Mercantilist Policy → National Variations → Criticism of Mercantilism → Legacy of Mercantilism → Lessons for Today

·Tariffs and prohibitions. High duties on the import of finished goods, low ones on raw materials. Prohibitions on the export of strategic goods and technologies. The goal is to develop domestic pro...
·Monopolies and privileges. The creation of trading companies with monopoly rights (East India Company, West India Company). Granting privileges to domestic producers.
·Regulation of labor and population. Encouraging population growth (more hands — more production). Restricting emigration. Regulation of wages (low wages = low production costs = competitiveness on ...
·Navigation Acts. Laws requiring that foreign trade be carried out on ships flying the national flag. The best known are the English Navigation Acts (1651–1849).
·French Colbertism (named after Jean-Baptiste Colbert, the minister of Louis XIV) emphasized the development of manufactures, state enterprises, and standardization of production.
·English mercantilism focused on maritime trade, colonial expansion, and the development of the fleet.
·German Cameralism stressed the administrative management of state finances and systematic development of the national economy.
·Mistaken identification of wealth with money. True wealth consists in goods and services, not in gold itself. The accumulation of precious metals leads to inflation and does not make a country genu...
·Trade is not a zero-sum game. International trade can be mutually beneficial. Ricardo's theory of comparative advantage showed that specialization and exchange increase the total wealth of all part...
·State intervention distorts incentives. Monopolies, tariffs, and regulations create inefficiency, corruption, and rent-seeking. The free market allocates resources more efficiently.
·Neomercantilism. Modern states use industrial policy, export subsidies, and currency manipulation to support national producers. The Chinese economic model is often described as neomercantilist.
·Economic nationalism. In times of crisis and uncertainty, protectionist sentiments intensify. Brexit, Trump’s trade wars, “deglobalization”—all these are echoes of mercantilist thinking.
·Strategic trade policy. Modern economic theory recognizes that in conditions of imperfect competition and increasing returns to scale, government intervention may be justified. This rehabilitates s...

Mercantilism is an economic doctrine and practice that dominated Europe from the 16th to the 18th century. Although the term itself was coined later by critics (primarily Adam Smith), mercantilism represented the first systematic attempt to comprehend the relationship between the economy and stat...

Mercantilism emerged in the era of the formation of nation-states in Europe. The 16th–17th centuries were a time of religious wars, colonial expansion, and the rise of absolute monarchies. States competed for resources, territories, and influence. The economy was viewed as an instrument of state ...

Wealth as gold and silver. Mercantilists equated wealth with stocks of precious metals. A country was considered wealthy if it accumulated gold and silver. This was explained by practical considerations: precious metals were a universal means of payment, necessary for maintaining armies and wagin...

Positive trade balance. Since the amount of gold in the world is limited, the enrichment of one country meant the impoverishment of another. Trade was seen as a zero-sum game. Hence the imperative: export more than is imported. A positive balance of trade leads to an inflow of precious metals.

Classical Political Economy: Smith, Ricardo, Malthus

Classical political economy (late 18th – mid-19th centuries) laid the foundations of modern economic science. Adam Smith, David Ricardo, Thomas Malthus, and their followers created the first holistic theory of the market economy, its laws, and development trends.

"An Inquiry into the Nature and Causes of the Wealth of Nations" (1776) by Adam Smith is considered the seminal work of economic science. Smith systematized the economic knowledge of his time and proposed an original concept of the market economy.

Division of labor. Smith begins with an analysis of the division of labor—the specialization of workers in separate operations. The famous example of the pin factory illustrates how division of labor multiplies productivity. Division of labor is limited by the size of the market: the larger the m...

"Invisible hand." Every individual, pursuing their own interest, is "led by an invisible hand" to a result that was not part of their intention—public benefit. The baker bakes bread not out of altruism, but for profit, yet society is supplied with bread as a result. The market coordinates the act...

Marxist Political Economy

·Classical political economy. Marx adopted the labor theory of value from Smith and Ricardo and brought it to its logical conclusion. If labor is the source of all value, where does the capitalist's...
·German philosophy. From Hegel, Marx borrowed the dialectical method—understanding development through contradictions. History moves through the conflict of opposites, their struggle and overcoming ...
·French socialism. Saint-Simon, Fourier, Proudhon offered a critique of capitalism and utopian projects for a just society. Marx sought to put socialism on a scientific basis.
·Commodity value. The value of a commodity is determined by the socially necessary labor time—the average time required for its production at a given technological level.
·Labor power as a commodity. In capitalist society, the worker sells his labor power—the capacity to work. The value of labor power is determined by the value of the means of subsistence necessary f...
·Exploitation. The profit of the capitalist is the result of the exploitation of the worker. This is not a moral condemnation, but a structural characteristic of capitalist relations. The capitalist...
·Definition of class. Classes are determined by their relation to the means of production. Capitalists (bourgeoisie) own the means of production, workers (proletariat) own only their labor power. Th...
·Class struggle. The conflict between classes is the driving force of history. In capitalism, the main conflict is between the bourgeoisie and the proletariat. As capitalism develops, class contradi...
·Class consciousness. Marx distinguished “class in itself” (objective class position) and “class for itself” (awareness of class interests). Revolutionary transformation requires that workers realiz...
·Mode of production. Every society is characterized by a certain mode of production—a unity of productive forces (technology, labor force) and production relations (property relations, class structu...
·Base and superstructure. The economic “base” (production relations) determines the political and ideological “superstructure”—the state, law, morality, religion, art. The dominant ideas are the ide...
·Dialectics of development. When productive forces develop, they enter into contradiction with outdated production relations. This contradiction is resolved by social revolution, establishing a new ...
·Tendency of the rate of profit to fall. Capitalists compete by replacing living labor with machines. But if only living labor creates value, growth in the “organic composition of capital” (the rati...
·Crises of overproduction. Capitalism strives for unbounded expansion of production, but solvent demand is limited by low wages. Periodic crises of overproduction are not accidents, but regularities...
·Concentration and centralization of capital. Competition leads to the absorption of small capitals by larger ones. Capital becomes increasingly concentrated, monopolized, socialized—preparing the g...
·Analysis of inequality. Thomas Piketty’s work on inequality and capital concentration revives Marxist themes, albeit in a modified form.
·Critique of global capitalism. Neo-Marxist theories analyze global value chains, exploitation in developing countries, financial capitalism.
·Crisis theory. After the 2008 financial crisis, interest in Marxist crisis theories has grown. Explaining crises through the internal contradictions of capitalism, rather than random shocks, has be...

Marxist political economy — Karl Marx (1818–1883) created the most influential critique of capitalism in the history of economic thought. His political economy does not simply analyze the economy—it seeks to explain capitalism as a historically transient system, based on exploitation and leading ...

Labor Theory of Value and Exploitation The central idea of Marxist political economy is the theory of surplus value:

Classes and Class Struggle For Marx, “the history of all hitherto existing societies is the history of class struggles.”

Internal Contradictions of Capitalism Marx analyzed the internal contradictions of capitalism, leading to its crises:

From Neoclassicism to Neoliberalism

The Marginalist Revolution → Development of Neoclassical Theory → Neoliberalism as a Political-Economic Doctrine → Neoliberal Reforms → Criticism of Neoliberalism → Crisis and Transformation

·Subjective Theory of Value. Value is determined not by labor costs (as with the classical economists), but by subjective utility for the consumer. The value of a diamond is determined by people’s d...
·Marginal Analysis. The key concept is marginal utility: the additional utility from an additional unit of a good. The law of diminishing marginal utility explains why we value the first glass of wa...
·Methodological Individualism. Economic phenomena are explained through the decisions of individuals, maximizing utility (consumers) or profit (firms). Classes disappear from the analysis.
·Equilibrium. The economy is modeled as a system tending toward equilibrium. Prices coordinate supply and demand, ensuring efficient allocation of resources.
·General Equilibrium Theory (Walras, Arrow, Debreu) models the entire economy as a system of interconnected markets in equilibrium. The existence of equilibrium and its efficiency has been proven (t...
·Welfare Economics analyzes the conditions for efficiency and “market failures”—situations where the market outcome is inefficient (external effects, public goods, monopolies).
·Monetarism (Milton Friedman) emphasized the role of the money supply in the economy. Inflation is “always and everywhere a monetary phenomenon.” The central bank should follow simple rules, not dis...
·Rational Expectations Theory (Robert Lucas) assumes agents use all available information and do not make systematic errors. This undercuts Keynesian arguments about the possibility of stimulating t...
·Intellectual Origins. Neoliberalism was formed in the 1930s–1940s as a reaction to Keynesianism and socialism. Key figures: Friedrich Hayek, Ludwig von Mises, Milton Friedman. The center of crystal...
·Key Principles:
·The market is the most efficient mechanism for resource allocation
·State intervention distorts price signals and generates inefficiency
·Private property is the basis of freedom and efficiency
·Competition is the driving force of progress
·Individual freedom supersedes collective goals
·Thatcherism and Reaganomics. Margaret Thatcher in Great Britain and Ronald Reagan in the USA carried out large-scale privatization, deregulation, tax reductions, weakening of labor unions.
·Reforms in Latin America. Chile under Pinochet became a “laboratory” for neoliberalism. Mexico, Argentina, Brazil carried out structural reforms under IMF pressure.
·Transition Economies. After the collapse of socialism, Eastern European countries and the former USSR carried out “shock therapy”—rapid liberalization, privatization, opening up the economy.
·Rising Inequality. Neoliberal reforms were accompanied by rising income and wealth inequality. The benefits of growth were concentrated at the top, while the middle class and the poor lost out.
·Financial Crises. Financial deregulation contributed to a series of crises—from Mexico (1994) and Asia (1997–1998) to the global crisis of 2008.
·Undermining Democracy. Critics argue that neoliberalism limits democratic choice, placing “market requirements” above democratic decisions.
·Social Costs. Cuts in social spending, precarity of labor, weakening of worker protections—all these are social costs of neoliberal reforms.

From Neoclassicism to Neoliberalism In the second half of the 19th century, economic theory underwent a radical transformation—the “marginalist revolution.” The new, neoclassical economics abandoned the class perspective of the classical economists and Marxism, shifting the focus to individual ch...

In the 1870s, three economists independently of each other—William Jevons (England), Carl Menger (Austria), and Léon Walras (Switzerland)—proposed a new approach to economic theory:

Neoliberalism is not just an economic theory, but a politico-economic project combining theoretical ideas with a political program:

Neoliberalism was manifested in radical reforms in different parts of the world:

Institutionalism and Evolutionary Economics

Institutionalism represents one of the most important directions of economic thought, challenging the neoclassical orthodoxy and offering an alternative perspective on economic processes. The focal point of institutionalists is not abstract models of rational choice, but real institutions, organi...

Institutionalism as an independent school formed in the USA at the end of the 19th — beginning of the 20th century. Its founders — Thorstein Veblen, John Commons, and Wesley Mitchell — rejected the key assumptions of neoclassical theory: the abstract “economic man,” static equilibrium, disregard ...

Thorstein Veblen (1857–1929) is the most prominent and radical representative of early institutionalism. In his book “The Theory of the Leisure Class” (1899), he ridiculed the neoclassical conception of the rational consumer, showing that consumption is often motivated not by utility, but by “con...

John Commons (1862–1945) focused on legal institutions and collective action. He viewed the economy as a system of “transactions” — not just exchanges, but complex interactions regulated by rules, customs, and power relations. Commons studied labor relations, trade unions, and regulation, insisti...

Austrian School and Libertarianism

Austrian School and Libertarianism The Austrian School of economics represents a unique intellectual tradition that has exerted a profound influence on economic theory, the philosophy of freedom, and political practice. Emerging in the late 19th century in Vienna, this school opposed its approach...

Carl Menger (1840–1921) — founder of the Austrian School. His “Principles of Political Economy” (1871) laid the foundation of the subjectivist theory of value. Menger demonstrated that the value of goods is determined not by the labor costs (as in the classics) and not by objective utility, but b...

Eugen Böhm-Bawerk (1851–1914) developed the theory of capital and interest. He criticized the Marxist theory of exploitation, showing that interest is not “appropriation of surplus value,” but a consequence of time preference: people value the present more than the future, and interest compensate...

Ludwig von Mises (1881–1973) — the central figure of the “neo-Austrian” school of the 20th century. His major works — “Socialism” (1922), “Human Action” (1949) — contain systematic criticism of socialism and an elaborate theory of the market economy. Mises formulated the “problem of economic calc...

Economic Systems and Types of Capitalism

Economic systems and varieties of capitalism

Capitalism, Socialism, and the Mixed Economy

·Private ownership. The means of production (land, capital, enterprises) are in private hands. Owners have the right to dispose of their property: to use, sell, and inherit it.
·Market coordination. Economic decisions are made in a decentralized manner by millions of independent agents. Prices coordinate supply and demand, conveying information about resource scarcity.
·Profit motive. Entrepreneurs aim to maximize profit. Profit is the reward for risk, innovation, and the efficient use of resources.
·Competition. Many sellers and buyers compete with each other. Competition lowers prices, improves quality, and stimulates innovation.
·Wage labor. Most of the population does not own the means of production and sells their labor power for wages.
·Public ownership. The means of production belong to society as a whole (through the state, cooperatives, workers' collectives). Private ownership of the means of production is restricted or absent.
·Planned coordination. Economic decisions are made centrally by planning agencies. The plan determines what to produce, how to produce, and for whom.
·Distribution according to labor. Ideally, rewards depend on labor contribution, not property. “From each according to their ability, to each according to their labor” is the principle of socialism.
·Social guarantees. The state provides basic needs: education, healthcare, housing, employment.
·Coexistence of sectors. The private sector (competitive markets) coexists with the public (infrastructure, education, healthcare) and cooperative sectors.
·Market regulation. The state regulates markets: antitrust policy, consumer protection, environmental regulation, labor law.
·Redistribution. Progressive taxation and social transfers smooth out market inequality.
·Macroeconomic policy. The state uses fiscal and monetary policy to stabilize the economy.
·State enterprises in key industries (energy, transport, banks)
·State investment funds
·Close ties between the state and big business
·Industrial policy and “cultivation” of national champions

Capitalism, Socialism, and the Mixed Economy Economic systems are methods of organizing the production, distribution, and consumption of goods in society. The three main types—capitalism, socialism, and the mixed economy—represent different answers to fundamental questions: who owns the means of ...

Capitalism: Private Ownership and the Market Capitalism is an economic system based on private ownership of the means of production, the free market, and the pursuit of profit.

Arguments in favor of capitalism: efficient allocation of resources through the price mechanism; incentives for innovation and entrepreneurship; economic freedom as the foundation of political freedom; dynamism and adaptability.

Criticism of capitalism: it generates inequality; is prone to crises; creates externalities (pollution, resource depletion); commodifies everything, including labor and nature.

Models of Capitalism: Varieties of Capitalism

The VoC Approach: Two Ideal Types → Institutional Complementarity → Comparative Advantages → Other Models of Capitalism → Change and Convergence

·Liberal Market Economies (LME) — USA, United Kingdom, Ireland, Canada, Australia.
·Coordinated Market Economies (CME) — Germany, Austria, Switzerland, the Netherlands, Scandinavia, Japan.
·LME excel at radical innovation, fast-changing industries, finance, biotechnology, IT. Flexibility enables rapid reallocation of resources into new sectors.
·CME excel at incremental innovation, high-quality production (machinery, automotive, chemicals). A stable workforce and specific skills ensure continuous improvement.
·Mediterranean capitalism (Italy, Spain, Greece, Portugal): family businesses, informal networks, weak state, segmented labor market.
·East European capitalism: dependence on foreign investment, export-oriented production platforms (Visegrad group), or liberalized but weakly institutionalized economies (Baltics).
·Asian capitalism: strong state, industrial policy, "developmental state" (Japan, Korea, Taiwan, Singapore). China is a special case of state capitalism with the Communist Party in power.
·Oligarchic capitalism: concentration of ownership in the hands of a narrow group of oligarchs, close ties between business and government, weak institutions (Russia, Ukraine, some Latin American co...
·Financialization: increased importance of financial markets even in CME. German companies are increasingly oriented toward shareholder value.
·Liberalization: weakening of employment protection, decentralization of wage bargaining in CME under pressure from competition and political reforms.
·Dualization: emergence of segmented labor markets with protected insiders and precarious outsiders.

Capitalism is not a monolithic system. Different countries have developed diverse models of organizing the market economy, distinguished by their institutions, the role of the state, labor relations, and financial systems. The concept of "Varieties of Capitalism" (VoC) systematizes this diversity.

Peter Hall and David Soskice identified two polar types of capitalist economies:

Finance: stock markets are the main source of financing. Shareholder value is the key criterion. Corporate governance: dispersed ownership, an active market for corporate control (mergers and acquisitions), short-term horizon. Labor relations: flexible labor market, weak trade unions, decentraliz...

Finance: bank financing, "patient capital", long-term relationships with creditors. Corporate governance: concentrated ownership (banks, families, other corporations), protection from hostile takeovers, employee representation on boards of directors. Labor relations: strong trade unions, sectoral...

The Role of Institutions and Path Dependence

Formal and Informal Institutions → Interaction of Formal and Informal Institutions → Path Dependence: Dependence on the Path → Critical Junctures → Gradual Changes → Practical Implications

·Constitutions and laws
·Property rights and contract law
·Regulations and standards
·Organizational rules
·Social norms and taboos
·Traditions and customs
·Business ethics and culture
·Networks and connections
·Complementarity: Informal norms reinforce the action of formal rules. A culture of law compliance makes the legal system effective.
·Substitution: Informal institutions replace weak formal ones. Where courts are ineffective, business relies on reputation and networks.
·Conflict: Informal practices undermine formal rules. Corruption as an informal institution destroys formal rules.
·Increasing returns: The more people use a particular technology or institution, the more beneficial it becomes to join in. The QWERTY keyboard layout is a classic example: it is not optimal, but ev...
·Self-reinforcement: Institutions create groups interested in their preservation. Beneficiaries of the existing order resist changes.
·Adaptation and learning: People invest in skills and knowledge specific to a given system. Changing the system devalues these investments.
·Coordination effects: The benefits of following rules depend on whether others follow them. Changing coordination equilibria requires a collective shift.
·Wars and revolutions: destroy the old order and create the opportunity for new institutional design
·Economic crises: discredit existing policies and open the path to reforms
·Change of political regimes: democratization or authoritarian takeover changes the rules of the game
·External shocks: colonization, integration, international pressure
·Displacement: new institutions gradually displace old ones.
·Layering: new rules are added on top of the old, gradually changing their operation.
·Drift: institutions remain formally unchanged, but the changing context alters their effects.
·Conversion: institutions are redirected to new goals.
·For reformers: it is impossible to simply "copy" successful institutions. Context and history matter. Reforms must take into account existing institutions and interests.
·For investors: institutional analysis is a key element in assessing country risk. Formal laws are only part of the picture.
·For researchers: understanding modern economies requires a historical perspective. "Why is it like this here?" is a question whose answer often lies in history.

Why are economic systems so resistant to change? Why do countries with similar resources develop differently? The answers to these questions are connected to the concepts of institutions and path dependence—the dependence of the present on past decisions.

Informal institutions are often more important than formal ones. A law may look excellent on paper but fail to work in practice. Conversely, informal arrangements can efficiently regulate behavior without written rules.

Path dependence means that historical decisions and events influence subsequent development, limiting the set of possible trajectories.

Despite inertia, institutions do change. Especially important are "critical junctures"—moments when usual constraints weaken and opportunities for radical change open up:

Planned and Market Coordination

Market Coordination → Planned Coordination → The Calculation Debate → Modern Synthesis

·Price mechanism: prices transmit information about the scarcity of resources and the intensity of needs. If demand exceeds supply, the price rises, signaling producers to increase output and consum...
·Decentralization: decisions are made by millions of independent agents based on local information. No one has the complete picture, but the system as a whole works.
·Incentives: agents are motivated by their own interests—profit, utility. These incentives stimulate efficiency, innovation, and the satisfaction of needs.
·Efficient use of dispersed information (Hayek's argument)
·Flexibility and adaptability to change
·Incentives for innovation and entrepreneurship
·Freedom of choice for consumers and producers
·Externalities: the market does not take into account the costs of pollution or the benefits of education
·Public goods: the market underproduces goods from which non-payers cannot be excluded
·Asymmetric information: one side knows more than the other, which leads to adverse selection and moral hazard
·Monopoly power: large players may manipulate prices
·Inequality: the market allocates according to the “ability to pay,” not needs
·Central plan: the planning authority determines what to produce, in what quantities, and with what resources. The plan is communicated to enterprises as a mandatory assignment.
·Material balances: the plan is compiled through a system of balances: production of steel = consumption of steel (automobiles + mechanical engineering + construction + ...).
·Administrative prices: prices are set by the planning authority and serve as an accounting tool, not as a mechanism of coordination.
·Rational use of resources without the “anarchy” of the market
·Mobilization for priority tasks (industrialization, defense)
·Elimination of crises of overproduction
·Fair distribution according to needs
·The information problem: the center cannot collect and process all information dispersed among millions of agents
·The incentive problem: the absence of profit and competition reduces incentives for efficiency
·Inertia and inflexibility: the plan is difficult to adjust in response to changes
·Politicization: economic decisions are subordinated to political priorities
·Ludwig von Mises argued that without private property and market prices for the means of production, rational economic calculation is impossible. The planning authority has no criterion for compari...
·Oskar Lange proposed a model of “market socialism”: the central authority sets prices and adjusts them by trial and error, imitating the market mechanism.
·Friedrich Hayek developed the critique, emphasizing the role of dispersed knowledge. The value of market prices is in aggregating local information from millions of agents. No central authority can...
·Which areas are better coordinated by the market, and which—by the state?
·How to correct market failures without government failures?
·What is the role of industrial policy and strategic planning?
·Is “bottom-up planning” possible based on new technologies (big data, AI)?

Any economy faces the problem of coordination: how to reconcile the decisions of millions of independent agents—producers and consumers, workers and employers? The two main coordination mechanisms—market and plan—have their own advantages and limitations.

Centralized planning coordinates the economy through the directives of planning authorities:

In the 1920s–1930s, a famous debate unfolded about the possibility of socialist economic calculation:

The experience of planned economies confirmed many arguments of the critics: chronic shortages, low quality, technological lag. However, at early stages, planning demonstrated an ability to mobilize resources (Soviet industrialization).

Post-Socialist Transformation

The collapse of the socialist system at the end of the twentieth century became one of the greatest social experiments in history. The transition from a planned economy to a market economy affected almost a third of the world’s population and provided a unique laboratory for studying economic ref...

By the late 1980s, the socialist system encompassed the USSR and 14 union republics, the countries of Eastern Europe (Poland, Hungary, Czechoslovakia, GDR, Bulgaria, Romania, Yugoslavia, Albania), Asian countries (China, Vietnam, DPRK, Mongolia, Cambodia, Laos), and Cuba. The population of these ...

Economic structure. The USSR and CMEA countries had a hypertrophied industrial sector (especially heavy industry and the military-industrial complex) and a weak services sector. Agriculture was collectivized and inefficient. The consumer sector was underdeveloped.

Institutional legacy. Decades of planning destroyed the institutions of market economy: private property, contract law, banking system, stock exchanges. Knowledge and skills for market activity were lost.

Scandinavian Model: Welfare State and Competitiveness

Main Characteristics → Historical Origins → The Paradox: Big State and Competitiveness → Challenges and Evolution → Is the Model Applicable?

·High taxes. The overall tax burden is 40–50% of GDP—significantly higher than in the USA (about 25%) or even continental Europe. The tax system is relatively progressive, although VAT (a regressive...
·Open economy. Given the small size of the Scandinavian economies, they are highly integrated into global trade. Exports make up 40–50% of GDP. Protectionism is minimal.
·Flexicurity. The Danish model of “flexible security” combines a flexible labor market (ease of hiring and firing) with generous unemployment benefits and active retraining programs. Workers are pro...
·Strong labor movement. Social-democratic parties dominated the politics of the Scandinavian countries for most of the twentieth century. The Swedish Social Democratic Labour Party ruled uninterrupt...
·Class compromise. In the 1930s, a historic compromise was made between labor and capital. In exchange for recognizing the right to private property and managerial prerogatives, workers received soc...
·Small open economies. Dependence on exports created incentives for competitiveness. Social protection made workers more ready for structural changes. Openness disciplined both capital and labor.
·Economic success. Scandinavian countries are among the richest in the world. Per capita GDP is comparable to the USA, despite shorter working hours. Unemployment is usually lower than the European ...
·Innovation. Sweden and Finland are world leaders in innovation, patents, spending on R&D. Global companies—Ericsson, Nokia, Spotify, IKEA—hail from Scandinavia.
·Quality of life. Scandinavian countries consistently top rankings of happiness, human development, quality of education, low corruption.
·Quality of the state. It is not just the size of the state, but its effectiveness. Scandinavian states are characterized by low corruption, professional bureaucracy, and high public trust. Taxes ar...
·Investment in human capital. Free high-quality education from kindergarten to university, healthcare, support for families—all this shapes a productive workforce.
·Reducing uncertainty. Universal social protection reduces risks for workers, making them more willing to be mobile and embrace change. Entrepreneurs can take risks knowing that failure does not mea...
·Social cohesion. Low inequality and high trust lower social costs—crime, social conflicts, political instability.
·Globalization. The openness of the economy means competitive pressures. Companies may shift production to countries with lower costs. Scandinavian countries respond with investment in innovation an...
·Aging population. The increasing proportion of the elderly creates pressure on the pension system and healthcare. Reforms have been carried out: raising the retirement age, introducing funded eleme...
·Immigration. The influx of immigrants, especially refugees, raises questions about the boundaries of the universal welfare state. High unemployment among immigrants creates social tensions and fuel...
·Skeptics point to unique conditions: small, homogeneous societies with high trust; historically strong labor movement; Protestant cultural tradition. Attempts to “import” the model to countries wit...
·Optimists note that key elements—investment in human capital, active labor market policy, high-quality state governance—can be adapted. Many countries have adopted individual elements: flexicurity,...

The Scandinavian countries—Sweden, Norway, Denmark, Finland, and also Iceland—represent a unique phenomenon: a combination of an expansive welfare state, high taxes, strong labor unions, and at the same time high competitiveness, innovation, and economic success. How does this model work, and is ...

The Scandinavian model is not the result of economic automatism but a product of a specific political history:

Neoclassical theory predicts that high taxes and a generous welfare state should reduce incentives to work and invest, lead to inefficiency and stagnation. Scandinavia disproves these predictions:

The question of the transferability of the Scandinavian model is a matter of debate:

Power, Classes, Interests

Power, classes, interests

The Concept of Power in Political Economy

The concept of power in political economy Power is a central category in political economy. Unlike "pure" economic theory, which often models agents as equal participants in voluntary exchange, political economy recognizes that agents possess varying abilities to influence the rules of the game, ...

Definitions of power The classic definition of power was formulated by Max Weber: "Power is the probability that one actor in a social relationship will be able to carry out his own will despite resistance." Robert Dahl proposed an operational definition: "A has power over B to the extent that A ...

Three faces of power Steven Lukes identified three "faces" or dimensions of power:

First face of power — direct influence on decisions. A defeats B in an open conflict: the law adopted is what A wanted, not B. This is power in debates, voting, negotiations.

Interest Groups and Lobbying

What Are Interest Groups → The Collective Action Problem → Lobbying: Mechanisms of Influence → Regulation of Lobbying → Corporatism → Criticism and Consequences

·Business associations: chambers of commerce and industry, sectoral associations, employers’ unions
·Trade unions: organizations of workers for protection of labor rights and interests
·Professional associations: doctors, lawyers, engineers, etc.
·Consumer organizations: protection of consumer rights
·Public groups: environmental, human rights, religious organizations
·Producers vs consumers: 100 steel companies, each losing millions from free trade, organize a powerful lobby. Millions of consumers, each saving pennies, remain unorganized.
·Subsidies vs taxes: recipients of subsidies know what they get, and lobby. Taxpayers bear spread out costs and do not organize against.
·Informational lobbying. Providing legislators with information, expertise, ready-made bills. Legislators are overloaded and dependent on external sources. Whoever provides information shapes decisi...
·Direct contact. Meetings with legislators and officials, participation in hearings, informal communication.
·Grassroots lobbying. Mobilizing voters to put pressure on politicians: letters, calls, petitions, demonstrations.
·Financial influence. Donations to electoral campaigns, funding research and media.
·Coalition building. Forming coalitions with other groups to strengthen influence.
·USA: developed system of lobbyist registration, disclosure of lobbying expenses, restrictions on “revolving doors.” At the same time, lobbying is legitimized as part of the democratic process.
·EU: voluntary lobbyist registry, transparency in meetings with officials. Fewer formal restrictions, more “soft” regulation.
·Many countries: lobbying is not specially regulated, but limited by anti-corruption legislation.
·Monopoly or semi-monopoly “peak” organizations (a single employers’ association, one central trade union)
·Mandatory or quasi-mandatory membership
·Tripartite negotiations: state—business—trade unions
·Nationwide agreements (on wage levels, working conditions, social policy)
·Representation of interests that otherwise would not be heard
·Provision of expertise and information
·Articulation of preferences and aggregation of interests
·Inequality of influence: wealthy and organized interests dominate
·Rent-seeking: resources are spent on redistribution, not production
·Political sclerosis (Olson): accumulation of interest groups slows economic adaptation
·Regulatory capture: regulated industries “capture” the regulators

Interest Groups and Lobbying Economic policy is rarely determined by an abstract “public good.” Behind every decision—trade agreement, tax reform, regulation—there are concrete interests. Interest groups—organizations representing these interests—play a key role in the political process.

Interest groups (interest groups) are organizations that unite people with common economic, professional, or ideological interests to influence government policy.

Mancur Olson, in the book “The Logic of Collective Action” (1965), showed a paradox: groups with common interests do not necessarily organize to protect them.

The free rider problem. If a group achieves favorable policy (for example, an import tariff), all members of the industry benefit, regardless of participation in lobbying. A rational agent prefers to “ride for free” on the efforts of others.

Wealth Distribution as a Political Issue

·Distribution affects efficiency. High inequality can reduce growth: it limits the human capital of the poor, decreases social mobility, and generates instability.
·Power determines the “rules of the game.” Property rights, contract law, the tax system—all these are political constructs that determine who wins and who loses.
·Inequality reproduces itself. The wealthy use resources for political influence, entrenching favorable rules.
·Human capital: education, skills, experience
·Capital: ownership of assets (financial, real estate, business)
·Bargaining power: the ability of workers vs employers
·Market power: monopolies, rent-seeking
·Discrimination: by gender, race, ethnicity
·Tax policy: progressivity of taxes, taxes on capital and inheritance
·Social transfers: pensions, benefits, subsidies
·Labor regulation: minimum wage, employment protection, union rights
·Educational policy: accessibility and quality of education
·Antitrust policy: limiting market power
·Meltzer–Richard model. The higher pre-tax inequality, the more the median voter stands to gain from redistribution, and the stronger his support.
·Paradox: Empirically, the relationship is ambiguous—in more unequal countries, redistribution is not necessarily higher.
·Political influence of the rich: the wealthy block redistribution via lobbying and financing
·Ideology: belief in meritocracy (“everyone deserves what they have”) lowers support for redistribution
·Ethnic fragmentation: people are less inclined to support redistribution to “others”
·Institutions: electoral systems, federalism, veto players affect the possibility of reform
·Modernization theory assumed that democratization goes hand-in-hand with economic development and the formation of a middle class. The middle class demands political representation.
·Acemoglu–Robinson theory: democracy arises as a result of the threat of revolution. Elites grant voting rights to avoid violent redistribution. But if inequality is too high, elites will prefer rep...
·Inequality undermines democracy: economic inequality converts into political inequality. The rich influence politics, and politics reproduces inequality. Ultimately—an oligarchy with a democratic f...
·Global inequality: the gap between rich and poor countries is enormous. Place of birth is a key determinant of life chances.
·Globalization: opening borders for trade and capital has influenced inequality ambiguously. Reduced inequality between countries (growth of China, India), but possibly increased it within developed...
·Tax competition: capital mobility limits states’ ability to tax it. A “race to the bottom” in capital taxation.
·Inequality is not a “natural” market outcome. It reflects political choices—on property rights, taxes, regulation. Different choices—different inequality.
·Reforms are a political process. Changing distribution affects interests. Reform success depends on the ability to build coalitions and overcome resistance.
·Inequality affects everything. Economic growth, political stability, social trust, population health—all are connected to distribution.

Wealth distribution as a political issue Wealth and income distribution is not simply an economic result, but a profoundly political issue. Who gets what is determined not only by the market, but also by political decisions regarding taxes, social policy, regulation, and property rights. Understa...

Inequality as a political-economic problem Economists have traditionally separated the “positive” analysis of efficiency from the “normative” issue of distribution. It was assumed that economic theory determines effective policies, and society, through the political process, decides how to alloca...

Political economy of redistribution Why do some societies redistribute more than others?

Inequality and democracy The connection between inequality and political regime is a classic question in political economy:

Interest Groups and Lobbying

Typology of Interest Groups → Logic of Collective Action → Mechanisms of Lobbying → Theories of Interest Group Influence → Lobbying in Different Countries → Normative Assessments

·Economic groups represent the material interests of their members: business associations, labor unions, professional organizations, agricultural organizations. They lobby for tax policy, regulation...
·Public interest groups advance ideas and values not directly linked to members’ material benefit: environmental organizations, human rights groups, religious organizations.
·Membership organizations (unions, associations) unite individuals or companies, funded by membership dues.
·Institutional groups are organizations for which lobbying is not the primary goal, but which promote their interests: corporations, universities, local governments.
·Group size. Small groups organize more easily: each member is more significant, monitoring contributions is simpler, peer pressure is more effective.
·Selective incentives. Organizations provide benefits only to members (insurance, information, networking), creating an incentive to join.
·By-product. Organizations created for other purposes (firms, clubs) might engage in lobbying as a secondary activity.
·Direct lobbying—direct contact with legislators and officials: meetings, provision of information, expert reports, drafting of bills. Professional lobbyists—often former politicians and officials—p...
·Grassroots lobbying—mobilization of ordinary members to put pressure on politicians: letters, phone calls, petitions, demonstrations. Especially effective before elections.
·Campaign financing. In the USA, through political action committees (PACs) and "super-PACs", groups channel funds to election campaigns. While direct purchase of votes is forbidden, money ensures a...
·Informational lobbying. Groups provide expertise, research, data. Legislators, overloaded with information, rely on external sources. Whoever controls information shapes the agenda.
·Revolving doors. The movement between public and private sectors creates networks of influence. Former regulators become lobbyists; lobbyists receive appointments in government agencies.
·Neocorporatism describes systems where the state includes "peak" business and labor organizations in the formal policy-making process. In Scandinavian countries and continental Europe, centralized ...
·USA—the most developed lobbying system. Thousands of registered lobbyists work in Washington; lobbying expenditures exceed $3 billion per year. Lobbying is legal and regulated; lobbyists are requir...
·European Union—the world’s second-largest lobbying hub. About 30,000 lobbyists work in Brussels, representing business, regions, NGOs. The European Commission maintains a Transparency Register, but...
·Russia—lobbying exists, but in opaque forms. There is no legislative regulation. Influence is achieved through informal ties with authorities, "manual control", and government contracts. The bounda...
·Defenders note that lobbying is the exercise of the right to petition, enshrined in the constitutions of democratic countries. Interest groups provide expertise, articulate preferences, and strengt...
·Critics point to resource inequality: wealthy groups have disproportionate influence. Lobbying distorts democracy in favor of organized interests at the expense of the dispersed. Money buys access,...

Interest groups and lobbying Interest groups—organized associations seeking to influence government policy in the interests of their members—are an integral part of modern political systems. Lobbying, the activity of promoting the interests of these groups, provokes mixed assessments: from recogn...

Mancur Olson, in his book *The Logic of Collective Action* (1965), formulated a paradox: if a group achieves a collective good (for example, favorable legislation), every member benefits regardless of participation. A rational individual becomes a "free rider"—enjoying the outcome without bearing...

Olson’s conclusion: small groups with concentrated interests (industries, professions) are better organized than large groups with diffuse interests (consumers, taxpayers). Politics systematically favors organized groups at the expense of the unorganized majority.

Political Economy of Inequality

Measuring Inequality → Inequality Trends → Political Determinants of Inequality → Feedback: How Inequality Influences Politics → Consequences of Inequality → Policies to Reduce Inequality

·Gini coefficient is the most widespread indicator. It ranges from 0 (absolute equality) to 1 (absolute inequality). For incomes before taxes and transfers: Scandinavian countries—about 0.25, USA—ab...
·Shares of top groups—what portion of income or wealth is received by the top 1%, 10%, 0.1%. This indicator was popularized by Thomas Piketty and his colleagues. In the USA, the share of the top 1% ...
·Difference between income inequality and wealth inequality. Wealth (assets minus liabilities) is distributed much more unevenly than incomes. In most countries, the top 1% owns 25–40% of wealth, th...
·Inequality of market incomes vs disposable incomes. Taxes and transfers redistribute incomes. In Scandinavian countries, redistribution reduces Gini by 15–20 points; in the USA—by 10–12 points.
·“The Great Compression”—the period from 1914 to 1945 when inequality in developed countries sharply decreased. Wars destroyed capital, progressive taxes funded military expenditures, inflation depr...
·Growth of inequality since the 1980s. In Anglo-Saxon countries, inequality began to rise starting from the Reagan and Thatcher era. The reasons are debated: technological changes, globalization, we...
·Piketty’s thesis. In the book "Capital in the Twenty-First Century," Thomas Piketty demonstrated that when capital returns ($r$) exceed the rate of economic growth ($g$), wealth inequality inevitab...
·Tax Policy. The progressivity of taxes, taxation of capital and inheritance, offshore schemes—all this determines how much remains with the top groups. Lowering top rates from the 1980s is a factor...
·Labor market institutions. Minimum wage, the strength of unions, hiring and firing rules influence the distribution between labor and capital. Weakening unions and labor market deregulation correla...
·Social policy. The size and design of the welfare state—benefits, pensions, healthcare, education—redistribute resources and opportunities.
·Regulation of the financial sector. Financialization—the growth of the financial sector's share in the economy—is linked to rising incomes at the top of the distribution. Banker bonuses and profits...
·Meltzer-Richard paradox. In a democracy, the median voter is poorer than the average; therefore, they should vote for redistribution. Why then does inequality grow? Possible explanations: ideologic...
·Social mobility. High inequality lowers intergenerational mobility—“Great Gatsby curve.” In unequal societies, rich children remain rich, poor children remain poor. This undermines the meritocratic...
·Health and social problems. Richard Wilkinson and Kate Pickett in the book "The Spirit Level" showed a correlation of inequality with worse health indicators, crime, teenage pregnancy, obesity—even...
·Democracy. Extreme inequality threatens democracy. When the rich control politics, democratic institutions turn into a façade. Oligarchy is not an exaggeration, but a description of reality in a nu...
·Progressive taxation—increasing rates on high incomes, inheritance taxation, wealth taxes. Piketty proposes a global tax on capital to prevent capital flight.
·Strengthening market institutions—increasing minimum wage, support for unions, antitrust policy.
·Investment in human capital—quality education from early childhood, accessible healthcare.
·Universal basic income—the idea of a guaranteed income for all citizens is gaining popularity as a response to automation and labor precarity.

Inequality is one of the central topics of political economy, connecting economic analysis with issues of power, justice, and social structure. How inequality is measured, which factors determine it, how it influences politics and economic growth—these questions are at the center of contemporary ...

Inequality is not the result of “natural” economic forces but a product of political decisions:

Corporatism and Social Partnership

Origin and Evolution of the Concept → Characteristics of Neocorporatism → Functions of Corporatism → Forms of Corporatism → Conditions for the Success of Corporatism → Criticism of Corporatism → Corporatism in the 21st Century

·Centralized organizations. The interests of labor and capital are represented by “peak associations”: national federations of trade unions and employers’ associations. Membership is often mandatory...
·Monopoly of representation. The state recognizes one organization as the monopoly representative of the corresponding group. This ensures discipline: agreements concluded by leaders are binding for...
·Tripartite negotiations. Government, trade unions, and employers negotiate a wide range of issues: wages, employment, social policy, economic strategy. The results—“social pacts”—are often formaliz...
·Exchange. Each party receives benefits: trade unions— influence on policy and social guarantees; employers— predictability and restraint of wages; state— social peace and legitimacy of policy.
·Coordination of wages. Centralized bargaining allows macroeconomic consequences of wage growth to be taken into account. In decentralized systems, each union seeks maximum increase for its own memb...
·Conflict management. Institutionalized negotiations channel class conflict into peaceful avenues. Strikes and lockouts are less common in corporatist systems.
·Policy implementation. Labor and business organizations not only participate in policy development but also help implement it. Trade unions ensure compliance with agreements by members; employers i...
·Legitimization. Participation of social partners in decision-making increases policy legitimacy. Trade unions explain to members the necessity of restraint; employers justify social expenditures.
·Swedish model combined centralized wage bargaining with active labor market policy. The Saltsjöbaden Agreement (1938) between trade unions and employers established the rules of the game for decades.
·Germany practices a more sectoral and less centralized corporatism. Codetermination—representation of workers in company supervisory boards—complements sectoral bargaining.
·The Netherlands after the crisis of the 1980s revived corporatism through the Wassenaar Agreement (1982): trade unions agreed to wage restraint in exchange for reduced working hours and social guar...
·Strong, centralized organizations. If trade unions are fragmented and compete, centralized agreements are impossible. Membership coverage should be high.
·Culture of compromise. Social partners must recognize each other’s legitimacy and be ready for mutual concessions.
·Economic openness. Small open economies (Austria, the Netherlands, Scandinavian countries) have strong incentives for coordination: in conditions of global market competition, uncontrolled cost gro...
·Social-democratic or centrist government. Trade unions are more willing to cooperate with governments they trust. Right-wing governments can destroy the corporatist consensus.
·Criticism from the left. Corporatism integrates the labor movement into the capitalist system, blunting class conflict. Trade union leaders become part of the elite, distanced from rank-and-file me...
·Criticism from the right. Corporatism creates rigidities in the labor market, hinders structural adaptation, protects “insiders” (those employed in large firms) at the expense of “outsiders” (the u...
·Criticism of representation. Corporatism represents only organized groups. The interests of consumers, the unemployed, migrants, future generations have no “seat at the table.”
·Decentralization. Wage bargaining is shifting from the national to the sectoral and company level. Centralized pacts are giving way to fragmented regulation.
·Weakening of trade unions. Trade union membership is declining in all developed countries. Deindustrialization, precarization of labor, individualization are undermining traditional forms of organi...
·New agreements. Despite trends, social pacts are concluded even in the 21st century—especially in response to crises. Irish “social partnership” of 1987–2009, Dutch and Belgian agreements show that...

Corporatism and Social Partnership Corporatism is a system of interest organization in which the state incorporates representative organizations of business and labor into the formal process of policy development and implementation. Unlike pluralism, where interest groups compete for influence ov...

The term “corporatism” has a contradictory history. In the interwar period, it was associated with the fascist regimes of Italy, Portugal, Spain, where corporate structures were used to suppress class conflict and integrate labor into an authoritarian state. This “state corporatism” discredited t...

In the 1970s, political scientist Philippe Schmitter proposed distinguishing between “state” and “societal” corporatism. Societal corporatism is a voluntary system that arose in democratic countries: Austria, Sweden, Norway, the Netherlands. Here, trade unions and employers’ organizations are ind...

Neocorporatism (as societal corporatism is often called) is characterized by several features:

Institutions, States, and Regimes

State: Types and Functions

·Territoriality: the state controls a specific territory
·Monopoly on violence: only the state can lawfully employ force (police, army, courts)
·Legitimacy: violence is recognized as lawful by the population
·Protection of property rights and enforcement of contracts. Without the state, property rights are unreliable, contracts unenforceable. Anarchy leads to a “war of all against all.” The state provid...
·Defense and security. Protection from external threats and maintaining internal order are classic functions of the state.
·Providing public goods. Goods from which non-payers cannot be excluded (non-excludable) and which are not diminished by consumption (non-rival): defense, law and order, basic infrastructure.
·Correction of market failures: regulation of monopolies, internalization of externalities, overcoming informational asymmetry.
·Redistribution: social protection, combating poverty, smoothing inequality.
·Stabilization: macroeconomic policy – smoothing cycles, controlling inflation, maintaining employment.
·Development: industrial policy, investment in human capital and infrastructure.
·Democracy. Power comes from the people through free elections. Key characteristics: competitive elections, civil liberties, rule of law, separation of powers.
·Authoritarianism. Power is concentrated, political competition is limited. Variants: military dictatorships, one-party regimes, personalist regimes.
·Totalitarianism. An extreme form: the state controls all spheres of life, including the economy, culture, and private life.
·Hybrid regimes. Combine elements of democracy (elections) with authoritarian practices (manipulation, restriction of opposition). “Competitive authoritarianism”, “electoral authoritarianism.”
·Fiscal capacity: ability to collect taxes
·Administrative capacity: effective bureaucracy capable of implementing decisions
·Legal capacity: functioning judicial system, enforcement of laws
·Coercive capacity: territorial control, monopoly on violence
·Inclusive political institutions: broad distribution of power, checks and balances, pluralism. Inclusive political institutions foster inclusive economic institutions – protection of property, equa...
·Extractive political institutions: concentration of power in the hands of a narrow elite. Extractive political institutions support extractive economic institutions – resource extraction by elites,...
·Minimalist approach: the state should limit itself to protecting property rights and refraining from intervention. The market will provide development.
·Developmentalist approach: the state actively directs development through industrial policy, investment, coordination. The successes of East Asia are an argument in favor of an active state.

State: Types and Functions The state is the central actor in political economy. It sets the rules of the game, protects property rights, regulates markets, and redistributes resources. Understanding the nature of the state, its types and functions is key to analyzing economic policy.

What is the state Max Weber defined the state as an organization possessing a “monopoly on the legitimate use of physical force in a given territory.” This definition emphasizes:

The state is not monolithic. It includes numerous agencies, levels, and branches of power with their own interests and logic.

Functions of the state Even minimalist concepts recognize a number of functions of the state:

Democracy and Economic Outcomes

·Protection of property rights. Democracy limits the arbitrariness of authority by protecting investors from expropriation. Predictable rules stimulate investment.
·Accountability. Elected leaders are interested in economic outcomes — voters “vote with their wallets.”
·Information and feedback. A free press and opposition signal problems, allowing policy correction.
·Human capital. Democracies invest more in education and healthcare, which fosters long-term growth.
·Short-term focus. Democratic politicians focus on the electoral cycle rather than long-term development.
·Populism. Pressure from voters leads to inefficient policies — subsidies, protectionism, excessive spending.
·Interest groups. Democracies are vulnerable to capture by organized interests.
·The need for a “firm hand.” At early stages of development, resource mobilization is needed, which authoritarianism can deliver more efficiently.
·No simple connection. Among fast-growing economies there are both democracies (India, Botswana) and autocracies (China, Singapore). Among stagnating ones — also both types.
·Democracy reduces volatility. Democracies exhibit more stable growth; autocracies — more volatility. Autocracies can grow very fast (China) or suffer catastrophically (Zimbabwe).
·Democracy and human development. Democracies do better in health, education, and poverty reduction indicators. Amartya Sen: in democracies, famines do not occur.
·Conditional relationships. The effect of regime depends on context: quality of institutions, level of development, external environment.
·Through economic policy. Democracies and autocracies pursue different policies. Democracies redistribute more, autocracies less. Democracies are less likely to allow hyperinflation.
·Through institutions. Democracy is associated with better institutions — rule of law, protection of property, low corruption. But causality is ambiguous: perhaps good institutions lead both to demo...
·Through information. Freedom of the press, transparency, political competition improve the information environment for economic decisions.
·East Asian autocracies: South Korea under Park Chung Hee, Taiwan under the Kuomintang, Singapore under Lee Kuan Yew. Strong state, industrial policy, investment in education.
·China: unprecedented growth under CCP leadership. Combination of market mechanisms with state control.
·Competent, meritocratic bureaucracy
·State autonomy from rent-seeking groups
·Elites oriented towards development, not extraction
·Built-in feedback mechanisms (intra-party competition, experimentation)
·Dependence on leader quality — a bad autocrat is catastrophic
·Problem of succession
·Accumulation of mistakes without correction
·Risk of degeneration into an extractive regime
·Short-term costs. Democratization can be accompanied by instability, redistributive pressure, uncertainty.
·Long-term benefits. Research (Acemoglu et al.) shows that democratization leads to an increase of GDP by ~20% over 25 years — through improvements in institutions, education, and healthcare.
·Sequence matters. Democracy with poor institutions (weak rule of law) may be less stable and effective. Some argue that first institutions are needed, then democracy. Others — that democracy itself...

The relationship between political regime and economic outcomes is one of the central questions of political economy. Does democracy promote economic growth? Or is authoritarianism more effective in mobilizing resources?

Institutional Traps and Path Dependence

·Increasing returns. The more people use a particular technology or institution, the more advantageous it is to join them. Network effects reinforce the initial choice.
·Switching costs. Transitioning to an alternative requires expenses — retraining, restructuring systems, coordination.
·Adaptive expectations. People adjust their strategies to existing rules, which makes changing the rules even more costly.
·Complementarity. Institutions complement each other. Changing one requires altering related elements.
·Individual rationality leads to collective irrationality. Each agent acts optimally within the existing rules, but the result is inefficient for everyone. Example — the corruption trap: if everyone...
·Beneficiaries resist change. Inefficient institutions create benefits for certain groups that block reforms. Rent from inefficiency is concentrated, while costs are distributed.
·Lack of coordination. Even if everyone wants change, no one wants to be first. Coordination on a new equilibrium requires leadership or an external mechanism.
·Honest businesses lose out to corrupt competitors
·Officials rationally take bribes if everyone does
·Anti-corruption reforms require simultaneous behavioral change by many agents
·Without a critical mass of honest participants, the trap is stable
·Low incomes → low savings → low investment → low productivity → low incomes
·Weak institutions → low trust → low investment → weak institutions
·Brain drain → shortage of human capital → low development → brain drain
·Too expensive to compete with poor countries in labor-intensive production
·Not innovative enough to compete with rich countries
·Institutions that worked at an earlier stage do not fit the next stage
·Resource rent creates incentives for rent-seeking, not value creation
·“Dutch disease” — currency appreciation suppresses other sectors
·Elites are interested in weak institutions that allow rent extraction
·Critical junctures. Crises, wars, revolutions weaken resistance to reforms and open windows of opportunity. Postwar reforms in Germany and Japan, democratization after the collapse of the USSR are ...
·External pressure. Conditions of international organizations, requirements for membership in unions (EU) can overcome internal resistance. But reforms imposed from outside are often unstable.
·Leadership and coordination. Strong reformers can coordinate the transition to a new equilibrium. Lee Kuan Yew in Singapore, Park Chung-hee in Korea are examples of such leadership.
·Gradual change. Marginal changes can accumulate and eventually break the trap. Conversion, layering, drift are mechanisms of gradual institutional change.
·Experimentation and learning. Local experiments (like China’s “special economic zones”) make it possible to test reforms and demonstrate their success, reducing resistance.
·Reforms require windows of opportunity. Not every moment is suitable for reforms. It is necessary to recognize and use critical junctures.
·Sequence matters. The order of reforms is important. Some changes create the conditions for others, some block them.
·Complementarity of institutions. Isolated reforms are often ineffective. Interconnected elements must be changed.
·Reform coalitions. Successful reforms require support. Coalitions must be formed, compensating the losers.
·Patience and persistence. Institutional change takes decades. Rapid “shock” reforms are often rolled back.

Why do some countries get stuck in inefficient institutional regimes? Why do reforms often fail? Answers to these questions are provided by the concept of institutional traps and path dependence.

Path dependence is a property of systems in which their current state is determined not only by present conditions, but also by the history of development. Past decisions constrain future choices.

A classic example is the QWERTY keyboard layout. This layout was developed in the 19th century for mechanical typewriters to slow down typing and prevent typebar jams. Today, there are no technical limitations, but switching to a more efficient layout is impossible — too many people are trained i...

An institutional trap is a stable inefficient equilibrium from which the system cannot exit without external intervention or a shock.

Federalism and Multilevel Governance

·Decentralization Theorem (Oates). In the absence of externalities and economies of scale, decentralized provision of public goods is more efficient than centralized provision. Logic: local authorit...
·Foot Voting (Tiebout). If citizens can move between jurisdictions, competition among local authorities leads to efficient provision of services. People choose the jurisdiction with their preferred ...
·Externalities. If the actions of one jurisdiction affect others (for example, pollution in a river crossing boundaries), coordination at a higher level is needed.
·Economies of Scale. Some goods are more efficiently provided centrally: defense, monetary system.
·Redistribution. If the wealthy can move away from high taxes, redistribution must be centralized.
·Uniform Standards. Basic rights and minimum standards require the national level.
·Information. Local authorities know local conditions and preferences better.
·Accountability. It's easier to control local authorities than a distant central power.
·Innovation. Multiple jurisdictions are a “laboratory of democracy” where experiments can take place.
·Competition. Rivalry among jurisdictions disciplines authorities.
·Distribution of Expenditures. General principle: a function should be performed at the lowest level capable of effectively carrying it out (subsidiarity). Defense — center, local beautification — m...
·Distribution of Taxes. Mobile tax bases (capital, skilled labor) should be taxed at the national level, otherwise there will be a “race to the bottom”. Non-mobile (real estate) — at the local level.
·Vertical Imbalance. Often, the spending powers of regions exceed their taxing capabilities. This requires transfers from the center — interbudgetary relations.
·Horizontal Imbalance. Regions differ in wealth. Equalizing transfers smooth out differences but can undermine incentives.
·Federalism as protection against tyranny. Vertical division of power complements horizontal division. Federalism is a guarantee against concentration of power.
·Federalism as accommodation. In multiethnic societies, federalism can keep the state together by giving minorities autonomy. Belgium, Switzerland, India — examples.
·Secession. But federalism can also contribute to breakup — giving regions tools for mobilizing against the center. The USSR, Yugoslavia, Czechoslovakia broke up along federal seams.
·Soft budget constraints. If regions expect help from the center in case of trouble, they lack incentives for financial discipline. Debt crises of subnational entities are a widespread problem.
·New Regionalism. Decentralization is occurring in many unitary states: Spain, United Kingdom, Italy, France. Regions are gaining more powers.
·Supranational Integration. The EU is a unique experiment in multilevel governance. Part of sovereignty has been transferred to the supranational level.
·Glocalization. Simultaneous strengthening of global and local levels at the expense of the national. Cities and regions enter the international arena directly.
·Networks and Governance. Formal levels of power are supplemented by networks of non-governmental actors, public-private partnerships, and transnational regimes.
·There is no universal recipe. The right degree of centralization/decentralization depends on the size of the country, diversity, historical legacy, and political culture.
·Compatibility is important. Spending and taxing powers must be coordinated. Responsibility without resources is ineffective.
·Coordination mechanisms are needed. Multilevel governance requires institutions to resolve conflicts and coordinate between levels.

Federalism and Multilevel Governance How is power distributed between levels of government? Why are some countries federations, while others are unitary states? Which level of government should be responsible for which functions? These questions lie at the intersection of political science and ec...

Forms of Territorial Organization of Power Unitary State — power is concentrated at the national level. Local bodies operate by delegation from the center and can be reorganized or abolished. Examples: France, Japan, United Kingdom. Federation — power is constitutionally divided between the feder...

Economic Theory of Federalism Economists analyze the optimal distribution of functions among the levels of government:

Fiscal Federalism The distribution of taxing and spending powers is a key question:

State Capacity and State-Building

·Administrative capacity — the ability of the state to implement policy through an effective bureaucracy. Weberian bureaucracy is characterized by meritocratic recruitment, career incentives, hierar...
·Extractive capacity — the ability to mobilize resources, primarily through taxation. Tax collection is one of the oldest and fundamental signs of statehood. States with taxes above 15–20% of GDP ar...
·Coercive capacity — the ability to maintain order and ensure security. Monopoly on legitimate violence (according to Weber) is a defining feature of the state. Weak states lose control over territo...
·Legal capacity — the ability to create and enforce rules, protect property rights, enforce contracts. Rule of law implies that rules are applied consistently and impartially, including to the state...
·Economic development. Capable states provide basic conditions for economic activity: property protection, contract enforcement, infrastructure, education. Incapable states cannot support a market e...
·Provision of public goods. Healthcare, education, sanitation, roads — all require administrative capabilities and resources. Weak states are unable to provide quality public services.
·Stability and peace. States unable to control their territory are prone to internal conflict, rebel movements, organized crime. “Failed states” are a threat to regional and global security.
·Democracy. Paradoxically, a strong state is necessary for democracy. The state must be strong enough to oppose private groups and ensure equal application of the law, but limited so as not to suppr...
·External state-building — attempts by external actors (international organizations, developed countries) to build state institutions from outside. Experience is generally disappointing: imposed ins...
·Public administration reforms in developing countries are aimed at improving bureaucratic quality: meritocratic recruitment, increasing salaries, performance evaluation systems. Results are mixed: ...
·A strong state is not always good. A capable state can use its capabilities for repression, expropriation, waging aggressive wars. Nazi Germany and Stalinist USSR were highly capable states.
·Is a limited state more important than a strong one? The liberal tradition emphasizes the importance of limiting state power: rule of law, separation of powers, human rights. The balance between ca...
·Measurement is problematic. State capacity is a latent variable, difficult to measure directly. The indicators used (tax/GDP, bureaucracy quality, corruption control) are imperfect and may not capt...
·A strong state is not in everyone’s interest. Elites benefiting from state weakness (corrupt actors, oligarchs, regional leaders) will resist reforms.
·State-building is a political process requiring coalitions to support it.
·External pressure and incentives can help. The prospect of EU membership stimulated reforms in Central and Eastern Europe. Conditions of international loans (although criticized) create pressure fo...
·Local leadership is critically important. Successful reforms are those supported by local reformers with political will and legitimacy.

State capacity and state-building State capacity — the ability of the state to effectively formulate and implement policy within its territory — is a key factor of economic development, political stability, and citizens’ welfare. Why are some states strong and others weak? How is state capacity f...

Measuring state capacity State capacity is multidimensional and includes several components:

Why state capacity is important Research shows a link between state capacity and key economic and political outcomes:

Historical origins of state capacity The formation of capable states is a lengthy historical process:

Federalism and Multilevel Governance

·Unitary state — power is concentrated at the center; local authorities are subdivisions of the central government, whose powers can be changed by ordinary law. Examples: France, Japan, most post-So...
·Federation — powers are divided between the center and the subjects of the federation; this division is constitutionally protected and cannot be altered unilaterally. Examples: USA, Germany, Austra...
·Confederation — a union of sovereign states that delegate part of their powers to joint bodies but retain the right to secede. Historical examples: Swiss Confederation until 1848, German Confederat...
·Devolution — the transfer of powers from the center to regions within a unitary state. Example: devolution in the United Kingdom (creation of the Scottish, Welsh, and Northern Ireland Parliaments) ...
·Principle of subsidiarity: powers should be exercised at the lowest level capable of performing them effectively. This principle is enshrined in EU treaties.
·Tax allocation. Mobile tax bases (capital, high-income individuals) are better taxed at the central level; immobile (real estate) — at the local. Otherwise, tax competition undermines collection.
·Vertical imbalance. Frequently, spending powers are more decentralized than taxing powers. Regions depend on transfers from the center, which creates problems of accountability and “soft budget con...
·Horizontal transfers. Equalizing transfers from rich to poor regions ensure a minimum level of services everywhere, but may weaken development incentives.
·Who gets what? The division of powers is the result of political struggle. The center seeks to retain control; regions to expand autonomy. Resource-rich regions want to keep more revenue; poor ones...
·Stability of federations. Federations may collapse (USSR, Yugoslavia, Czechoslovakia) or consolidate (EU). Factors of stability: balanced federal structure, mechanisms for conflict resolution, inte...
·Supranational level. EU institutions (Commission, Parliament, Court) have powers delegated by member states. EU law has direct effect and supremacy over national law in the EU’s fields of competence.
·National level. Member states retain sovereignty in most areas and remain key actors.
·Subnational level. Regions are increasingly involved in EU governance. The Committee of the Regions, regional representations in Brussels, and structural funds create a “Europe of the regions.”

Federalism is a system of government organization in which power is divided between a central government and regional units (states, provinces, Länder), with each level possessing its own constitutionally enshrined powers. Federalism and the broader concept of multilevel governance have deep econ...

Oates’ Theorem. In a classical study, Wallace Oates showed: if citizens’ preferences differ between regions, decentralized provision of public goods increases welfare. A centralized solution, uniform for all, does not account for local preferences.

“Voting with your feet” (Tiebout). Charles Tiebout proposed a model in which citizens “vote with their feet” by choosing a jurisdiction with their preferred mix of taxes and services. Competition between jurisdictions creates pressure for efficiency. Poorly governed regions lose population and ta...

Laboratories of democracy. Regions can experiment with policy. Successful experiments spread, unsuccessful ones are rejected. Federalism is a mechanism of institutional learning.

The Political Economy of Democracies and Dictatorships

Voting Models and Paradoxes of Democracy

The Condorcet Paradox → Arrow’s Impossibility Theorem → The Median Voter Theorem → Spatial Models of Voting → Strategic Voting → Electoral Systems → Consequences of System Choice

·Universality: the rule must work for any configuration of individual preferences
·Unanimity (Pareto): if everyone prefers $x$ over $y$, the collective choice must prefer $x$ over $y$
·Independence of irrelevant alternatives: collective choice between $x$ and $y$ must depend only on individual preferences between $x$ and $y$, and not on third alternatives
·Non-dictatorship: there must be no individual whose preferences automatically become collective
·One-dimensional political space (e.g., “left-right”)
·Single-peaked preferences (each individual has one most preferred point)
·Both parties converge to the center (convergence)
·Extreme positions lose
·Politics is determined by the centrist majority
·Real political space is multidimensional
·Preferences are not always single-peaked
·There are turnout, information, party loyalty
·Downs Model. Voters vote for the nearest candidate. Candidates maximize votes. In the one-dimensional case—convergence to the median.
·Directional Voting Model. Voters prefer candidates moving in the “right” direction, even if far from the center. This explains the success of radical candidates.
·Probabilistic Voting Model. Voting with a probability depending on distance. Takes uncertainty and randomness of choice into account.
·Useful voting: voting for the “lesser evil”, not for the preferred but unelectable candidate
·Voting against: voting for one likely to defeat an undesirable candidate
·Vote splitting: a third candidate draws votes from an ideologically similar one
·Plurality: the candidate with the most votes wins, even without an absolute majority
·Absolute majority with run-off: if no one gets
gt;50\%$, a second round is held
·Alternative voting: voters rank candidates, the weakest are eliminated
·Party lists: seats are distributed proportionally to votes for parties
·STV (single transferable vote): multi-member districts with candidate rankings
·Majoritarian systems lead to two-party systems
·Proportional—lead to multiparty systems

Voting Models and Paradoxes of Democracy Democracy is “the power of the people”, but how exactly should individual preferences be aggregated into collective decisions? This seemingly simple question conceals deep paradoxes and fundamental problems, studied by the theory of social choice.

The Marquis de Condorcet, already in the 18th century, discovered a fundamental problem of majority voting:

Example. Three voters (A, B, C) vote over three alternatives (x, y, z): Voter A: $x > y > z$ Voter B: $y > z > x$ Voter C: $z > x > y$

Pairwise comparison gives: $x$ beats $y$ (2:1), $y$ beats $z$ (2:1), but $z$ beats $x$ (2:1). There is no winner! Collective preferences become “cyclical”.

Political Business Cycles

Classical Theory (Nordhaus) → Partisan Cycles (Hibbs) → Rational Models (Alesina) → Empirical Evidence → Voting on Economic Results → Institutional Constraints

·Voters make decisions based on economic results — especially just before elections
·There is a short-term trade-off between inflation and unemployment (Phillips curve)
·Politicians seek re-election and manipulate the economy
·Immediately after the elections, the government implements unpopular measures (combating inflation, cutting expenditures)
·Unemployment rises, inflation falls
·Before the next elections — economic stimulation
·Unemployment declines, growth accelerates
·After elections, inflation appears, and the cycle repeats
·Left-wing parties represent the interests of labor, for whom unemployment is the main evil. They prefer stimulative policy, even at the cost of higher inflation.
·Right-wing parties represent the interests of capital and the middle class, for whom inflation is more dangerous. They prefer strict (restraining) policy.
·Rational opportunistic cycles (Rogoff). Voters are rational, but asymmetrically informed. Politicians signal their competence through budget manipulations before elections.
·Rational partisan cycles (Alesina). Uncertainty of election outcome creates real effects. If firms and workers sign contracts without knowing which party will win, the election result has a real im...
·Opportunistic cycles are weak — voters are not so naive, politicians are constrained by institutions
·Some evidence of partisan differences, especially at the beginning of terms
·Independence of central banks has weakened opportunities for manipulation
·Political cycles are stronger — institutions are weaker, voters are more naive
·Fiscal manipulations before elections are widespread
·IMF and international markets limit manipulations
·Monetary policy (where the central bank is dependent)
·Fiscal policy — increased spending, lowered taxes
·Targeted transfers — pensions, subsidies, “gifts” before elections
·Delay of unpopular decisions
·Egocentric: voting based on one’s own financial situation
·Sociotropic: voting based on assessment of the national economy
·Independent central bank. Isolation of monetary policy from political pressure. Empirically: independent central banks are associated with lower inflation.
·Budget rules. Limits on deficit, debt, spending. But rules are often circumvented or violated.
·Fiscal councils. Independent bodies assessing budgetary policy. Provide information, increase transparency.
·International obligations. Membership in IMF, EU, treaties restrict freedom of maneuver.

The economy fluctuates, and politicians seek to use these fluctuations to their advantage. The theory of political business cycles explores the relationship between the electoral process and economic policy.

Result: The economy systematically deviates from optimum. Excessive inflation, suboptimal fluctuations.

Douglas Hibbs proposed an alternative model based on ideological differences between parties:

Cycle: Entry of left-wing → stimulation → growth → inflation; entry of right-wing → restraint → recession → low inflation.

Authoritarian Regimes and the Economy

The Diversity of Authoritarianism → Economic Logic of Authoritarianism → When Does Authoritarianism "Work"? → When Does Authoritarianism Fail? → Autocracy and Innovation → The Dilemma of the Development-Oriented Autocrat → Practical Conclusions

·Personalist regimes: power is concentrated in the hands of a single leader (Turkmenistan under Niyazov, Zimbabwe under Mugabe)
·One-party regimes: the ruling party is the main institution of power (China, USSR, Mexico under PRI)
·Military regimes: the army controls power (Myanmar, historically—Latin America)
·Monarchies: traditional legitimacy (Saudi Arabia, UAE, historically—most countries)
·Totalitarianism—control over all aspects of life
·“Soft” authoritarianism—limited pluralism, elections without real choice
·Competitive authoritarianism—formally democratic institutions, but unequal conditions
·The commitment problem. An autocrat can promise property protection, but what prevents them from confiscating it tomorrow? Without independent institutions—nothing. This undermines investment.
·Time horizon. An autocrat confident of long-term rule is interested in development—they will reap the rewards. An unstable autocrat maximizes short-term extraction.
·Selectorate theory (Bueno de Mesquita). The autocrat relies on a narrow “winning coalition.” It is more beneficial to distribute private goods (bribes, privileges) among supporters than public good...
·Information problems. Without a free press and opposition, information about the real state of affairs is distorted. Bad news is hidden, mistakes accumulate.
·East Asian “tigers”: South Korea under military governments (1961–1987)
·Taiwan under the Kuomintang (until 1987)
·Singapore under Lee Kuan Yew
·China: unprecedented growth under CPC leadership since 1978.
·Elite orientation toward development. Leaders genuinely sought modernization, not merely enrichment.
·Competent bureaucracy. Meritocratic selection, relative autonomy from patronage.
·Isolation from group interests. The state was not captured by oligarchs or lobbyists.
·Built-in feedback. Mechanisms for correcting errors—inner-party competition, experimentation, economic indicators.
·External threats. Competition with neighbors (North Korea, mainland China) disciplined elites.
·Personalist regimes. Concentration of power in one pair of hands leads to arbitrariness, corruption, destruction of institutions. Zimbabwe, Venezuela—examples of economic catastrophe.
·Resource autocracies. Oil and gas allow the regime to survive without developing the economy. Rent is distributed to maintain loyalty, not invested.
·Lack of checks and balances. Mistakes are not corrected, critics are suppressed, information is distorted. The result—accumulation of problems until crisis.
·Succession problem. Even successful autocrats are not eternal. Transfer of power often destabilizes the regime and the economy.
·Catch-up vs. frontier. Authoritarianism may be effective for catch-up development—copying and adapting existing technologies. But innovation at the frontier requires freedom of thought, tolerance f...
·Control and creativity are incompatible. Innovation requires experimentation, unorthodox thinking, the right to fail—all of which authoritarian control suppresses.
·The China test. Can China transition from imitation to innovation while preserving its authoritarian system? This is the main question of the 21st century.
·Growth of the middle class. Economic development creates an educated middle class demanding political participation.
·Modernization theory. As development progresses, pressure toward democratization increases. Lipset: democracy is the "natural" state of wealthy societies.
·Alternative: can the regime satisfy material demands without political liberalization? Singapore, contemporary China—attempts at such a path.
·The middle-income trap. The transition from extensive growth to intensive may require institutional reforms incompatible with authoritarianism.
·The type of regime matters. Not all autocracies are alike. One-party regimes with meritocracy are more stable and predictable than personalist ones.
·Look for built-in checks. Even in autocracies, there may be limitations on power—party organs, technocrats, regional elites.
·Monitor succession. Leadership change is a critical moment. Institutionalized succession reduces risks.
·Assess the time horizon. An autocrat planning to transfer power to his son behaves differently than one who does not know what tomorrow will bring.

Authoritarian Regimes and the Economy Authoritarian regimes remain a widespread form of governance in the modern world. How do they function economically? Why do some autocracies grow rapidly while others stagnate? What are the advantages and disadvantages of the authoritarian development path?

Authoritarian regimes are not monolithic—they differ in structure and functioning:

The connection between authoritarianism and innovation is especially problematic:

Democratization and Its Economic Consequences

·Sufficient inequality so that the masses want redistribution
·Insufficiently strong threat of revolution for the elite to prefer repression
·Capital mobility reduces the costs of democracy for the elite
·Liberalization: easing of repression, expansion of freedoms while retaining authoritarian power.
·Transition period: negotiations about new rules of the game, initial competitive elections, uncertainty.
·Consolidation: democracy becomes the “only game in town.” All significant actors accept democratic rules.
·Deepening: improvement in the quality of democracy — rule of law, accountability, participation.
·Uncertainty. The transition period creates uncertainty regarding property rights and economic policy. This may restrain investment.
·Redistributive pressure. New voters demand redistribution. Fiscal pressure may increase.
·Political instability. Competition for power may destabilize the economy.
·Democratization increases GDP per capita by about 20% over 25 years
·The effect operates through increased investments (especially in human capital), economic reforms, reduced social conflict
·Democracies invest more in education and healthcare
·Influence of the wealthy on the political process (lobbying, campaign financing)
·Capital mobility limits taxation
·Voters do not always vote according to economic interests
·Legitimacy. Democratically elected governments have a mandate for reforms. The population is willing to tolerate short-term costs.
·Feedback. Democracy allows for reforms to be adjusted based on feedback from those adversely affected.
·Compensation. Democratic governments can compensate those who lose from reforms, securing support.

The transition from authoritarianism to democracy is one of the most important political processes of modernity. What are its economic causes and consequences? How does democratization influence growth, inequality, and economic policy?

Samuel Huntington distinguished three waves of democratization in world history:

First Wave (1828–1926): gradual expansion of suffrage in Western Europe and North America. Democratization proceeded slowly, over decades.

Second Wave (1943–1962): democratization after World War II — West Germany, Japan, Italy, decolonization. Partially reversed by military coups in Latin America and Africa.

Electoral Authoritarianism

·Control over the media. State television dominates the information space; independent media are marginalized through pressure on owners, withdrawal of licenses, and judicial prosecution of journali...
·Use of state resources. The ruling party uses the administrative apparatus to mobilize voters. State contracts, subsidies, and social payments are directed to loyal regions and groups. Civil servan...
·Pressure on the opposition. Opposition leaders are subjected to criminal prosecution on fabricated charges, are not allowed to participate in elections, and their parties are deprived of registrati...
·Falsifications. Direct falsifications—ballot stuffing, “carousel voting,” manipulations during counting—are used when other methods are insufficient. However, “high-quality” electoral autocracies p...
·Legitimation. After the Cold War, democracy became the global norm. Elections are a way to claim democratic legitimacy, satisfying international partners and part of the domestic population.
·Information. Elections reveal the actual level of support for the regime. The autocrat learns which regions are loyal, which elites effectively mobilize voters, and where discontent exists.
·Co-optation of elites. Access to power through elections creates incentives for elites to support the regime. Victory in elections “consecrates” the distribution of posts and resources.
·Managing the opposition. The electoral arena channels opposition activity into a controlled track. The opposition is occupied with preparing for elections instead of revolutionary mobilization.
·Risk of defeat. Sometimes control fails and the opposition wins. “Color revolutions” (Serbia 2000, Georgia 2003, Ukraine 2004, Kyrgyzstan 2005) demonstrated that mass mobilization after stolen elec...
·Delegitimization. Obvious falsifications undermine the legitimacy that elections are supposed to provide. Mass protests after the elections in Belarus in 2020 are an example of such delegitimization.
·Intra-elite splits. Elections create an arena for competition among elites. Losing factions may defect to the opposition or organize a coup.
·Democratization. Under pressure from below or from outside, the regime may open up, allowing genuinely competitive elections. Examples: Mexico (the long PRI rule ended in 2000), Taiwan, South Korea.
·Closure. After a legitimacy crisis, the regime may shift to harsher authoritarianism, abandoning the electoral façade. Belarus after 2020, Venezuela in the 2010s are examples of such dynamics.
·Consolidation. The regime may stabilize in a hybrid form, balancing liberalization and repression. Russia in the 2000–2020s is an example of relatively stable electoral authoritarianism.
·Resource rent. Oil, gas, and minerals provide regimes with resources to buy off elites and the population without the need to develop taxation and accountability. The “resource curse” is a factor i...
·Economic growth. Regimes that deliver economic growth enjoy greater support. China is not an electoral autocracy, but demonstrates that economic success can legitimize non-democratic rule.
·Distribution and clientelism. Electoral autocrats use state resources to “buy” votes through targeted transfers, subsidies, and social programs. Clientelist networks link voters to power through ma...
·Diffusion. Successes of electoral autocrats inspire imitators. Manipulation techniques spread through experience sharing, consultants, and imitation.
·External pressure. Western countries and international organizations criticize unfair elections, impose sanctions, and condition aid. However, the effectiveness of pressure is limited, especially w...
·Authoritarian support. Authoritarian powers support each other: legitimize disputed elections, block international pressure, provide economic aid.

Electoral Authoritarianism Electoral authoritarianism is a political regime in which multiparty elections are held, but they are neither free nor fair. The ruling party or leader manipulates the electoral process, ensuring their own victory while maintaining the appearance of democratic legitimac...

Scale of the phenomenon After the Cold War, the number of countries holding multiparty elections rose sharply. By the 2020s, elections are held in almost all countries of the world. However, the quality of these elections varies greatly. According to the V-Dem project, about half of all electoral...

Why elections? Why do autocrats risk holding elections if they might lose? Studies indicate several functions of electoral authoritarianism:

Vulnerabilities of electoral authoritarianism Electoral authoritarianism is not without vulnerabilities:

Political Business Cycles

Classical Models → Channels of Influence → Empirical Evidence → Consequences of Political Cycles → Institutional Constraints → Political Economy Interpretation

Rational Models

·Fiscal policy. Government spending is the most direct tool. Before elections, governments increase social transfers, infrastructure projects, and public sector salaries. Research finds significant ...
·Monetary policy. In countries where the central bank is not independent, the government can pressure for looser monetary policy before elections. Central bank independence weakens this channel.
·Regulation and price controls. Governments control prices on certain goods (energy carriers, basic products), subsidize producers, postpone tariff increases. These measures create the illusion of l...
·State-owned enterprises. In countries with a large public sector, state-owned companies are used for political purposes: hiring workers, setting low prices, investing in regions.
·Developing countries. Evidence of political business cycles in developing countries and young democracies is much stronger. Fiscal deficits grow before elections, money supply increases, exchange r...
·Conditional effects. Political business cycles are stronger under certain conditions: young democracies, weak institutions, low voter awareness, absence of an independent central bank, close electo...
·Macroeconomic instability. Cyclical policy causes fluctuations not related to fundamental economic factors. Booms are followed by recessions, increasing uncertainty for businesses and households.
·Inflationary bias. If governments systematically stimulate the economy before elections, the result is chronically elevated inflation. This undermines long-term growth and redistributes wealth from...
·Suboptimal spending. Pre-election expenditures are often inefficient: projects are selected according to political, not economic criteria. “White elephants”—large-scale projects with no economic se...
·Debt accumulation. Fiscal expansion without subsequent consolidation leads to accumulation of government debt. This limits the government’s future capabilities and creates risks of debt crises.
·Independent central bank. Delegating monetary policy to an independent body focused on price stability is the most widespread institutional solution. Central banks with a clear mandate and protecti...
·Fiscal rules. Constitutional or legislative limits on budget deficit, debt, and spending restrict fiscal manipulations. The Stability and Growth Pact in the EU is an example of an international fis...
·Transparency. Requirements for disclosure of budget information, independent audits, and fiscal councils make hidden manipulations more difficult. Informed voters and media can punish opportunistic...
·International commitments. Membership in international organizations, conditions of international loans, and reputational considerations constrain the government’s freedom of action.

Political business cycles are systematic fluctuations in economic activity connected with the electoral calendar. The theory predicts that governments manipulate the economy to increase their chances of reelection: they stimulate growth before elections and implement unpopular reforms afterward. ...

William Nordhaus in 1975 proposed a model in which politicians manipulate macroeconomic policy to win elections. Before elections, the government stimulates the economy (cuts taxes, increases expenditures, eases monetary policy), creating a temporary boom. After elections, it has to fight inflati...

Douglas Hibbs suggested an alternative model: parties pursue different economic goals reflecting the interests of their electorates. Left-wing parties (relying on workers) prioritize employment and are willing to tolerate higher inflation. Right-wing parties (relying on the middle class and busin...

Models with rational expectations (Rogoff, Alesina) weaken the assumption of “short-sighted” voters. In these models, politicians signal their competence through economic policy. Manipulations are limited because rational voters foresee the consequences.

Public Choice and Political Incentives

Public Choice Theory: Fundamentals

·Methodological individualism. Collective entities (the state, parties, bureaucracy) have no goals of their own. Only individuals act, pursuing their own interests.
·Rationality. Political actors — voters, politicians, bureaucrats — act rationally, maximizing their utility. Politicians seek reelection, bureaucrats seek budget expansion, voters seek favorable po...
·Exchange as a model of politics. Politics is the exchange of votes for policy. Politicians "sell" policy decisions in exchange for votes and support.
·Symmetry. The same behavioral assumptions as in economics (self-interest, rationality) apply to politics. There are no grounds to believe that people become more altruistic upon entering public ser...
·Logic. If the benefit from collective action accrues to all group members regardless of participation, the rational individual will prefer to "free ride." The result is underprovision of the collec...
·Example. Consumers suffer from tariffs, but each consumer loses little, and the costs of organization are high. Producers each gain a lot, they are few, organizing is easier. Result — tariffs.
·Group size matters. Small groups organize more easily — each member’s contribution is more noticeable, control is simpler, the benefit per person is larger.
·Asymmetry of interests. Concentrated interests (producers, unions of specific industries) defeat diffuse ones (consumers, taxpayers).
·Logic. The chance of affecting the outcome of elections with one’s vote is negligible. The benefit of informed voting is distributed among all, while the cost of gathering information is borne by t...
·Voters vote based on superficial information, symbols, emotions
·Politicians can promote inefficient policies beneficial to organized groups
·Media and "shortcuts" (party affiliation, endorsements) substitute deep analysis
·Rational irrationality (Caplan). Beliefs are also a consumer good. People derive pleasure from certain beliefs and "buy" them cheaply when the cost of delusion is spread out.
·Explicit logrolling: "I vote for your project, you — for mine." Allows consideration of preference intensity.
·Implicit logrolling: combining different issues into one package. Each gets something important for themselves.
·Pork barrel: local projects financed from the federal budget to attract district voters. The costs are spread among all taxpayers.
·Government failures. Just as markets have "failures," so does the state. One cannot compare the real market with the ideal state — real must be compared with real.
·Institutional design. Institutions are needed to limit abuses: constitutional constraints, separation of powers, federalism, rules instead of discretion.
·Skepticism of interventions. Every government intervention creates opportunities for rent-seeking. Costs and benefits must be carefully weighed.
·Constitutional economics. The rules of the game are more important than specific decisions. Institutions should be designed with participants’ incentives in mind.

Public choice theory applies economic analysis to political processes. Instead of the romantic notion of politicians as servants of the people, it considers them as rational agents pursuing their own interests. This is not cynicism, but a scientific program with profound practical consequences.

Public choice theory emerged in the 1960s at the intersection of economics and political science: James Buchanan — founder of the school, Nobel laureate of 1986. His main idea: constitutions should limit the power of the majority to protect individual rights. Gordon Tullock — Buchanan’s coauthor,...

Problem: logrolling can lead to excessive spending. Each project is inefficient, but passes thanks to coalitions.

Rent-Seeking and Its Consequences

Rent-seeking — one of the central concepts in the theory of public choice. This is activity aimed at obtaining wealth through political mechanisms rather than through value creation. Rent-seeking is the main channel through which politics distorts the economy.

What is rent? In the economic sense, rent is income above what is necessary to attract a resource to this use:

Ricardian rent: excess income to the owner of a resource due to its scarcity (fertile land, unique talent). Monopoly rent: superprofits thanks to market power. Political rent: income received due to political decisions — licenses, tariffs, subsidies, regulation. Key distinction: market rent arise...

Lobbying. Direct influence on legislators and officials. Providing information, arguments, access — and sometimes bribes. Campaign financing. Donations to politicians in exchange for favorable decisions. A legal form of “buying” policy. Revolving doors. Regulators move to regulated industries and...

Bureaucracy and Government Failures

·Bureaucrats maximize the budget of their agency
·Budget is associated with prestige, power, salary, opportunities
·Bureaucrats possess an informational advantage over politicians
·Politicians cannot effectively control the bureaucracy
·Bureaucrats may maximize not the total budget, but the discretionary budget (the portion that can be freely spent)
·Bureaucrats value a quiet life, leading to risk aversion and avoidance of innovation
·Career incentives influence behavior
·Rent-seeking. Resources are diverted from production to the struggle for political rents.
·Rational ignorance. Voters do not control politicians; policy diverges from the majority's preferences.
·Short-termism. Politicians focus on the election cycle, not on long-term consequences.
·Bureaucratic bloat. The public sector is larger than optimal.
·Regulatory capture. Regulators operate in the interests of the regulated.
·Absence of feedback. Without market signals (prices, profits), it is difficult to know whether resources are used efficiently.
·Lack of competition. State agencies are usually monopolists. There is no competitive pressure to lower costs or improve quality.
·Soft budget constraints. Inefficient bodies do not go bankrupt. On the contrary, problems are often "treated" by increasing the budget.
·Absence of residual rights. In a private firm, the owner receives the residual profit—a strong efficiency incentive. A bureaucrat has no claim to "savings"—there is no incentive to economize.
·Difficulty of dismissal. Protection of civil servants from arbitrary firing (important for independence) reduces incentives for diligence.
·Career incentives. Bureaucrats are concerned with their careers. This creates an incentive for safe, conformist behavior and risk aversion.
·New Public Management. The movement of the 1980s–1990s for the application of managerial methods in the public sector: performance measurement, pay for results, competition, outsourcing.
·Privatization and competition. Transfer of functions to the private sector where possible. Competition among service providers (vouchers in education).
·Agencification. Creation of agencies with clear goals and autonomy. Contracts between ministries and agencies.
·Performance budgeting. Funding tied to measurable outcomes, not expenditures.
·Electronic government. Automation reduces discretion and corruption, increases transparency.
·Bureaucratic resistance. Reforms threaten insiders' interests, who resist.
·Difficulty of measurement. Many public sector outcomes are hard to measure. Measuring what is measurable distorts incentives ("teaching to the test").
·Politicization. Reforms may be used for political purposes—to cut "wrong" programs.
·Transaction costs. Contracts, monitoring, tenders—all incur costs. Sometimes hierarchy is more efficient than the market.

The state is not some abstract well-intentioned agent, but rather a collection of organizations with their own interests. Bureaucracy—the main instrument of state power—follows its own logic, which does not always coincide with the public good.

Result: bureaucracy produces more than is optimal, and at inflated prices. The public sector is systematically bloated.

Hierarchy of principals: Citizens → politicians → senior officials → rank-and-file bureaucrats

Informational asymmetry. Bureaucrats know more about real costs and possibilities than their superiors. They can use this knowledge in their own interests.

Corruption: Causes and Consequences

Forms and Types of Corruption → Economic Analysis of Corruption → Causes of Corruption → Economic Consequences of Corruption → Combating Corruption

·Bribery: payment for a service that an official should provide for free, or for the violation of rules by an official.
·Extortion: an official creates artificial obstacles and demands payment for their removal.
·Embezzlement: misappropriation of public funds.
·Nepotism and cronyism: appointing relatives and friends to positions.
·Conflict of interest: making decisions that personally benefit the official.
·State capture: systematic distortion of laws and regulations in the interests of narrow groups.
·Becker’s Model. The official compares the benefit from a bribe with the risk of punishment. Corruption is profitable if:
·Consequences:
·Higher salaries reduce the attractiveness of bribes
·Strengthening oversight and punishments restrains corruption
·The greater the discretion of the official, the more opportunities for corruption
·Multiple equilibria. Corruption tends to be self-sustaining:
·If everyone takes bribes, not taking them is stupid and dangerous
·If no one takes bribes, taking them is risky
·“Good” and “bad” equilibria are possible
·Institutional factors:
·Weak rule of law, ineffective courts
·Excessive regulation, creating opportunities for rent-seeking
·Low transparency of government decisions
·Weak oversight and accountability
·Economic factors:
·Poverty—low salaries for officials
·Inequality—the rich can “buy” power
·Natural resources—rents create opportunities for corruption
·Political factors:
·Authoritarianism—lack of political competition and oversight
·Weak civil society and media
·Political instability—short planning horizon
·Cultural factors:
·Norms tolerant of corruption
·Importance of personal ties vs. impersonal rules
·Trust in institutions
·Allocative distortions. Resources are directed not where they are most effective, but where there are opportunities for corruption. Investments go into projects with larger bribes, not with greater...
·Reduction in investment. Corruption is a tax on investment, and an unpredictable one. Uncertainty holds back investment more than even high but predictable taxes.
·Rising costs. Bribes increase the cost of doing business. Infrastructure projects in corrupt countries are significantly more expensive.
·Undermining competition. Those who are most connected, not most efficient, win. This suppresses innovation and productivity growth.
·Deterioration of public services. Corruption decreases the quality of public services—education, healthcare, infrastructure.
·Inequality. The poor suffer more from corruption—they cannot pay bribes and depend on public services.
·Empirics. Research shows a negative relationship between corruption and growth, investment, human development.

"Grease the Wheels"?

·Argument: under conditions of excessive regulation and inefficient bureaucracy, bribes “grease the wheels,” speeding up processes.
·Corruption creates incentives to complicate regulations
·Bribes don’t speed up but slow down processes (extortion)
·Empirically: corruption is associated with worse, not better, outcomes even under poor regulation
·Simplifying regulation. Fewer rules—fewer opportunities for corruption. Deregulation is a powerful anti-corruption tool.
·Transparency. Publication of budgets, contracts, declarations. E-procurement reduces corruption.
·Independent anti-corruption bodies. Effective if protected from political pressure (Hong Kong, Singapore).
·Freedom of the press. The media is a watchdog, exposing corruption.
·Competition. Political competition creates incentives to expose opponents’ corruption.
·International pressure. Anti-corruption conventions, FATF, conditions of international organizations.
·Changing norms. In the long run, it is necessary to change the culture, but this is the most difficult.

Corruption: Causes and Consequences Corruption—the use of public power for private gain—is a universal phenomenon, but its scale varies radically between countries. Why are some societies corrupt while others are not? What are the economic consequences of corruption?

“Grand” vs. “petty” corruption. Petty corruption—bribes at the grassroots level. Grand corruption—corruption at the highest levels, distorting policy.

Regulatory capture: regulator capture

Classical theory of capture → Mechanisms of capture → Examples of capture → Forms of capture → Counteracting capture → Criticism of capture theory

·Information asymmetry. The regulated industry possesses specialized knowledge that the regulator does not have. The regulator depends on information provided by the industry, which gives the indust...
·Resource advantage. The industry has resources for lobbying: money, personnel, and expertise. Consumers and the general public are dispersed and unorganized. As Olson showed, concentrated interests...
·Revolving doors. Personnel move between the regulator and the industry. Regulator officials count on future careers in the industry and try not to spoil relations with potential employers. Former i...
·Cultural proximity. Regulators and industry representatives interact, attend the same conferences, and share a professional culture. An "epistemic community" is formed with common views on problems...
·Political pressure. The industry exerts pressure through politicians: funds campaigns, lobbies for appointments to regulatory bodies, threatens plant closures and layoffs.
·Aviation safety. The Boeing 737 MAX crashes (2018–2019) exposed problems at the FAA (Federal Aviation Administration of the USA). The regulator delegated certification functions to Boeing itself, t...
·Oil and gas industry. The U.S. Minerals Management Service (MMS) before the Deepwater Horizon disaster (2010) was known for close relationships with oil companies. Employees received gifts, accepte...
·Telecommunications. The FCC (Federal Communications Commission) has repeatedly been criticized for decisions in favor of large telecommunications companies: approving mergers, relaxing net neutrali...
·Material capture — direct bribery, personal gain for officials. This is the most blatant form, bordering on corruption.
·Cultural (cognitive) capture — the regulator internalizes the industry's worldview. Unconsciously, officials begin to see the world through the eyes of the regulated, to adopt their definitions of ...
·Political capture — the industry controls politicians, who in turn control appointments and the budget of the regulator.
·Institutional design. Separation of functions between several agencies, mandatory consumer representation on boards, staff rotation, restrictions on "revolving doors" (ban on working in the industr...
·Transparency. Publicity of decisions, mandatory disclosure of contacts with the industry, and open hearings allow external oversight of the regulator.
·Public participation. Formal mechanisms for the participation of consumer organizations, NGOs, and the general public in the regulatory process. However, the resource imbalance remains a problem.
·Funding and independence. Adequate funding enables the regulator to hire qualified personnel and conduct independent research, rather than relying on industry information.
·Alternatives to regulation. Sometimes the best way to avoid capture is to minimize regulation. Libertarian critics argue that regulation is inevitably captured and that market competition is the be...
·Excessive generalization. Not all regulators are captured. Some effectively protect the public interest, especially in areas with organized consumer groups or strong public attention.
·Ignoring other failures. Capture is not the only problem of regulation. Bureaucratic inertia, incompetence, and contradictory mandates also lead to failures.
·Normative ambiguity. What should be considered the "public interest"? The interests of the industry and society may coincide. A successful industry creates jobs and tax revenues. The line between l...

Regulatory capture: regulator capture Regulatory capture (захват регулятора) is a situation in which a regulatory agency, created to protect the public interest, begins to act in the interests of the regulated industry. This phenomenon is one of the central examples of "government failure" in pub...

The theory of capture was developed by economist George Stigler in the article "The Theory of Economic Regulation" (1971). Stigler showed that regulation is not simply a response to "market failures", but a product for which there is demand and supply. Industries "demand" regulation when it can b...

Bureaucracy and Public Administration

·Hierarchical organization. A clear command chain from the top to the bottom. Each official is subordinate to a superior and supervises subordinates.
·Specialization and division of labor. Functions are clearly distributed among departments. Each official is responsible for a certain area.
·Formal rules. Activities are regulated by written rules and procedures. Decisions are made based on rules, not personal discretion.
·Meritocratic recruitment. Officials are selected based on qualifications (exams, diplomas), not connections or bribery.
·Career incentives. Public service is a long-term career with predictable advancement based on seniority and merit.
·Impersonality. Officials apply rules impartially, making no distinctions between citizens.
·Bureaucrats have their own interests. They seek to maximize their agency's budget: a larger budget means more power, prestige, and opportunities for employees.
·Information asymmetry. Bureaucrats know the “production function” of their agency—how many resources are needed to achieve goals. Lawmakers, who control the budget, do not have this information.
·Monopoly. Often, the agency is the sole provider of certain services. There is no competition, and the bureaucrat can overstate the resources requested.
·Politicians set goals and allocate resources but cannot directly observe and control the bureaucracy’s activity.
·Bureaucrats possess information about actual costs and results that politicians do not have. They can pursue their own interests (less work, more resources) at the expense of the principal's goals.
·Monitoring. Politicians create reporting systems, hold hearings, and appoint inspectors. However, monitoring is expensive and imperfect.
·Incentives. Pay-for-performance systems, career incentives for good work, sanctions for poor work. In practice, measuring outcomes in the public sector is difficult.
·Competition. Creating competing agencies, outsourcing, voucher systems. Competition disciplines, but is not always possible.
·Limiting discretion. Detailed rules restrict bureaucrats' room for maneuver, but decrease flexibility and adaptability.
·“Goal displacement.” The bureaucracy begins to work for itself rather than fulfilling its mission. Rules and procedures become an end in themselves (ritualism, according to Merton).
·Rigidity. Formal rules hinder adaptation to changing conditions. Bureaucracy responds slowly to new problems.
·“Bureaucratic politics.” Agencies compete for resources and influence, sometimes sabotaging policies promoted by others. Interdepartmental conflicts are a characteristic feature of any government.
·Decentralization. Transfer of authority to lower levels of administration, closer to “clients”—citizens.
·Results orientation. Instead of process control—evaluation of results. Agencies receive autonomy in means but are accountable for achieving goals.
·Marketization. Introduction of market mechanisms: bidding, outsourcing, vouchers. The state is a “steersman, not a rower.”
·Client-orientation. Citizens are considered “clients”; their satisfaction is a measure of service quality.
·Patrimonialism. Appointments are based on personal connections, ethnicity, loyalty to a patron, not qualification.
·Corruption. Officials extract rent from their positions: demand bribes for services, embezzle public funds.
·Low pay. Salaries in the public sector are insufficient for a decent living, which drives corruption and moonlighting.
·Politicization. Changes in government lead to mass dismissals and appointments, undermining professionalism and continuity.

Bureaucracy and public administration Bureaucracy—the administrative apparatus of the state—performs the critical function of implementing political decisions. The quality of bureaucracy largely determines the state's ability to achieve its set goals. Public choice theory analyzes bureaucracy as ...

Weberian Model Max Weber, in the early 20th century, described the “ideal type” of rational bureaucracy:

Weberian bureaucracy is an instrument of rational governance, free from patrimonialism (rule through personal connections and loyalty). Studies show that countries with more Weberian bureaucracy demonstrate better economic performance.

Niskanen's Theory William Niskanen, in his book “Bureaucracy and Representative Government” (1971), proposed the model of the budget-maximizing bureaucrat. In this model:

The Political Economy of Inequality and Redistribution

Inequality: Measurement and Trends

How to Measure Inequality → Historical Trends → Reasons for Rising Inequality → Piketty’s Theory → Consequences of Inequality

·Gini coefficient. The most popular indicator. Ranges from 0 (complete equality) to 1 (everything in the hands of one person). Calculated on the basis of the Lorenz curve—a graph showing the share o...
·Decile and quintile ratios. The ratio of the incomes of the top 10% (20%) to the bottom 10% (20%). A straightforward, easy-to-understand measure.
·Shares of top groups. The share of national income going to the top 1%, 0.1%, 0.01%. Especially important for analysis of wealth concentration at the very top.
·Theil index. An indicator that allows decomposition—it is possible to divide total inequality into "within-group" and "between-group" components.

What to Measure?

·Income vs. wealth. Wealth is distributed even more unevenly than income.
·Market vs. disposable income. Before and after taxes and transfers.
·Individual vs. household. Should family size be taken into account?
·Consumption. Consumption inequality is lower than income inequality (smoothing).
·Early 20th century: extreme inequality. The top 1% received 15–25% of national income in developed countries. Enormous concentration of wealth among elites.
·1914–1980: "the great compression." World wars, the Great Depression, progressive taxation, and the welfare state sharply reduced inequality. The share of the top 1% fell to 5–10%.
·1980–present: "the great divergence." Inequality is rising again, especially in Anglo-Saxon countries. The share of top groups has returned to levels seen at the beginning of the century.
·Global inequality: inequality between countries is decreasing (China, India are catching up), but inequality within countries is growing.
·"Milanovic's elephant": the winners are the middle class of developing countries and the global elite; the losers are the middle class of developed countries.
·Technologies. Skill-biased technological change: new technologies increase demand for skilled labor, reducing demand for unskilled labor. The education premium rises.
·Globalization. Competition with cheap labor from developing countries depresses wages in labor-intensive sectors of developed countries. Capital benefits from global markets.
·Weakening of institutions. Decline in union coverage, deregulation of the labor market, and decline in (real) minimum wages have weakened workers’ positions.
·Tax policy. Declining progressivity of taxes, reduced rates on capital income, inheritance. The rich pay a smaller share than before.
·Financialization. Growth of the financial sector with high salaries and bonuses. A significant part of the income growth of the top 1% is financial earnings.
·Superstars and winner-take-all. In certain professions (sports, entertainment, management), technology and globalization amplify gaps—the stars take all.
·r > g. When the return on capital ($r$) exceeds the growth rate of the economy ($g$), wealth becomes concentrated. Owners of capital get richer faster than the economy as a whole.
·Historical data. Piketty showed that $r > g$ is the historical norm, and the low-inequality twentieth century was an exception. Wars and inflation destroyed capital; high growth rates narrowed the ...
·Forecast. With slowing growth (demographics, technological frontier), inequality will increase. Without interventions, there will be a return to "patrimonial capitalism".
·$r$ is a gross return, net return is much lower
·Wealth is spent, divided among heirs, given to charity
·Entrepreneurs create new wealth, not only inherit it
·Institutions and policy matter—it is not an automatic process

Economic arguments:

·Inequality can reduce aggregate demand (the poor spend more)
·Credit constraints prevent the poor from investing in human capital
·High inequality is associated with financial crises

Political arguments:

·Wealth is converted into political influence
·Elites capture institutions
·Growth of populism as a reaction to inequality

Social arguments:

·Inequality correlates with social problems—crime, health, trust (book "The Spirit Level")
·Restricts social mobility
·Undermines social cohesion

Inequality is one of the central themes of political economy. How is inequality measured? How has it changed historically? Why has inequality grown in many countries over recent decades? The answers to these questions are key for understanding contemporary politics and economics.

Thomas Piketty and other economists have reconstructed the long-term dynamics of inequality:

Thomas Piketty, in his book "Capital in the Twenty-First Century", proposed an influential theory of inequality:

Redistribution and the Welfare State

Emergence of the Welfare State → Welfare State Models → Instruments of Redistribution → Political Economy of Redistribution → Economic Effects of Redistribution → Challenges for the Welfare State

·Bismarckian model (Germany, 1880s): The first systematic social insurance system—pensions, sickness and accident insurance. Goal: to connect workers to the state and counteract socialism.
·Liberal reforms (United Kingdom, 1900–1910s): Old-age pensions, unemployment insurance, basic medical care.
·New Deal (USA, 1930s): Social Security, unemployment insurance, work programs. Response to the Great Depression.
·Postwar consensus (1945–1970s): Expansion of the welfare state in all developed countries. Beveridge Plan in the UK, Scandinavian model, continental systems.
·Liberal model (USA, UK, Australia):
·Means-tested benefits—help only for the poor
·Low universal payments
·Privatized risks (private insurance, pension funds)
·Stigmatization of benefit recipients
·Low spending as a share of GDP
·Conservative-corporatist model (Germany, France, Italy):
·Social insurance linked to employment
·Preservation of status differences between occupational groups
·Traditional family as the unit—male breadwinner, female homemaker
·Medium level of expenditures
·Social-democratic model (Scandinavia):
·Universal rights for all citizens
·High benefits replacing market income
·Decommodification—independence of welfare from the market
·Active labor market policy
·High level of expenditures (25–30% of GDP)
·Mediterranean (Spain, Greece)—family as the basis of protection
·East Asian—“productivist,” oriented toward growth
·Post-socialist—transformation of the Soviet model
·Tax system:
·Progressive personal income tax
·Taxes on wealth, inheritance, property
·Tax credits and deductions for low-wage workers (EITC in USA)
·Cash transfers:
·Pensions—the largest budget item
·Unemployment benefits
·Child benefits
·Social assistance for the needy
·In-kind services:
·Education—the largest equalizer
·Care for children and the elderly
·Regulation:
·Minimum wage
·Employment protection
·Regulation of working hours
·Meltzer-Richard model: The higher the inequality, the more redistribution. The median voter is poorer than the average—votes for redistribution.
·Redistribution paradox: Empirically, the correlation is reverse: countries with more universal programs (Scandinavia) redistribute more than countries with means-tested programs (USA).
·Universal programs create broad support coalitions
·Means-tested programs are stigmatized and politically vulnerable
·The middle class supports programs that they themselves use
·Taxes distort incentives for labor and investment
·Benefits can create a “poverty trap”—making employment less attractive
·Administrative costs
·Moral hazard—abuse of the system
·Social insurance increases willingness to take risks (entrepreneurship)
·Investment in human capital of poor children
·Demand stabilization in recessions
·Social cohesion and political stability
·Demography: Aging populations increase spending on pensions and healthcare, reduce the taxpayer base.
·Globalization: Capital mobility limits taxation. Competition for investment creates pressure on social spending.
·New risks: The traditional welfare state is oriented to “old” risks (old age, unemployment). “New” risks—part-time employment, single parents, long-term care—require adaptation.
·Political polarization: The rise of populism, anti-immigrant sentiment creates pressure on universal programs.

Redistribution and the Welfare State The welfare state is a system of institutions that redistribute income and provide social protection. How did these systems arise? How do they differ among countries? What are their economic and political consequences?

Role of institutions: Proportional electoral systems are associated with greater redistribution. Coalition governments have to take more interests into account.

Role of ethnic heterogeneity: Ethnically diverse societies redistribute less. People are less inclined to help “others.”

Empirics: Scandinavian countries with high redistribution are rich, competitive, and innovative. The welfare state does not necessarily suppress growth. But the design of programs is important—activation, labor incentives.

Social Mobility and Equality of Opportunity

Types of Social Mobility → International Differences → Reasons for Differences in Mobility → Mobility Within the USA → Inequality of Opportunity → Policy to Increase Mobility

·Intergenerational mobility: the connection between the status of parents and children. If the children of the rich become rich and the children of the poor become poor, mobility is low.
·Intragenerational mobility: the change in status within a lifetime. Career advancement or decline.
·Absolute mobility: the proportion of people living better than their parents. Depends on overall economic growth.
·Relative mobility: the relationship between the positions of parents and children in the distribution. Can one climb the ladder, regardless of how high the ladder is?
·Income elasticity (IGE): what percentage of the income difference between parents translates into a difference in children's income. 0 = full mobility, 1 = complete reproduction.
·Rank-rank slope: the relationship between positions in the distribution.
·Transition matrices: the probability of moving between quintiles.
·High mobility: Scandinavian countries (IGE ~ 0.2). Denmark is a "model" case: origin poorly predicts income.
·Average mobility: Germany, Canada, Australia (IGE ~ 0.3).
·Low mobility: USA, United Kingdom (IGE ~ 0.5). Contrary to the myth of the "American dream", the USA is a country of low mobility.
·Very low mobility: Developing countries with high inequality (Brazil, Peru — IGE ~ 0.6–0.7).
·High-quality early childhood education smooths out initial differences
·Free higher education expands access
·School funding: In the USA, schools depend on local taxes—wealthy areas, good schools
·Social policy:
·Support for families with children reduces the impact of origin
·Healthcare—parental illness should not determine a child’s fate
·Housing policy—segregation reduces mobility
·Labor market:
·High minimum wage ensures a "floor"
·Unions compress the wage distribution
·Active labor market policies help with transitions
·Social capital and networks:
·Children of the rich have access to networks, information, mentors
·Segregation—the poor and rich live in different worlds—reduces mobility
·Low segregation—the poor and rich live nearby
·Low income inequality
·Good schools
·High social capital—community participation
·Stable families
·Responsibility vs. circumstances. Inequality due to different efforts and choices is permissible. Inequality due to circumstances of birth (family, genes, country) is unjust.
·Equality of opportunity: everyone starts from the same starting line, the result depends on effort.
·Where is the boundary between effort and circumstances? Diligence is also partly a result of upbringing.
·Genes—a circumstance? Then differences in talent are unfair.
·How to compensate for unequal starting conditions in practice?
·Early childhood. Investments in early childhood development yield the greatest return. Programs like Head Start, high-quality kindergartens.
·Education. Equalizing school funding, accessible higher education, support programs for students from poor families.
·Desegregation. Housing policy creating mixed neighborhoods. Relocation assistance programs (Moving to Opportunity).
·Family support. Child allowances, paid parental leave, affordable childcare allow parents to invest in children.
·Labor market. Minimum wage, active employment policy, retraining programs create opportunities for upward mobility among adults.

Social Mobility and Equality of Opportunity If outcome inequality is inevitable, perhaps equality of opportunity is more important? Social mobility—the ability to improve one's status regardless of origin—is often viewed as a key indicator of a society's fairness.

"The Great Gatsby Curve": Alan Krueger showed that countries with high inequality have low mobility. Inequality today predicts low mobility tomorrow.

Raj Chetty and colleagues demonstrated huge differences in mobility within the USA:

Geography of mobility: Mobility is high in some regions (Pacific Northwest, certain cities) and very low in others (South, Rust Belt).

Inequality Policy: Debates and Solutions

Conservative Arguments → Progressive Arguments → Policy Tools → Piketty’s Proposal: The Global Wealth Tax → Universal Basic Income → Political Economy of Reform

·Inequality is a result of freedom. People make different choices, put in different efforts, possess different talents. The result is inequality. Eliminating inequality requires restricting freedom.
·Incentives matter. The opportunity to get rich motivates diligence, risk-taking, innovation. Without inequality, there are no incentives.
·Redistribution reduces incentives for both the rich (taxes) and the poor (benefits).
·Trickle-down. Wealth is created at the top and “trickles down.” Investments by the rich create jobs. Low taxes stimulate growth, benefiting everyone.
·Absolute vs. relative level. What matters is the absolute standard of living, not the relative. If the poor live better than before, what difference does it make how much richer the wealthy have be...
·Government failures. Redistribution through the state is inefficient. Bureaucracy wastes resources; programs create dependency and poverty traps.
·Equality of opportunity is a myth. Children of the rich and poor do not have equal opportunities. Inequality of outcomes turns into inequality of opportunity for the next generation.
·Power of the rich. Economic inequality is converted into political inequality. The rich set the rules in their own favor. Democracy is undermined.
·Social costs. Inequality correlates with crime, poor health, distrust. Costs are borne by everyone.
·Economic instability. Extreme inequality leads to insufficient demand (the wealthy save more), financial bubbles, crises.
·Justice. The moral argument: extreme inequality is unjust, regardless of its economic consequences. Society should care for the vulnerable.
·Progressive taxation:
·Higher rates for high incomes
·Wealth taxes (discussed, rarely applied)
·Inheritance taxes
·Closing loopholes, fighting offshore evasion
·Predistribution:
·Minimum wage
·Strengthening labor unions
·Antitrust policy
·Financial regulation
·Universal programs:
·Free education
·Universal healthcare
·Basic income (discussed)
·Targeted programs:
·Aid to the poor
·Tax credits for low-wage earners (EITC)
·Food stamps
·Idea: a progressive global tax on net wealth (all assets minus debts). Low rates for middle wealth (1%), high rates for large fortunes (2–5%).
·Advantages:
·Directly addresses wealth concentration
·Stimulates productive use of capital
·Increases transparency—requires declaration of assets
·Global coordination is virtually impossible
·Asset valuation is complex and contentious
·Evasion and capital flight
·Taxing unrealized gains creates liquidity problems
·Idea: every citizen receives a regular cash payment—enough for basic needs, with no conditions or means-testing.
·Arguments “for”:
·Eliminates poverty traps—no loss of benefits when employed
·Administrative simplicity
·Freedom of choice—people decide themselves how to spend
·Protection from automation—income is not dependent on employment
·Arguments “against”:
·Expense—even a modest basic income requires enormous resources
·Reduced incentives to work
·Inflationary pressure
·Political infeasibility
·The wealthy—an organized interest. Elites influence policy through lobbying, campaign financing, media control. Reforms threatening their interests are blocked.
·Ideological dominance. Neoliberal ideas about the virtues of the market and the harms of redistribution have become dominant. “Common sense” argues against raising taxes.
·Divided voters. The poor do not vote as a single bloc. Racial, cultural, and religious differences impede class solidarity (especially in the US).
·Globalization as a limitation. Capital mobility creates the threat of “voting with their feet.” Countries compete for investment by lowering taxes.

Inequality Policy: Debates and Solutions Inequality is one of the most politicized topics. The left demands redistribution, the right defends the market. What arguments do the sides use? What policy solutions are proposed? How can we find a balance between efficiency and fairness?

Experiments: Pilot projects in Finland, Kenya, and Canada yield mixed results. Basic income does not dramatically reduce employment, improves well-being, but does not transform the situation.

Piketty's Thesis and the Debate on Capital

Central Thesis → Historical Dynamics → The Role of Inheritance → Political Proposals → Criticism of Piketty’s Thesis → Further Research → Significance for Political Economy

·Belle Époque (1870–1914). Period of extreme inequality. The top 1% received 20–25% of national income in European countries, even more in the USA. Wealth was even more concentrated. Inherited capit...
·“Great Compression” (1914–1945). Two world wars, the Great Depression, inflation, and progressive taxation destroyed fortunes. The share of upper groups dropped sharply.
·Postwar period (1945–1980). Inequality remained historically low. Strong labor unions, progressive taxes, the welfare state, fast economic growth (high $g$) — all these constrained wealth concentra...
·Neoliberal era (1980 — present). Inequality began to rise. Decreased tax progressivity, deregulation, weakening of labor unions, and financialization contributed to the growth of income and wealth ...
·Global progressive tax on capital. An annual tax on net wealth (assets minus liabilities) with rates rising with the size of the fortune. Global scope is necessary to prevent capital flight to tax ...
·Progressive inheritance tax. High rates on large inheritances to limit intergenerational transmission of inequality.
·Raising top income tax rates. Piketty considers that the optimal top rate is about 80% for incomes above a certain threshold.
·Transparency. Automatic exchange of financial information between countries to combat tax evasion.
·Empirical criticism. Piketty’s data have been scrutinized and challenged. The Financial Times revealed errors in spreadsheets (though these do not cancel the main conclusions). Debates continue abo...
·Political criticism. A global capital tax is not politically realistic. Coordination among hundreds of countries with divergent interests is impossible. Piketty’s proposals are utopian.
·Conceptual criticism. Piketty mixes different types of “capital”: productive capital (machines, buildings), housing, financial assets. The rise in housing prices in large cities is a different dyna...
·World Inequality Database. An online database on income and wealth distribution by country and over time — an open resource for researchers.
·“Capital and Ideology” (2019). Piketty’s new book, in which he extends the analysis to non-Western societies and emphasizes the role of ideologies in legitimizing inequality.
·Measuring offshore wealth. Gabriel Zucman estimated the scale of wealth hidden offshore — about 10% of world GDP.
·Restoring distribution to the center of the discussion. For decades, mainstream economics ignored questions of distribution, focusing on efficiency. Piketty showed that distribution is a central ec...
·Historical perspective. Long-term data show that current trends are not inevitable. Politics (wars, taxes, institutions) dramatically affected inequality in the past — which means it can affect it ...
·Political economy of inequality. Piketty emphasizes the political determinants of economic inequality and the economic consequences of political decisions. This is an exemplary political economy ap...

Piketty's thesis and the debate on capital The publication of Thomas Piketty’s book "Capital in the Twenty-First Century" in 2013 (English translation — 2014) became the major intellectual event in economics of the decade. The book revived the discussion on inequality, capital, and long-term tren...

Piketty’s main thesis is expressed in a simple formula: $r > g$, where $r$ is the average return on capital, $g$ is the rate of economic growth. When the return on capital steadily exceeds the rate of economic growth, wealth accumulates faster than the economy as a whole grows. Owners of capital ...

Piketty relies on large-scale historical data. He and his colleagues (Emmanuel Saez, Gabriel Zucman, Anthony Atkinson) collected data on the distribution of income and wealth over several centuries for many countries. This work itself is an outstanding achievement, having changed the empirical fo...

Piketty shows that inequality in developed countries is described by a U-shaped curve:

Unconditional Basic Income: Pros and Cons

Historical Origins → Arguments for UBI → Arguments Against UBI → Results of Experiments → Alternatives and Variations

·Universality. The payment is received by all citizens (or residents), not only certain categories (the poor, the unemployed, the elderly).
·Unconditionality. Receipt is not tied to any conditions: there is no requirement to seek work, undergo training, or demonstrate "worthy" behavior.
·Individuality. The payment goes to each individual, not to a household.
·Sufficiency. It is assumed that the payment is sufficient for basic needs (although the precise amount is a subject of discussion).
·Regularity. The payment is regular (usually monthly), not a one-time event.
·Automation and the future of labor. Technological progress — artificial intelligence, robotics — threatens mass unemployment. UBI is a way to ensure income for those whose jobs will disappear. This...
·Simplification of the welfare state. The existing social protection system is complex, bureaucratic, and humiliating for recipients. UBI replaces numerous programs with a single simple payment, red...
·Elimination of poverty. A universal payment above the poverty line guarantees that no one will fall into destitution. Unlike targeted programs, UBI does not create "poverty traps" — situations in w...
·Freedom and dignity. UBI gives people the opportunity to refuse poor working conditions. Employers will not be able to exploit workers' desperation. This strengthens labor's bargaining position.
·Recognition of unpaid labor. Caring for children, the elderly, domestic work, volunteering — all of these are societal contributions not rewarded by the market. UBI acknowledges this activity.
·Stimulation of demand. Payments to the population increase consumer demand, especially in recessions. This is a Keynesian argument in favor of UBI as a stabilization tool.
·Work incentives. If basic needs are met, will people still work? Neoclassical economics predicts a reduction in labor supply. Empirical data from pilot projects do not confirm a mass withdrawal fro...
·Inflation. If everyone receives additional money, prices will rise, and real purchasing power will not change. This argument is especially relevant if UBI is not accompanied by taxing the rich.
·Justice. Why pay millionaires? Resources are limited; it is better to direct them to those who truly need them. Targeted programs fight poverty more effectively within the same budget.
·The value of work. Work is not only a source of income, but also a structuring element of life, a source of meaning, social ties, and identity. UBI may weaken the connection to work, which has nega...
·Political unreality. The introduction of UBI would require revolutionary political changes. Current beneficiaries of social programs will defend their interests. Taxpayers will resist funding.
·Finland (2017–2018). 2000 unemployed people received €560 per month unconditionally. Results: slight improvement in employment, significant improvement in well-being and mental health.
·Kenya (GiveDirectly). A long-term experiment with unconditional transfers in rural villages. Results: increased consumption, investment in business and education, no reduction in employment.
·Stockton, California (2019–2021). 125 residents received $500 per month. Results: improvement in employment (full employment rose from 28% to 40%), reduction in anxiety and depression.
·Job Guarantee. The state acts as an "employer of last resort," offering jobs to all who wish at a guaranteed wage. This idea competes with UBI on the left flank.
·Negative Income Tax. Instead of universal payments — subsidies to those whose income is below a threshold. This is the targeted version of UBI preferred by economists concerned with incentives and ...
·Basic services. Instead of money — universal access to services: healthcare, education, housing, transport. This alternative appeals to those who do not trust individual choice in the market.

Unconditional Basic Income (UBI) — a regular cash payment to all citizens regardless of employment, income, or behavior — is experiencing a surge of interest in the 21st century. From the futuristic technological circles of Silicon Valley to left-wing social movements, the idea of UBI attracts su...

The idea of basic income has a long history: Thomas Paine in 1797 proposed to pay every citizen, upon reaching the age of 21, a lump sum as compensation for the loss of "natural inheritance" — communal land privatized by private owners.

Milton Friedman in the 1960s proposed the "negative income tax" — a system in which citizens with incomes below a certain level receive payments from the government instead of paying taxes. This is a variant of UBI supported by a conservative economist.

Pilot projects were conducted in the United States and Canada in the 1970s, in Namibia, India, Finland, Kenya, and other countries in the 21st century.

International Political Economy (IPE)

Fundamentals of International Political Economy

·Susan Strange — critique of the “strange non-encounter” between economics and political science
·Robert Gilpin — political economy of international relations
·Robert Keohane — regime theory, liberal institutionalism
·American IPE: positivist, quantitative, employs formal models
·British IPE: more critical, historical, normative
·Trade and interdependence promote peace
·International institutions assist in cooperation
·The market is an efficient mechanism for resource allocation
·States are not the only actors (TNCs, NGOs, international organizations)
·States are the main actors, pursuing national interests
·The economy is an instrument of power politics
·Relative, not absolute, gains matter
·The international system is anarchic — self-help is inevitable
·The world economy is a system of center-periphery exploitation
·Class interests are transnational
·Capitalism generates inequality and crises
·Focus on power and distribution
·Ideas, norms, and identities shape interests
·Economic institutions are social constructs
·What matters is how actors interpret their interests
·British hegemony (19th century) — gold standard, free trade, Pax Britannica
·American hegemony (after 1945) — Bretton Woods, GATT, the dollar as the world currency
·Trade globalization — the growing share of trade in GDP
·Financial globalization — free movement of capital
·Production globalization — global value chains
·Migration — movement of people
·Restriction of state autonomy?
·Rising inequality within countries
·Backlash — protectionism, populism, nationalism
·New forms of governance — multilevel, networked

International Political Economy (IPE) studies the interaction of politics and economics on a global level. How do states shape the world economy? How do global economic forces influence politics? IPE acts as a bridge between economics and international relations.

Formation of IPE as a Discipline IPE emerged as a separate field of knowledge in the 1970s:

Context. The collapse of the Bretton Woods system (1971), the oil crisis (1973), and stagflation showed that the economy cannot be studied separately from politics, nor international relations separately from the economy.

International trade. Who wins and loses from trade? Why do countries protect certain industries? How has the trading system evolved from GATT to the WTO?

Political Economy of International Trade

·Ricardian model (comparative advantage). Even if a country produces everything less efficiently, it benefits from specializing in what it has a relative advantage in.
·Heckscher-Ohlin model. Countries export goods that intensively use their abundant factor (labor, capital, land). Trade equalizes factor prices.
·New trade theory. Economies of scale and imperfect competition explain intra-industry trade between similar countries.
·Stolper-Samuelson model. Trade raises incomes of owners of the abundant factor and lowers incomes of owners of the scarce factor. In wealthy countries, capital wins and labor loses from trade with ...
·Specific factors model. Factors are "stuck" in sectors. Export sectors win, import-competing sectors lose.
·Grossman-Helpman model ("Protection for Sale"). Industry lobbyists "buy" protection from politicians. The government maximizes the weighted sum of welfare and lobbyist contributions. Explains tarif...
·Median voter. In a democracy, the decisive vote is the median voter. If the median voter is a labor owner, they vote for protection from imports from countries with cheap labor.
·Institutions matter. Systems with proportional representation protect geographically dispersed groups. Majoritarian systems protect geographically concentrated groups (districts).
·Delegation. Countries delegate trade policy to the executive and international organizations (WTO), to isolate it from protectionist pressure.
·Protectionism in the 19th century. After the Napoleonic Wars, high tariffs in most countries. Exception—Great Britain after repeal of the Corn Laws (1846).
·First globalization (1870–1914). Lower transport costs, gold standard, relatively low tariffs. Massive migration and capital flows.
·Interwar period. Tariff war, Smoot-Hawley (1930), beggar-thy-neighbour policies deepened the Depression.
·Bretton Woods and GATT (1944–1994). The US creates a liberal order. GATT—a mechanism for gradual liberalization through rounds of negotiations. Tariffs fall from 40% to less than 5%.
·WTO (1995–). Institutionalization of GATT. Dispute resolution mechanism. Expansion to services, intellectual property. But the Doha Round stalled.
·"China shock". China’s accession to the WTO (2001) and explosive growth of its exports hit certain industries and regions of developed countries. Political consequences—rise of populism.
·Trade wars. Trump administration started a trade war with China. Tariffs as a tool of geopolitics, not just economic policy.
·Regionalism. Stagnation of multilateral liberalization leads to regional agreements (USMCA, CPTPP, RCEP). Fragmentation of the world system?
·Beyond tariffs. Modern barriers are not tariffs, but regulation, standards, subsidies, currency manipulation. The WTO struggles to handle these issues.
·Sustainability and labor. New agendas: environmental and labor standards in trade agreements. Carbon border adjustments.
·Import substitution (ISI). Development strategy through protection of domestic industry. Dominated in Latin America in the 1950s–1970s. Results are disappointing.
·Export-oriented growth. East Asian "tigers" grew through exports. But this is not pure laissez-faire—active industrial policy.
·Special and differentiated regime. Developing countries have preferences in the WTO. But they also lose from protectionism of rich countries in agriculture.
·Global value chains. Modern trade is not finished goods, but participation in chains. Opportunities for developing countries—but also dependence on global companies.

Economists have long proven that free trade increases welfare. But protectionism thrives. Why? The political economy of trade explains how interests, institutions, and ideas shape trade policy.

General conclusion: trade increases aggregate welfare. But there are winners and losers.

Empirically: the losers from trade are low-skilled workers in labor-intensive industries of developed countries. Competition with China hit specific regions and groups.

Political consequences: losers are concentrated and organized, winners are dispersed. Protectionism benefits the minority, but this is an active minority.

International Finance and Monetary Systems

Evolution of Monetary Systems → Financial Globalization → Financial Crises → Regulation after 2008 → The Dollar and the International Monetary System

·Fixed exchange rate — predictability for trade
·Free movement of capital — efficient allocation of investments
·Independent monetary policy — ability to respond to domestic conditions
·USA — floating exchange rate and free movement of capital, independent policy.
·Hong Kong — currency board, free capital, no independent policy.
·China (historically) — capital controls, managed exchange rate, independent policy.
·Efficient global allocation of capital
·Consumption smoothing via borrowing
·Discipline for macroeconomic policy
·Transmission of technology and managerial practices
·Volatility and sudden stops
·Financial crises
·Loss of political autonomy
·Overheating and bubbles
·Capital inflow → credit boom → bubbles
·Shock or change of sentiment → outflow
·Devaluation and/or banking crisis
·Recession, rising unemployment, political instability
·Mexico 1994 — “tequila crisis”
·Asian crisis 1997–1998 — Thailand, Indonesia, Korea
·Russia 1998 — default and devaluation
·Argentina 2001 — collapse of currency board
·Global financial crisis 2008 — epicenter in the USA, global spread
·Banking regulation (Basel III).
·Increased requirements for bank capital and liquidity.
·Macroprudential supervision.
·Rehabilitation of capital controls.
·Expansion of IMF resources,
·Regional mechanisms (Chiang Mai Initiative in Asia),
·Bilateral central bank swap lines.
·“Too big to fail” is unresolved.
·Coordination between jurisdictions insufficient.
·Shadow banking is growing.
·“Excessive privilege.” The USA can borrow in its own currency.
·Demand for dollars as reserves lowers financing costs.
·Global financial cycle. Fed policy affects the entire world. When the Fed tightens — capital outflow from emerging markets.
·The euro — did not become a competitor (eurozone crisis)
·The yuan — limited by capital controls
·Cryptocurrencies, central bank digital currencies — still marginal

International finance is a field where politics and economics are intertwined especially closely. Monetary systems, capital flows, financial crises — all these are shaped by the interaction of market forces and political decisions.

A central concept in international finance is the trilemma (impossible trinity):

Impossibility. It is possible to achieve any two, but not all three at the same time. If the exchange rate is fixed and capital is free, interest rates are determined externally (capital outflow if rates are lowered). If you want an independent policy, you must let the rate float or restrict capi...

Gold Standard (1870–1914). Fixed rates via linkage to gold. Automatic adjustment mechanism (Hume). Limited policy autonomy. Deflationary bias.

Transnational Corporations and Global Production

·About 1/3 of global GDP is produced by TNCs
·2/3 of world trade takes place within TNCs or with their involvement
·80% of foreign direct investment comes from TNCs
·Ownership advantages: the firm has unique assets (technologies, brands, management)
·Location advantages: there are reasons to produce abroad (markets, resources, costs)
·Internalization advantages: it is more profitable to produce on one’s own than to license (protection of know-how, quality control)
·Access to markets (market-seeking)
·Access to resources (resource-seeking)
·Efficiency improvement (efficiency-seeking)
·Access to knowledge (strategic asset-seeking)
·Mobility — threat of departure
·Control over technologies and markets
·Lobbying and political influence
·Regulatory arbitrage — using differences in regulation
·Access to the market
·Regulation and enforcement
·Taxation (though with limitations)
·Local content and technology transfer requirements
·Capital and investment
·Jobs (though often low-paid)
·Technology and skill transfer (spillovers)
·Access to global markets
·Tax revenue (with reservations)
·Displacement of local firms
·Profit repatriation
·Transfer pricing — tax avoidance
·Race to the bottom in regulation
·Political influence undermining democracy
·Environmental problems
·Local potential for technology absorption
·Linkages with local suppliers
·State regulatory capacity
·Local content and technology transfer requirements

Transnational corporations (TNCs) are key players in the global economy. They control global value chains, influence states, and shape development models. The political economy of TNCs is an important part of IPE.

Sizes. The revenues of the largest TNCs exceed the GDP of many countries. Walmart is bigger than Belgium, Apple surpasses Portugal.

Concentration. The 100 largest non-financial TNCs control about $10 trillion in assets abroad. Digital giants (GAFAM) are the new leaders.

Geographic Distribution. Most of the largest TNCs come from developed countries (USA, Europe, Japan). But there is growth among emerging market TNCs (China, India, Brazil).

International Economic Organizations

·International Monetary Fund (IMF) — to ensure currency stability, monitor macroeconomic policy, and provide loans to countries with payment difficulties.
·International Bank for Reconstruction and Development (IBRD, the core of the World Bank) — to finance postwar reconstruction and development.
·International Trade Organization — was planned but was not created due to opposition from the US Congress. Instead, the GATT (General Agreement on Tariffs and Trade) operated, which was transformed...
·European Union — the most advanced integration project: a single market, a single currency, shared institutions.
·Regional development banks — the Asian, African, Inter-American, and European Development Banks supplement the World Bank in their regions.
·New institutions — the Asian Infrastructure Investment Bank (AIIB), the New Development Bank of BRICS have been created as alternatives to Western-dominated organizations. Their emergence reflects ...

International economic organizations are the institutional framework of the global economy. The IMF, World Bank, WTO, and other organizations set the rules of international economic relations, provide financing, and resolve disputes. Understanding their structure, powers, and contradictions is ke...

The modern architecture of international economic organizations emerged at the Bretton Woods Conference (New Hampshire, USA) in 1944. The Allies were creating the postwar economic order, learning lessons from the interwar chaos: protectionism, currency devaluation wars, and the Great Depression.

Functions. The IMF oversees the macroeconomic policies of its member countries, advises governments, and provides short-term financing to countries with balance of payments problems.

Governance. Votes are distributed in proportion to quotas (contributions), which reflect the country’s economic weight. The United States has about 16% of the votes — enough to block the most important decisions (which require 85%). Developing countries long sought quota reform; in 2010, a reform...

Global Value Chains

Evolution of Global Production

·Reduction in transportation costs. Containerization and cheap air freight have made it possible to move components around the world.
·Information technology. Coordinating complex chains requires real-time information exchange. The internet and modern ERP systems have made this possible.
·Trade liberalization. Lowering tariffs and non-tariff barriers, as well as bilateral and regional agreements, have created the conditions for international production.
·Investment liberalization. The removal of restrictions on foreign direct investment has allowed companies to relocate production abroad.

Structure of the Chains

·Market. Simple transactions between independent buyers and sellers. Specifications are standardized, switching between suppliers is easy.
·Modular chain. Suppliers manufacture according to the lead firm's specifications, but have significant autonomy. Interfaces are codified.
·Relational chain. Complex interactions between buyer and supplier, requiring mutual investments and trust. Knowledge is “tacit,” difficult to transfer.
·Captive chain. Small suppliers depend on large buyers who control their activities. Power asymmetry exists.
·Hierarchy. Vertically integrated firm; all stages are controlled from the center.

Value Distribution

·Developed countries control high-income stages: Apple receives the largest share of the iPhone’s value, even though assembly occurs in China.
·Developing countries often remain stuck at low-income stages — assembly, sewing, processing. Their workers receive a small share of the final price.

Labor in Global Chains

·Relocation of production. Labor-intensive production has shifted to countries with low wages. This has created jobs in Asia and other regions, but reduced industrial employment in developed countries.
·Working conditions. Pressure to reduce costs is transmitted along the chain to suppliers. The Rana Plaza catastrophe in Bangladesh (2013), where more than 1,100 garment factory workers died, highli...
·“Race to the bottom?” Countries compete for investment by lowering labor and environmental standards. Yet empirical evidence is mixed: some studies find a “race to the bottom,” others — a convergen...

Policy and GVC

·Trade policy. Tariffs and non-tariff barriers affect the location of production. Rules of origin determine which goods receive preferences.
·Industrial policy. States seek to promote their firms up the value chain through subsidies, education, infrastructure, technological policy.
·Standards and regulation. Environmental, labor, and sanitary standards affect market access. The EU uses standards as a tool of influence (“the Brussels effect”).
·Sanctions and export control. Geopolitical conflicts are manifested in chains. Sanctions against Huawei disrupted semiconductor supplies; the war in Ukraine — global food and energy chains.

Global Value Chains (GVC — Global Value Chains) are networks of firms participating in various stages of the production of a good, from raw materials to the final consumer, located in different countries. The modern world economy is organized around these chains: the iPhone is designed in Califor...

Traditional international trade consisted of exchanges of finished goods: England exported textiles, Brazil — coffee. Modern trade is different: countries specialize in individual stages of production, exchanging intermediate goods and services.

The “smiling curve” of value added is a graph showing that the greatest value added is created at the ends of the chain: R&D, design, and branding at one end; marketing and retail at the other. Production and assembly in the middle are the least profitable stages.

"Upgrade" — moving up the value chain — is a strategic goal for developing countries. Examples: South Korea traversed the path from assembly to its own brands (Samsung, Hyundai); China strives for technological leadership.

Globalization, Financialization, and the World System

Globalization: Waves, Dimensions, Consequences

Historical Waves of Globalization → Driving Forces of Globalization → Winners and Losers → Political Consequences

·Economic dimension: integration of markets for goods, services, capital, and labor. Growth of international trade, investment, and financial flows.
·Political dimension: spread of democracy, human rights, international organizations, global governance.
·Cultural dimension: spread of ideas, values, and lifestyles. Global media, the internet, tourism.
·Technological dimension: information technologies, transport, and communications compress space and time.
·Intensification of cross-border flows
·Acceleration and compression of time
·Expansion of scale — the local affects the global and vice versa
·Deepening interdependence
·First globalization (1870–1914):
·The gold standard ensured currency stability
·Railways and steamships reduced transportation costs
·Large-scale migration — 60 million Europeans to America
·Free movement of capital
·By some indicators, integration is comparable to the current situation
·Deglobalization (1914–1945):
·World wars broke ties
·Protectionism, currency wars
·Capital controls, migration restrictions
·Shows: globalization is reversible
·Second globalization (1945–1980):
·Recovery under American hegemony
·Bretton Woods, GATT — the institutional foundation
·Trade integration, but capital controls
·Limited — mainly among developed countries
·Third globalization (1980–2008):
·Financial and capital liberalization
·Technological revolution — internet, containerization
·Inclusion of China and emerging markets
·Global value chains
·Peak integration
·Slowbalisation (2008–):
·The global crisis revealed the risks
·Trade is growing slower than GDP
·Political backlash — Brexit, Trump
·Geopolitical rivalry US–China
·COVID-19 accelerated the re-evaluation
·Technologies:
·Reduction of transportation costs (containers, aviation)
·Telecommunications (internet, mobile communications)
·Digitalization — services cross borders
·Trade liberalization (GATT/WTO)
·Financial deregulation
·Privatization and market opening
·Regional integration (EU, NAFTA)
·Neoliberal consensus
·Faith in the market and openness
·Development model through integration
·Corporations benefit from global markets
·Financial sector — from capital freedom
·Consumers — from cheap imports
·The global elite — the top 1%
·Asian middle class — especially China
·Corporations with a global reach
·Consumers (cheap goods)
·Working and middle class in developed countries
·Industries competing with imports
·Regions tied to declining industries
·Low-skilled workers
·Rise of populism. Losers from globalization vote for populists who promise protection — from immigration, imports, elites.
·Crisis of centrist parties. Traditional mainstream parties that supported openness are losing support.
·Nationalism. Return to national identity as a reaction to the feeling of loss of control.
·Brexit and Trump (2016). Symbolic events that demonstrated the power of the backlash.
·Rodrik's dilemma. Dani Rodrik formulated the "trilemma": it is impossible to have hyperglobalization, national sovereignty, and democracy at the same time. One must choose two out of three.

Globalization: Waves, Dimensions, Consequences Globalization is one of the most discussed phenomena of modern times. What does it mean? Is it new? What are its driving forces and consequences? A deep understanding of globalization is necessary for the analysis of modern political economy.

*"Milanovic's elephant". A chart of income growth by global distribution: incomes rose in the 50–70th percentiles (Asian middle class) and the top 1% (global elite). Stagnated — 75–90th percentiles (middle class in developed countries).*

Financialization of the Economy

Causes of Financialization → Shareholder Value and Corporate Governance → Financialization of Households → Consequences of Financialization → The Crisis of 2008 → Alternatives

·Growth of financial markets and instruments
·Increase in household and corporate debt
·Orientation of non-financial companies towards financial income
·“Shareholder value” as the main goal of business
·Penetration of finance into everyday life
·Deregulation:
·Repeal of Glass-Steagall (1999)—banks are allowed to engage in investment activities
·Liberalization of interest rates
·Easing of capital controls
·Expansion of permissible financial instruments
·Technologies:
·Computerization of trading
·Complex risk management models
·Global networks of instant transactions
·Globalization:
·Growth of cross-border capital flows
·Offshore financial centers
·Arbitrage between jurisdictions
·Neoliberal ideas:
·Efficient Market Hypothesis—markets are always right
·Financial innovations are beneficial
·Regulation hinders efficiency
·Share buybacks instead of investment
·High dividends
·Cost-cutting (including labor)
·Short-termism—a quarterly time horizon
·Growth of CEO salaries tied to stock prices
·Growth of debt. Mortgages, consumer loans, student loans. US household debt rose from 60% of disposable income in 1980 to 130% in 2007.
·Pension financialization. The shift from defined benefit (guaranteed pension) to defined contribution (accumulative) transfers risks onto individuals. Pensions depend on financial markets.
·Asset-based welfare. Well-being increasingly depends on asset ownership (housing, stocks), rather than salaries or government programs.
·Financial literacy. Responsibility for complex financial decisions is shifted onto individuals, often unprepared.
·Inequality:
·Financial income concentrates at the top
·Capital income grows faster than labor income
·Financial bonuses increase the gap
·Instability:
·Financial bubbles and crises
·Systemic risks
·“Too big to fail”—socialization of losses
·Undermining of the real economy:
·Diversion of talent into finance
·Lack of investment in production
·Pressure on workers
·Political influence:
·Financial lobbying—one of the strongest
·Regulatory capture
·Revolving door between Wall Street and government
·Mechanism. Subprime mortgages were packaged into complex instruments (CDOs), receiving high ratings. When housing prices fell—collapse.
·Systemic consequences. Bankruptcy of Lehman Brothers, AIG crisis, paralysis of credit markets, global recession.
·Bailouts. Governments saved the banks—trillions of dollars. “Privatization of profits, socialization of losses.”
·Reforms? Dodd-Frank in the US, Basel III worldwide. But the financial sector remains huge and influential. The lessons have not been fully learned.
·Regulatory reforms:
·Separation of commercial and investment banks
·Financial transaction tax (Tobin tax)
·Strict capital requirements
·Limitation of derivatives
·Corporate governance:
·Stakeholder governance instead of shareholder primacy
·Limiting buybacks
·Worker representation on boards of directors
·Financial alternatives:
·Public banks
·Credit unions
·Pension systems with guarantees

Since the 1980s, the financial sector has begun to play an unprecedentedly important role in the economy and society. This phenomenon—financialization—has transformed the economy, politics, and everyday life.

Quantitative definition: the growth of the share of the financial sector in GDP, employment, and profits. In the US, the share of finance in corporate profits has increased from 10% in the 1950s to 40% in the 2000s.

Qualitative definition: the increasing role of financial motives, financial markets, financial actors, and financial institutions in the functioning of the economy (Epstein).

The ideology of shareholder value. The sole purpose of the company is maximization of value for shareholders. Other stakeholders (workers, society) are secondary.

Wallerstein's World-Systems Analysis

Intellectual Origins → Key Concepts → Historical Dynamics → Criticism and Debates → Structural Crisis → Significance for the Present

Definitions

World-system: — the unit of analysis:

·Marxism: emphasis on the economic base, classes, exploitation, and the contradictions of capitalism.
·Annales School: *longue durée*—the study of long-term historical structures, rather than events.
·Dependency Theory: Latin American economists (Prebisch, Furtado) demonstrated how the periphery is exploited by the center.
·Fernand Braudel: the concept of multi-level history, “grammar of civilizations”, the world economy.
·World-system (world-system). A social system with a single division of labor but a multitude of cultures and political units.
·Two forms: world-empires (a single political authority) and world-economies (many states, one economy).
·Core: developed countries, high-tech production, high wages, strong states
·Periphery: poor countries, raw materials export, low wages, weak states
·Semi-periphery: intermediate zone, combining traits of both; a buffer stabilizing the system
·Kondratiev waves. ~50-year cycles of growth and stagnation. Associated with technological revolutions and structural transformations.
·Hegemonic cycles. Periodic change of leaders:
·Netherlands (17th century)
·Great Britain (19th century)
·USA (20th century)
·Next—China?
·Phases of hegemony:
·Rise—a country becomes the most efficient producer
·Peak—dominance in production, trade, finance
·Decline—others catch up; financial expansion as compensation
·Geographic expansion. The world-system gradually included new territories: Eastern Europe, the Americas, Asia, Africa.
·Economic determinism. Too much attention to economics, too little—to politics, culture, ideas. Are states merely functions of the world market?
·Functionalism. Everything is explained by the needs of the system. Not enough attention to agency, struggle, and contingency.
·Structural staticism. Is the periphery doomed to remain the periphery? How to explain the rise of East Asia?
·Methodological problems. How to verify a theory of such magnitude? Where are the boundaries of the system?
·The semi-periphery allows for mobility
·Hegemonies change—the system is dynamic
·Capitalism is finite—a structural crisis is inevitable
·Problems of accumulation:
·Exhaustion of cheap labor (proletarianization is nearing completion)
·Rising ecological costs
·Rising social spending (welfare)
·Fiscal crisis of states
·Delegitimation:
·Collapse of “real socialism”—loss of an alternative
·Crisis of liberalism
·Growth of chaos and violence
·Global inequality. Poverty of the periphery is not just “backwardness”, but a result of the structure of the system.
·Long-term trends. The decline of American hegemony, the rise of China—part of larger cycles.
·Limits of development. Not everyone can become the core—the system requires a periphery.
·Global crises. Ecological crisis, financial shocks—symptoms of systemic crisis.

Wallerstein's World-Systems Analysis is an influential approach to the study of the global economy and politics. Developed by Immanuel Wallerstein, it views the world as a single system developing according to its own laws.

Modern world-system. Emerged in the 16th century in Europe. It is a capitalist world-economy, based on endless capital accumulation.

Unequal exchange. Trade between zones benefits the core. The periphery sells cheaply (raw materials, unskilled labor), buys expensively (technologies, capital). Surplus value flows to the core.

Bifurcation. The system is at a point of bifurcation—a transition to something new is inevitable, but the direction is not predetermined.

The Future of the Global Order

Crisis of the Liberal Order → US–China Rivalry → Fragmentation of the World Economy → Global Challenges → Future Scenarios → The Role of Ideas and Agency

·Open markets, free trade
·International institutions (UN, WTO, IMF)
·Rule of law in international relations
·Spreading democracy and human rights
·American leadership as the guarantor
·The rise of China as a systemic competitor
·Revisionism by Russia
·Retreat of the US from leadership (Trump)
·Internal crisis—populism, polarization
·Inability of institutions to solve problems (climate, pandemics)
·Technological confrontation (Huawei, semiconductors)
·Strengthening alliances in Asia (AUKUS, Quad)
·Competition within institutions
·New Cold War—division into blocs
·Hot conflict (Taiwan?)
·Competitive coexistence
·Chinese hegemony
·Trade grows slower than GDP.
·Reshoring, nearshoring.
·“Strategic autonomy.”
·Climate crisis. A global problem requiring a global solution. The Paris Agreement—not enough. Transformation of energy, economy, and way of life is needed.
·Pandemics. COVID-19 revealed vulnerabilities. The next pandemic is inevitable. The global health system is inadequate.
·Artificial Intelligence. A transformational technology with huge risks. Regulation is lagging. Who controls AI?
·Inequality and migration. Global inequality generates migration pressure. The political response—border closures.

The Future of the Global Order The world order that took shape after World War II, and especially after the Cold War, is undergoing profound transformation. What awaits the global economy and politics? What scenarios are possible?

China’s rise. Since the 1980s—unprecedented growth. GDP at PPP par with the US. Technological ambitions. Belt and Road Initiative. Modernization of the military.

“Thucydides’ Trap.” Graham Allison: when a rising power threatens the status of the incumbent, there is a high risk of war. Of 16 historical cases—12 ended in war.

Regionalization. Instead of global integration—regional blocs: North American, European, Asian.

Anti-globalism and Critique of Globalization

Anti-globalism and Critique of Globalization Globalization— the expansion of international economic, political, and cultural ties — is not a neutral or undisputed process. Since its acceleration in the 1990s, globalization has encountered criticism from the left and right, from below and above. U...

1990s–2000s: Left-wing Critique. The anti-globalist movement reached its peak at protests against the WTO in Seattle (1999), against the IMF and World Bank in Washington (2000), and at the World Social Forums in Porto Alegre. Criticism focused on inequality, labor exploitation, environmental dama...

2010s–Present: Right-wing Critique. Brexit (2016), the election of Trump (2016), the rise of populism in Europe— manifestations of right-wing criticism of globalization. The focus is different: immigration, loss of national sovereignty, decline of industrial regions, cultural threats.

Notably, despite different ideological foundations, left and right criticism sometimes converge: both reject the neoliberal consensus, both criticize the “global elite,” both demand greater state intervention.

Currency Wars and the International Monetary System

Currency Wars and the International Monetary System The international monetary system—a set of rules, institutions, and practices regulating currency relations between countries—is an arena of cooperation and conflict. “Currency wars”—competitive devaluations aimed at gaining trade advantages—per...

Historical Evolution Gold Standard (1870–1914). Currencies are tied to gold at fixed rates. Automatic mechanism: a balance of payments deficit leads to an outflow of gold, contraction of the money supply, price decreases, and restoration of competitiveness. The system provided stability, but at t...

Interwar Chaos (1919–1939). Attempts to restore the gold standard after World War I failed. The United Kingdom returned to the pre-war parity in 1925, which undermined its competitiveness. The Great Depression triggered a wave of devaluations, protectionism, and currency blocs. Competitive devalu...

Bretton Woods (1944–1971). Post-war system: the dollar was tied to gold ($35 per ounce), other currencies were tied to the dollar. Fixed but adjustable exchange rates: countries could change parity in case of “fundamental disequilibrium.” The IMF provided loans to support exchange rates. The syst...

The Political Economy of Development

Theories of Economic Development

Modernization Theory → Dependency Theory (dependencia) → Neoliberal Consensus → Institutional Turn → Developmental State → Contemporary Approaches

·Traditional society
·Preconditions for take-off
·The drive to maturity
·The age of mass consumption
·Ignores colonial heritage
·Western-centrism—one path for all
·Underestimation of international structural constraints
·Unequal exchange—raw materials depreciate, manufactured goods appreciate
·Leakage of surplus value to the metropolis
·Comprador elites dependent on external connections
·Technological dependence
·East Asian success refutes the thesis that development through integration is impossible
·Internal factors are underestimated
·Import substitution did not work
·Fiscal discipline
·Reduction of subsidies
·Liberalization of interest rates
·Competitive exchange rate
·Trade liberalization
·Attraction of foreign direct investment
·Privatization
·Deregulation
·Protection of property rights
·Protection of property rights
·Rule of law
·Contract law
·Limiting corruption
·Efficient bureaucracy
·Japan (MITI)
·South Korea (chaebols + state)
·Competent, meritocratic bureaucracy
·Autonomy from capture by interests
·Embedded autonomy—connection to business without capture
·Business discipline—aid in exchange for results

Why are some countries rich while others are poor? How can sustained economic development be achieved? These questions are central to the political economy of development, and very different answers to them have been given over the past seventy years.

Key idea: Development is a universal process of transition from a traditional society to a modern one. All countries go through the same stages.

Political consequences: Developing countries need to copy the path of developed ones: industrialization, urbanization, Western institutions and values.

Key idea: Underdevelopment is not lagging behind, but the result of being embedded in the world system under subordinate conditions. Development of the center and underdevelopment of the periphery are two sides of the same process.

The Resource Curse

·Inflow of petrodollars strengthens the national currency
·This makes exports of other goods more expensive
·Manufacturing and agriculture lose out
·The economy becomes single-sector
·Commodity prices are volatile
·Boom—growing expenditures, commitments
·Downturn—fiscal crisis, contraction
·Procyclical policy amplifies fluctuations
·Resource revenues reduce incentives to invest in education
·Easy money vs. accumulation of capabilities
·Young people go into the resource sector rather than productive industries
·The state is not dependent on citizens’ taxes
·No taxes—no representation
·Rent allows the purchase of loyalty and suppression of the opposition
·“Rentier state”
·Control over resources is the main prize
·Politics is a struggle for rent allocation, not development policy
·Corruption, clientelism, patronage
·Resources finance both rebels and governments
·“Blood diamonds”, oil in South Sudan
·Secessionist movements in rich regions
·Norway was a democracy with the rule of law before oil
·Botswana had traditional consultative institutions
·Institutions precede resources—a key condition
·Point resources (oil, diamonds) are more dangerous than diffuse ones (farmland)
·Offshore oil is less dangerous—harder to seize
·Sovereign funds (Norwegian Oil Fund)
·Spending rules (budget rules)
·Transparency and accountability
·Investment of resource revenues in human capital and infrastructure
·Creation of other industries in advance
·EITI (Extractive Industries Transparency Initiative)—payment transparency
·Kimberley Process—diamond certification
·Sanctions against “blood” resources
·Democratization and accountability
·Independent regulators
·Anti-corruption measures
·Sovereign wealth funds
·Spending rules smoothing the cycle
·Direct transfers to citizens (Alaska Permanent Fund)
·Industrial policy
·Investment in education and infrastructure
·Development of non-resource exports
·Publication of contracts
·Disclosure of revenues
·Civil society participation

Paradoxically, wealth in natural resources is often associated with poverty, authoritarianism, and conflict. This phenomenon—the “resource curse”—is one of the central puzzles in the political economy of development.

Negative examples: Nigeria — enormous oil revenues, mass poverty, corruption Venezuela — largest oil reserves, economic collapse Democratic Republic of the Congo — richest subsoil, poverty and wars Post-Soviet resource countries — authoritarianism, weak diversification

Positive examples: Norway — oil and the highest development level Botswana — diamonds and one of the best growth figures in Africa Chile — copper and steady growth Australia, Canada — resources and prosperity

Conclusion: resources are neither a verdict nor a guarantee. Institutions and policy determine the outcome.

International Development Assistance

·Bilateral — from government to government
·Multilateral — through international organizations (World Bank, UN)
·Project — specific projects (schools, roads)
·Program — budget support
·Technical — expertise, training
·Humanitarian — assistance in crises
·Health (especially after HIV/AIDS)
·Infrastructure
·Governance and institutions
·Agriculture
·Cold War — aid to allies against communism
·Influence in regions
·Votes in international organizations
·Tied aid — aid with a condition of procurement from the donor
·Opening markets for exports
·Access to resources
·The obligation of the rich to help the poor
·Global justice
·Pressure from civil society
·Poverty generates instability, migration, terrorism
·Aid as an instrument of prevention
·Aid works, more is needed
·"Poverty trap" — a big push is required
·Successes in health (polio, malaria)
·MDG and SDG — measurable progress
·$2 trillion spent — where are the results?
·Bureaucratic incentives distort aid
·Undermining of local institutions and initiative
·"Planners vs. Searchers" — local solutions needed, not imposed plans
·Aid is part of the problem, not the solution
·Creates dependency
·Supports bad regimes
·Suppresses local entrepreneurship
·Ownership — recipient countries set priorities
·Alignment — donors follow national strategies
·Harmonization — coordination among donors
·Results — focus on outcomes
·Mutual accountability — reciprocal accountability
·Trade, not aid (Aid for Trade)
·Migrant remittances (exceed ODA)
·Changing the rules of the global economy

International development assistance Since the 1950s, developed countries have directed billions of dollars towards aid for developing countries. Does this aid work? What are its motives and consequences? Debates about aid remain intense and politically charged.

Volumes. ~$160 billion per year (2020). The United States is the largest donor in absolute numbers. Scandinavian countries are leaders by share of GDP (few achieve the UN target of 0.7%).

Macro level. The connection between aid and growth is weak and ambiguous. Some studies find a positive effect, others none or negative. Depends on specification, period, sample.

Conditionality. Burnside-Dollar: aid works in countries with good policy. But the result is not reliably reproduced.

New Paths of Development: China and the Global South

The Chinese Miracle → “Beijing Consensus”? → The Belt and Road Initiative → The Global South: New Voices → Challenges and Dilemmas → Conclusions

·Average growth of ~10% per year over 40 years
·GDP increased more than 30-fold
·800 million people lifted out of poverty
·Second largest economy in the world (first by PPP)
·Gradualism in reforms — not shock therapy
·Experimentation — “cross the river by feeling for stones”
·Special Economic Zones — local experiments with capitalism
·State planning + market mechanisms
·Investment in infrastructure and education
·Integration into the world economy through exports
·Capital controls and a managed exchange rate
·Strategic planning (five-year plans)
·State-owned enterprises in key sectors
·Industrial policy — targeting priority industries
·State banks — directing credit
·Innovation, not privatization
·Sustainability and equality
·Sovereignty and self-determination
·There is no single “model” — China adapted along the way
·Not everything is replicable (size, history, geopolitics)
·Results are not only positive (environment, inequality, repression)
·Pragmatism and experimentation instead of ideology
·Active role of the state
·Investment in infrastructure and human capital
·Gradual reforms
·Transportation infrastructure — railways, ports, roads
·Energy — power plants, grids
·Digital infrastructure
·Special economic zones
·Excess capacity — export of construction services
·Access to resources
·Geopolitical influence
·Internationalization of the yuan
·“Debt trap” — unsustainable loans
·Environmental problems (coal power plants)
·Labor standards
·Unequal contract terms
·BRICS. Brazil, Russia, India, China, South Africa — a platform for an alternative voice.
·New Development Bank — an alternative to the World Bank.
·African Union and Agenda 2063
·ASEAN and regional integration in Asia
·Latin American alternatives (though weakened)
·Environmental constraints. The Chinese model of extensive growth is environmentally unsustainable. The climate crisis requires a different path.
·Automation. The traditional route — export of labor-intensive products — is closing. Robotization is returning manufacturing to developed countries.
·Geopolitics. US–China rivalry creates pressure to choose sides. Room for maneuver is narrowing.
·Internal contradictions. The Chinese model — inequality, repression, environmental damage. Not everything is worthy of imitation.
·Context matters. What works in China does not necessarily work in Zambia.
·The state can play a positive role. The Washington Consensus was excessively anti-state.
·Experimentation and adaptation. Pragmatism is more important than ideology.
·International context. Development is not only a domestic matter. The rules of the world economy, aid, and investment matter.

New Paths of Development: China and the Global South China’s rise is the most significant development story of our time. It has not only transformed China itself but also offers an alternative model for other developing countries, challenging the Western consensus.

Does China represent an alternative model? Joshua Ramo (2004): The “Beijing Consensus” as an alternative to the Washington Consensus:

Scale. Infrastructure investments in Asia, Africa, Latin America, Europe. Trillions of dollars. 140+ participating countries.

South-South cooperation. Trade and investment between developing countries are growing faster than North-South flows.

Resource Curse

The “resource curse” is a paradoxical phenomenon in which countries rich in natural resources (oil, gas, minerals) display worse economic and political outcomes than nations without such resources. Nigeria, Venezuela, Angola, and many post-Soviet states are examples where oil wealth has failed to...

The link between resource wealth and negative outcomes has been documented in numerous studies:

Economic growth. The classic work by Jeffrey Sachs and Andrew Warner (1995) showed that countries with a high share of natural resource exports grow more slowly. Subsequent studies clarified that the effect depends on the type of resources (oil and minerals are worse than agricultural), the quali...

Authoritarianism. Oil-rich states democratize less often and are more likely to remain authoritarian. Michael Ross demonstrated that oil hinders democratization through several mechanisms.

Foreign Aid: Does It Work?

Foreign aid: does it work? Official Development Assistance (ODA) — transfers from wealthy countries and international organizations to poor countries — amounts to about $160 billion per year. Does this aid work? Does it promote economic growth and reduce poverty? The debate continues for decades,...

Official development assistance is measured as a share of GNI of donor countries. The UN target is 0.7%, but only a few countries achieve it (Norway, Sweden, Denmark, Luxembourg). The United States, the largest donor in absolute figures, allocates about 0.2% of GNI.

Main donors: United States, Germany, United Kingdom, Japan, France. Institutional donors: the World Bank, regional development banks, UN, EU.

The main recipients: countries of Sub-Saharan Africa, South Asia, post-conflict states. Distribution reflects both needs and geopolitical interests of donors.

Regulation, States, and Markets

Why Reforms Are So Difficult

Why Reforms Are So Difficult Economists often know which reforms are needed for growth and development. But reforms do not happen or get reversed. The political economy of reforms explains why good economic policy is so difficult to implement.

The Problem of Status Quo Bias The existing state of affairs has the advantage: The losers are known, the winners are not. Reforms create specific losers (workers from closing industries); the winners are often diffuse and anonymous (consumers, future workers in new industries). Losses are felt m...

Uncertainty. Even if the reform increases the overall pie, the individual outcome is uncertain. The risk of losing one’s job is tangible; the promise of new opportunities is abstract.

Collective Action (Olson). Small groups with concentrated interests organize easily. Large groups with diffuse interests organize with difficulty.

Shock Therapy vs. Gradualism

Shock Therapy vs. Gradualism When a country faces the necessity for fundamental reforms, the question arises: should they be carried out quickly and comprehensively (“shock therapy”), or gradually and step by step (gradualism)? This debate is especially acute in the context of transitional econom...

Arguments for Shock Therapy Critical mass. Reforms are interrelated. Price liberalization without competition leads to monopoly prices. Privatization without institutions leads to pillaging. A comprehensive approach is needed. Credibility. Radical reforms signal the seriousness of intentions. Inv...

Arguments for Gradualism Institutional constraints. A market economy requires institutions—laws, courts, regulators, contract culture. They are not created overnight. Learning and adaptation. Agents (managers, workers, officials) must learn to operate under new rules. This takes time. Social cost...

Empirical Evidence What does the experience of transitional economies say? Diversity of outcomes. Among “shock” countries there are successes (Poland, Estonia) and failures (Russia). Among “gradualists” as well (China vs. many others). Initial conditions. The starting situation matters. Countries...

The Role of Technocrats and Experts

·Professional education (often Western)
·Career in academia, international organizations, central banks
·Common language and conceptual frameworks
·Relative isolation from electoral pressure
·Independent central banks
·Regulatory agencies
·Economic departments in government
·Constitutional courts
·Expertise. Economic policy is complex. Special knowledge is required, which politicians and voters lack.
·Time horizon. Politicians are focused on elections. Technocrats can make decisions with a long-term perspective.
·Resistance to pressure. Isolation protects against populism, lobbying, group interests.
·Credibility. An independent central bank inspires trust in investors. Commitments become more reliable.
·Example. Independent central banks are associated with lower inflation. Delegation of monetary policy works.
·Democratic deficit. Key decisions are made by unelected officials. Who controls them? To whom are they accountable?
·Ideological narrowness. Technocrats often share one paradigm (neoliberal). Alternative views are excluded.
·Social insensitivity. Technocrats are detached from the lives of ordinary people. They do not bear the costs of their decisions.
·Capture. Technocrats can be captured by those they regulate. Revolving door between regulators and business.
·Failures of expertise. Experts make mistakes. The 2008 financial crisis was not predicted by the mainstream. Models failed.
·Chicago Boys in Chile
·Balcerowicz's team in Poland
·Gaidar's team in Russia
·Technocrats in Mexico
·Political cover—a leader willing to protect technocrats
·Coherence of the team
·Crisis as a window of opportunity
·Dependence on a political patron
·Social insensitivity
·Ignoring the local context
·Delegation with constraints. Clear mandate, transparency, accountability mechanisms. The central bank is independent, but has an inflation target.
·Plurality of expertise. Not a single paradigm, but competition of ideas. Pluralistic advisory systems.
·Participation and deliberation. Involvement of stakeholders, public consultations, explanation of decisions.
·Humble expertise. Recognition of the limits of knowledge. Uncertainty, errors, the need for adaptation.
·Democratic control over objectives. Democracy determines what we want to achieve. Experts advise how. Separation of ends and means.
·Crisis of legitimacy. After 2008, and especially following the populist wave—distrust of "experts," "elites," "the establishment."
·New voices. Heterodox economics, MMT, pluralistic approaches challenge the mainstream.
·Complexity. Problems (climate, inequality, pandemics) require interdisciplinarity, not narrow expertise.
·Politicization. Boundaries between expertise and politics are blurred. Experts are drawn into political battles.

Reforms are often associated with teams of technocrats—experts isolated from political pressure. What is the role of expert knowledge in economic policy? What are the advantages and risks of technocratic governance?

Change teams. Reform teams, often with Western education, implemented reforms in Latin America, Eastern Europe, the former USSR.

International Organizations and Reforms

·Lender of last resort for countries
·Oversight of macroeconomic policy
·Conditionality — lending conditions
·~190 member countries, quotas determine votes
·Development financing — infrastructure, education, healthcare
·Analytical and consulting work
·Structural adjustment lending
·Rules for international trade
·Dispute settlement mechanism
·Negotiations for liberalization
·European Bank for Reconstruction and Development (EBRD)
·Asian Development Bank
·African Development Bank
·Conditionality. Lending conditions — a country receives funds in exchange for implementing reforms. Prior actions (before) and structural benchmarks (in process).
·Surveillance. Monitoring and evaluation of policy. Article IV consultations by IMF. Pressure through public criticism.
·Technical assistance. Support in designing and implementing reforms. Transfer of knowledge and practices.
·Ideas and norms. Formation of consensus on “correct” policy. Dissemination of ideas through publications, training, conferences.
·Leverage EU. Conditions for EU accession — the most powerful reform mechanism in Central and Eastern Europe.
·Democratic deficit. Decisions are made by unelected officials. Recipient countries have few votes. USA and Europe dominate.
·One size fits all. Standard prescriptions do not consider the local context. Washington Consensus — universal template.
·Procyclical policy. Requirements to cut spending in a crisis worsen recession. Social costs are ignored.
·Ownership problem. Reforms are imposed from outside, do not “belong” to local authorities. This lowers legitimacy and sustainability.
·Results. Structural programs do not always work. Latin America in the 1980s, Russia in the 1990s, Greece after 2010 — contentious cases.
·Post-Washington Consensus. Recognition of the role of institutions, social safety nets, ownership. But critics say: rhetoric changed, practice — less so.
·Poverty reduction focus. PRSP (Poverty Reduction Strategy Papers) — countries themselves develop strategies. But conditionality remains.
·Easing conditionality. Fewer conditions, more streamlined. But core conditions remain.
·Governance reforms. Increase in quotas and votes for developing countries. But slowly and insufficiently.
·New players. Chinese institutions (AIIB, NDB) — alternatives with less conditionality. Competition.
·Crisis insurance — lender of last resort
·Coordination between countries
·Dissemination of knowledge and practices
·Discipline — commitment device for reformers
·Imposition of inappropriate policies
·Social costs of programs
·Moral hazard — expectations of bailout
·Legitimization of unpopular reforms without a democratic mandate
·Neither philanthropists nor villains. Complex organizations with conflicting mandates and interests.
·Power is asymmetric. Developing countries — in a weak position. Governance reform is necessary.
·Context matters. The same interventions work in some conditions and fail in others.
·Alternatives are emerging. Chinese institutions, regional mechanisms create competition. This can change the balance.
·For developing countries, the question is how to use the resources and expertise of international organizations while minimizing the costs of dependence and inadequate conditions.

International organizations and reforms IMF, World Bank, WTO, and other international organizations play a key role in promoting economic reforms worldwide. What are their mechanisms of influence? How effective and legitimate are their interventions?

Are international organizations useful? Assessment is ambiguous: Positive functions:

Political Economy of Economic Reforms

Political Economy of Economic Reforms Economic reforms—changes in economic policy and institutions aimed at increasing efficiency and growth—are often recommended by economists but rarely successfully implemented. Why do some countries carry out necessary reforms while others do not? Why are refo...

Distributional Effects. Trade liberalization benefits consumers and exporters, but harms import-substituting industries. Privatization may increase efficiency but reduce employment. Reducing subsidies hits recipients hard.

Organizational Asymmetry. Losers from reforms are often better organized than winners. Workers in protected industries are united in trade unions; consumers are dispersed. Concentrated interests defeat dispersed ones (Olson’s logic).

Temporal Asymmetries. The costs of reforms are concentrated in time (layoffs, closures), while benefits are spread out (growth, innovation). Politicians with short time horizons avoid reforms.

Shadow Economy and Informality

Definitions and Measurement → Causes of Informality → Consequences of Informality → Policy Toward Informality → Debates on Informality

·Informal sector — enterprises and workers not officially registered, not paying taxes, and not covered by labor legislation. These include street vendors, workshops, and domestic workers.
·Shadow economy — a broader concept, also including tax evasion by formal enterprises, unaccounted deals, and "envelope" payments.
·Criminal economy — production and distribution of prohibited goods and services (drugs, prostitution, smuggling). Often separated from the "shadow" economy in the narrow sense.
·Tax burden. High taxes and fees drive people into the shadows. The relationship is complex: high rates encourage evasion but also may fund services that make formality attractive.
·Weak law enforcement. If the probability of being caught and punished is low, evasion is rational. Weak states cannot control the economy.
·Excessive regulation. Strict labor laws (high minimum wage, difficulty of dismissal) create incentives for informal hiring.
·Distrust of the state. If citizens do not believe that taxes are spent on public goods, they see no reason to pay. Corruption undermines tax morale.
·For workers. Informal employment means the absence of labor rights, social protection, pensions, and occupational safety. Earnings are often lower, more unstable, and conditions worse. But for many...
·For enterprises. Informal firms avoid taxes but lack access to credit, legal protection of contracts, and government contracts. They remain small and inefficient.
·For the state. The shadow economy equals lost taxes. A shrinking tax base leads to higher rates for the formal sector, which pushes even more into the shadows—a vicious cycle.
·For the economy. Informality distorts competition: firms that comply with rules lose out to those that evade them. This creates incentives toward informality. The low productivity of the informal s...
·Repressive approach. Intensifying control, fines, closure of illegal enterprises. The problem: it hits the poor, for whom informality is survival. Often ineffective with a weak state.
·Liberalization. Reducing barriers to formalization: simplifying registration, cutting licensing, lowering taxes for small business. The World Bank's "Doing Business" approach. Critique: even with l...
·Expansion of social protection. Extending social programs to informal workers: universal healthcare, social pensions, child benefits. This reduces the vulnerability of informal workers, although it...
·Strengthening the state. Improving the quality of public services, reducing corruption, strengthening tax morale. When citizens see the return on taxes, willingness to pay increases.
·Informality as a problem. The traditional view: the informal sector is a sign of underdevelopment, which will disappear with modernization. Policy should promote formalization.
·Informality as adaptation. An alternative view: the informal sector is a rational response to poor regulation and a weak state. Instead of "formalization", institutional reform is needed.
·Informality as choice. Some entrepreneurs consciously choose informality for flexibility, avoiding bureaucracy, independence. It is not only "forced" informality of the poor.
·Informality and innovation. A radical view: the informal sector is a platform for experimentation, bypassing outdated rules. Uber and Airbnb began as "informal" services.

Shadow Economy and Informality The shadow economy—economic activity not accounted for by official statistics and not subject to taxation—constitutes a significant share of the economy in many countries. In developing nations, the informal sector may encompass more than half of the workforce. Unde...

The concepts of "shadow economy", "informal sector", and "gray economy" overlap but are not identical:

Measurement is difficult by definition—the shadow activity is hidden. Methods include: surveys, discrepancies between incomes and expenses, the monetary method (growth in cash indicates shadow activity), the electricity method (discrepancy between electricity consumption and official GDP).

Estimates of the size of the shadow economy: 8–15% of GDP in developed countries, 30–50% in developing ones. In some African and Latin American countries, informal employment reaches 70–80% of the workforce.

Labour, Social Policy, and the Welfare State

Climate and Political Economy

Climate and Political Economy The climate crisis is the greatest challenge of the 21st century. The political economy of climate explains why it is so difficult to act despite scientific consensus, and what possible solutions exist.

Climate Economics Externality. CO2 emissions are a classic negative externality. The costs are borne by everyone, the benefits—by the emitters. Without intervention—excessive emissions.

Global character. The atmosphere is a common good. Emissions in one country affect everyone. Global coordination is needed—and that is difficult.

Intergenerational dimension. Costs today, benefits—to future generations. What discount rate should be used? Stern vs. Nordhaus—different answers.

Technology and the Future of Labor

Technology and the Future of Labor Automation, artificial intelligence, robots — technology is transforming the labor market. What are the political-economic consequences? How can policy be adapted?

Technological Waves Fears of technological unemployment are nothing new: the Luddites destroyed weaving machines (1811–1816). Each industrial revolution sparked concerns. Historically: new jobs were created to replace those lost. Novelty of today’s wave: AI can replace cognitive labor, not only r...

Distributional Effects Polarization. Middle-skill jobs are disappearing. The top (highly skilled) and bottom (services, care) are growing. The middle class is shrinking. Superstar effects. Technology amplifies the “winner-takes-all” effect. A few platforms, a few stars capture the market. Capital...

Political Responses Education and retraining. Lifelong learning, new skills. But not everyone is able to adapt. Social protection. Universal basic income? Expansion of unemployment insurance? Universal services? Platform regulation. The gig economy creates a precariat. New forms of labor protecti...

Trade Unions and Collective Bargaining

Trade Unions and Collective Bargaining Trade unions—organizations of workers created to protect and promote their interests—are one of the key institutions of the labor market. Their influence on wages, working conditions, inequality, and policy is studied by the political economy of labor.

Functions of Trade Unions Collective bargaining. The main function is negotiations with employers regarding working conditions: wages, working hours, vacations, occupational safety. The collective agreement covers all employees of an enterprise or industry united by the union.

Workers’ voice. Trade unions give workers a “voice” to express dissatisfaction and make suggestions. Albert Hirschman distinguished “exit” (quitting) and “voice” (protest). Trade unions are a mechanism of “voice,” an alternative to “exit.”

Protection from arbitrariness. Trade unions limit employer arbitrariness: unfair dismissals, discrimination, unsafe conditions. They provide procedural fairness.

The Precariat and New Forms of Labor

Causes of Precarization → Platform Economy → Consequences of Precarization → Political Responses

·Labor market security—sufficient opportunities to earn income.
·Employment security—protection against arbitrary dismissal.
·Job security—stable work, career.
·Work security—health and safety protection at work.
·Skill reproduction security—opportunities for training.
·Income security—stable, adequate income.
·Representation security—a voice in defending interests.
·Technological changes. Automation of routine tasks, digital platforms, artificial intelligence are transforming the labor market. Many traditional jobs are disappearing or changing.
·Globalization. International competition squeezes costs. Outsourcing, offshoring, global chains create pressure on wages and conditions.
·Deregulation. Weakening of labor legislation since the 1980s: easing of temporary contracts, reduction of protection against dismissal, weakening of trade unions.
·Corporate strategies. Firms strive for flexibility: “lightweight” labor force that can be hired and fired quickly. Permanent employees are being replaced by contractors, agency workers, platform “p...
·Model. Platforms connect “independent contractors” with clients. Formally this is not employment, but services of the self-employed. The platform is a “marketplace”, not an employer.
·Reality. Workers are often economically dependent on a single platform, subject to its algorithms, not controlling conditions. This is “pseudo-self-employment”.
·Consequences. Platform workers are deprived of labor rights: minimum wage (payment by completed tasks), paid vacation, sick leave, pensions, accident insurance.
·Regulation. Judicial and legislative battles are underway. In the United Kingdom, Uber drivers have been recognized as “workers” (an intermediate category); in California, law AB5 expanded the defi...
·Economic instability. Irregular income complicates planning, lending, family decisions. Many precarious workers balance on the edge of poverty.
·Psychological effects. Uncertainty, lack of control, status anxiety affect mental health. Standing describes the “four A’s” of the precariat: anger, anomie, anxiety, and alienation.
·Political consequences. The precariat is a potential political force, but not yet consolidated. Standing warns: the frustration of the precariat can fuel both progressive movements and populism and...
·Expansion of labor rights. Extending labor guarantees to non-standard workers: minimum hourly pay, rights to vacation, social insurance. Problem: how to finance under flexible models?
·Universal basic income. Guaranteed income regardless of employment—a response to labor market instability. The precariat is a key argument for UBI advocates.
·Portable benefits. Social guarantees linked to the individual, not the employer. The worker accumulates rights, moving between platforms and contracts.
·Organization of platform workers. Trade unions adapt to the platform economy: new forms of organization, legal protection, political pressure. Successes are so far limited, but the struggle continues.

“Precariat” is a term introduced by sociologist Guy Standing to designate a new social class characterized by unstable employment, lack of social guarantees, and uncertainty of the future. The transformation of labor in the 21st century—flexible contracts, platform economy, blurring boundaries be...

What is the precariat? According to Standing, the precariat is not simply the poor or the low-paid. These are people deprived of seven forms of “labor-related security”:

The precariat is deprived of all or most of these securities. These are freelancers, temporary workers, on-call workers, self-employed in the gig economy, migrants, youth in internships and zero-hour contracts.

A special place is occupied by the platform (gig) economy—Uber, Lyft, Deliveroo, TaskRabbit, Amazon Mechanical Turk and numerous other platforms:

The Political Economy of Migration

Scale and Trends → The Economics of Migration → Migration Policy → Migration and the Welfare State → Global Justice

·Restrictive arguments. Migrants “take jobs,” depress wages, strain social systems, threaten cultural identity, bring security risks. These arguments are especially strong among “losers of globaliza...
·Liberal arguments. Freedom of movement is a fundamental right. Migration is economically beneficial. Cultural diversity enriches societies. Aging societies need migrants to sustain pension systems.
·The progressives’ dilemma. The left traditionally supports both open migration and a generous welfare state. But are they compatible? An influx of migrants can undermine support for redistribution ...
·Empirical data. The connection is ambiguous. Some studies find that ethnic diversity reduces support for the welfare state (USA vs. Scandinavian countries). Others show that the design of programs ...
·Political consequences. Migration fuels right-wing populism. Parties exploiting anti-immigrant sentiment (Front National, AfD, UKIP, Fidesz) gain support, especially among the white working class.
·The right to exclude? Do states have the right to restrict entry? Libertarians and cosmopolitans challenge this: borders are arbitrary, migration restrictions are a form of discrimination by birthp...
·Global inequality. Most of the world’s inequality is between countries, not within. The “citizenship premium”—the advantage of being born in a rich country—is enormous. Migration is a way to overco...
·Open borders. A radical proposal: open borders completely. Economists estimate the effect as doubling global GDP. But political feasibility is nearly zero; consequences for receiving societies are ...

Migration—the movement of people across borders in search of a better life—is one of the most politically charged issues of our time. The economic consequences of migration for sending countries, receiving countries, and migrants themselves; political conflicts around migration policy—all this is...

According to the UN, about 280 million people live outside their country of birth—about 3.5% of the world's population. This share has grown from 2.8% in 2000. The largest corridors: Mexico–USA, India–UAE, Russia–Ukraine, Eastern Europe–Western Europe. Refugees make up about 26 million—a minority...

Theory. Neoclassical theory predicts that migration equalizes incomes: workers move from low-wage countries to high-wage countries until the gap narrows. Global welfare increases: workers become more productive in the host country.

Effects for receiving countries. Migrants fill labor shortages, often in sectors unattractive to natives (agriculture, care, construction). They pay taxes and consume. Studies usually find a zero or slightly positive effect on the labor market for local workers—migrants are more likely to complem...

Models of the Welfare State in Comparison

Esping-Andersen's Typology → Classification Criteria → Extending the Typology → Reasons for Differences → Consequences and Effectiveness → Convergence or Divergence?

·Social-democratic model (Scandinavian countries). Generous universal benefits for all citizens. High redistribution, low inequality. The state is the primary provider of services (healthcare, educa...
·Decommodification—the degree to which citizens can maintain an adequate standard of living independently of labor market participation. High decommodification means one can avoid work and not be po...
·Stratification—how the welfare state affects social structure. The liberal model creates a dualism: the middle class in the market, the poor on benefits. The conservative model preserves status dis...
·State-market-family. Three potential sources of welfare. The liberal model relies on the market; the conservative on the family; the social-democratic on the state.
·Mediterranean (Southern European) model. Italy, Spain, Greece, Portugal—weak state provision, a critical role for the family, fragmented programs, clientelism. Sometimes considered a variant of the...
·Postsocialist countries. Eastern Europe inherited socialist universalism, but in the transition period there was an erosion of guarantees and hybrid systems. Trajectories differ: Visegrad countries...
·East Asian model. Japan, South Korea, Taiwan, Singapore—"productivist" welfare state: social spending is subordinated to economic development, the family and firms play a significant role, low stat...
·Developing countries. The typology was created for wealthy countries. In developing nations, the configuration is different: weak states, a large informal sector, targeted poverty reduction program...
·Political mobilization. The strength of the labor movement and left parties is a key factor. Where social democracy dominated (Scandinavia), a universal welfare state emerged. Weak labor movement (...
·Religion. Catholic social doctrine supported corporatist institutions and the role of the family—influenced the continental model. Protestant individualism influenced the liberal model.
·Historical junctures. The timing of industrialization, the experience of wars and crises, colonial heritage shaped trajectories. Path dependence: once established, institutions tend to self-replicate.
·Inequality and poverty. The social-democratic model achieves the lowest inequality and poverty. The liberal model—the highest. The conservative model is intermediate.
·Employment. For a long time, it was believed that a generous welfare state reduces employment. But Scandinavian countries demonstrate high employment, especially among women. Active labor market po...
·Economic growth. The relationship is ambiguous. High social spending does not predetermine low growth. Investments in human capital can increase productivity.
·Gender equality. The social-democratic model is the most favorable for women: parental leave, state-provided childcare, high female employment. The conservative model cements traditional roles.

Models of the welfare state in comparison The welfare state (welfare state) is a system of government programs for social protection and redistribution that takes different forms in different countries. Esping-Andersen's classification identifies three "worlds of welfare capitalism"; subsequent r...

In the book "The Three Worlds of Welfare Capitalism" (1990), Gøsta Esping-Andersen proposed a classification that has become canonical:

Will differences between models persist? Globalization, population aging, changes in employment structure create common challenges. Some observe convergence: liberalization in Europe, welfare state expansion in Anglo-Saxon countries. Others emphasize the stability of national models.

The Political Economy of Security and Sanctions

Populism and the Crisis of Liberal Democracy

Economic Roots → Cultural Factors → Threats and Responses

·Left-wing (Latin America, Podemos) — against economic elites, in favor of redistribution
·Right-wing (Trump, Le Pen) — against cultural elites, for national identity, against immigration
·Undermining of institutions — courts, press, the electoral process
·Polarization and loss of shared public space
·Authoritarian drift
·Addressing economic grievances — jobs, dignity
·Institutional reform — restoring trust
·Inclusive narrative — not against, but in favor of

Populism and the Crisis of Liberal Democracy A wave of populism has swept the world: Trump, Brexit, Orbán, Bolsonaro, Le Pen. What is behind this phenomenon? What are its political-economic roots?

What is Populism Definition. Populism is a political style that pits the “pure people” against the “corrupt elites.” It claims to represent the “real people.”

Globalization. The “losers” from trade and immigration are the base of populism. The “Milanovic elephant” — the squeezing of the middle class in developed countries.

Inequality. Growth of inequality undermines the legitimacy of the system. Elites have become detached from the people.

The Crisis of Democratic Capitalism

·Trade unions and bargaining power of labor
·Welfare state — social insurance
·Progressive taxation
·Capital controls — room for national policy
·Deregulation, privatization
·Weakening of trade unions
·Liberalization of finance and capital
·Reduction of tax progressivity
·Rising inequality
·Stagnation of wages
·Financial crises
·Political dysfunction
·Inequality converts into political power
·Democracy responds with populism or authoritarianism
·Capitalism — through capital flight, crises
·Predistribution — primary redistribution before taxes
·Strengthening the voice of labor
·Stakeholder capitalism
·Democratization of economic decisions

After 1945, it seemed that democracy and capitalism formed a stable alliance. Today, this alliance is in question. What are the sources of tension? Is there a way out?

The Postwar Compromise Embedded liberalism. Open economy + social protection. Market — for efficiency, state — for fairness.

Result. The “Golden Age” of capitalism: high growth, low inequality, full employment, social mobility.

Tension between Democracy and Capitalism Logic of capitalism: accumulation, inequality, power of capital. Logic of democracy: equality of voices, accountability, representation.

Economic Sanctions: Theory and Practice

Types of Sanctions → Theoretical Foundations → Empirical Results → Problems with Sanctions → Modern Examples → Political Economy of Sanctions

Definitions

Comprehensive (all-encompassing) sanctions: — a ban on all or most economic relations with a state. Historical examples: the embargo against Iraq from 1990–2003, against Cuba. Now rare due to humanitarian costs.
Targeted (“smart”) sanctions: — restrictions aimed at specific individuals, companies, sectors. Freezing officials’ assets, travel bans, sectoral restrictions. In theory, they minimize harm to the population.
Financial sanctions: — disconnection from the international financial system. The most powerful tool: disconnection from SWIFT, blocking of correspondent relations, prohibition of dollar transactions. Effective due to the centrality of the American financial system.
Trade restrictions: — ban on the export or import of certain goods. Embargoes on oil, technology, weapons.

·Modest goals (changing a specific policy is easier than regime change)
·High dependence of the target on the sender
·Rapid imposition (before the target adapts)
·International coordination
·Democratic targets (more sensitive to economic damage)
·Ambitious goals (regime change is rarely achieved)
·Authoritarian targets (regimes shift costs onto the population)
·Availability of alternative partners (a “lifeline” from China, Russia)
·Duration (adaptation, “rallying around the flag”)

Economic sanctions—restrictions on economic relations designed to compel a state or organization to change its behavior—have become one of the main tools of international politics. Trade embargoes, asset freezes, and financial restrictions are being applied more and more frequently. But how effec...

Comprehensive (all-encompassing) sanctions—a ban on all or most economic relations with a state. Historical examples: the embargo against Iraq from 1990–2003, against Cuba. Now rare due to humanitarian costs.

Targeted (“smart”) sanctions—restrictions aimed at specific individuals, companies, sectors. Freezing officials’ assets, travel bans, sectoral restrictions. In theory, they minimize harm to the population.

Financial sanctions—disconnection from the international financial system. The most powerful tool: disconnection from SWIFT, blocking of correspondent relations, prohibition of dollar transactions. Effective due to the centrality of the American financial system.

Military-Industrial Complex

The military-industrial complex The military-industrial complex (MIC) — the entirety of the military department, defense enterprises, and the political and economic interests connected to them — became the subject of attention after President Eisenhower’s famous warning (1961). The political econ...

Eisenhower’s Speech In his farewell address (January 1961), Eisenhower — a general and president — warned of the danger of "unwarranted influence" from the MIC: "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the milit...

Structure of the MIC Defense companies. The largest contractors — Lockheed Martin, Boeing, Raytheon, Northrop Grumman, General Dynamics — receive hundreds of billions of dollars in contracts. The defense business is highly profitable and stable thanks to government orders.

Military department. The Pentagon is the largest purchaser. The military is interested in modern weapon systems; each branch lobbies for its own programs.

Economics of Conflicts and Civil Wars

Economics of conflicts and civil wars Civil wars are one of the main sources of suffering and destruction in the modern world. The political economy of conflicts analyzes the economic causes and consequences of internal armed conflicts: why they begin, how they are financed, why they are so diffi...

Trends in conflicts After World War II, interstate wars became rare (though they did not disappear). Civil wars, on the contrary, are the main form of organized violence. The peak occurred in the early 1990s (after the collapse of the USSR and the Cold War); then a decrease, but since the 2010s—a...

Economic causes Poverty. The link between poverty and conflict is persistent. Low GDP per capita is one of the best predictors of civil war. Mechanisms: low opportunity cost of rebel activity (nothing to lose), weak state, frustration.

Economic downturn. Recessions and shocks (falling prices for export goods, droughts) provoke conflicts. Unemployment and falling incomes create a reservoir of recruits for armed groups.

Economic Diplomacy and Geoeconomics

Geoeconomics—the use of economic instruments to achieve geopolitical goals—is becoming increasingly important in international relations. Trade, investment, aid, sanctions—all these are tools not only of economic but also foreign policy. In the era of "great power competition," the boundaries bet...

The term "geoeconomics" was popularized by Edward Luttwak in 1990. He predicted that after the Cold War, conflict between major powers would shift from the military sphere to the economic arena. States would compete for markets, technologies, resources, using economic instruments instead of armie...

Trade policy. Tariffs, quotas, non-tariff barriers are used not only to protect industries but also to exert pressure on partners. Trade wars (USA-China)—geoeconomics in action.

Investments. Foreign direct investment creates dependency and influence. Control over critical infrastructure (ports, telecom, energy)—a geopolitical lever. Hence, screening of foreign investments for national security.

Contemporary Challenges and the Future of Political Economy

Alternatives to Capitalism

Alternatives to capitalism Capitalism dominates, but it is not without critics. What alternatives are proposed? Are they realistic? What can be adopted from alternative models?

Historical alternatives Soviet socialism. State ownership, planning, absence of markets. Result — inefficiency, repression, collapse. But some achievements (industrialization, education, equality).

Social democracy. Not an abolition of capitalism, but its limitation. Redistribution, regulation, welfare state. The Scandinavian model is the most successful variant.

Contemporary proposals Market socialism. Market coordination + public ownership. Cooperatives, worker-owned firms, social funds. Examples: Mondragon, employee-ownership.

Political Economy for the XXI Century

Key Lessons of the Course → Challenges of the XXI Century → Application of Political Economy → Conclusion

Political Economy for the XXI Century The concluding article of the course. What lessons can be drawn? What questions remain? How can political-economic analysis be applied to the challenges of our time?

Politics and economics are inseparable. Markets do not exist in a vacuum. They are created and maintained by institutions, which themselves are a result of politics.

Distribution matters. Not only the size of the pie, but also its division. Distribution affects efficiency, stability, and politics.

Interests and ideas. Politics is determined both by material interests and by ideas about how the world works and how it ought to be.

The Political Economy of Climate

The Collective Action Problem → Winners and Losers → Lobbying and Climate Denial → Instruments of Climate Policy → International Negotiations → A Just Transition

·Between sectors. Fossil fuels, energy-intensive industries, the automotive industry—potential losers. Renewable energy, electric vehicles, "green" technologies—potential winners. But the transition...
·Between social groups. Carbon taxes are regressive: the poor spend a larger share of income on energy and transport. The "yellow vests" in France were a revolt against fuel tax increases. A just tr...
·Between generations. Current generations bear the costs of emissions reduction; future generations receive the benefits of mitigated climate change. But future generations do not vote.
·Carbon tax. A price on carbon reflecting environmental damage. Economically efficient: allows the market to find the cheapest ways to reduce emissions. But politically difficult: visible costs, inv...
·Emissions Trading System (ETS). Emission quotas are allocated to emitters; those who cut emissions below their quota sell surpluses. Creates a carbon market. The EU system is the largest in the world.
·Regulation. Efficiency standards, bans on certain technologies, renewable energy mandates. Less flexible, but politically easier.
·Subsidies. Support for clean technologies: renewable energy, electric vehicles, energy efficiency. Creates winners, not just losers.
·Government investment. Research, infrastructure, demonstration projects. The “Green New Deal” entails large-scale government investment in decarbonization.
·UN Framework Convention on Climate Change (1992). Established principles, but no obligations.
·Kyoto Protocol (1997). Obligations for developed countries; developing countries exempted. The US did not ratify. Limited success.
·Paris Agreement (2015). Universal participation; voluntary nationally determined contributions (NDCs); goal—to limit warming to 1.5–2°C. A diplomatic success, but commitments are insufficient to re...
·Fossil fuel workers. Miners, oil workers, power plant employees lose jobs. Retraining, social protection, investments in coal regions—elements of a just transition.
·Developing countries. The right to development; financial assistance for clean technologies; compensation for loss and damages from climate change.
·Vulnerable communities. Indigenous peoples, the poor, coastal residents, farmers—are most vulnerable to both climate impacts and misguided policy.

The Political Economy of Climate Climate change is perhaps the greatest challenge of the 21st century. But solving the climate problem is not simply a scientific or technological issue, but first and foremost a political-economic task. Why is action so slow, despite scientific consensus? Who gain...

The climate is a classic global public good. The atmosphere is shared by the entire planet; emissions in one country affect the climate everywhere. This creates a free rider problem: every country benefits from emission reductions by others, but bears the costs of its own reduction. The logic of ...

For decades, the oil and gas industry has financed climate skepticism campaigns. Exxon and other companies have known about climate risks since the 1970s, but have publicly spread doubt. Funding think tanks, PR campaigns, supporting skeptics in Congress—these are tools to oppose climate policy. T...

The enforcement problem: how to make countries fulfill their commitments? There is no international enforcement; reputational costs are limited.

Digital Capitalism and the Platform Economy

The Platform Economy → New Forms of Power → Political-Economic Issues → Regulatory Responses → Alternatives

·Power over infrastructure. Platforms are the infrastructure of the digital economy. AWS (Amazon Web Services) provides a third of all cloud computing; disconnection from it is catastrophic for busi...
·Algorithmic power. Algorithms determine what we see, buy, and read. They shape the information environment and influence politics (through targeted advertising, filter bubbles).
·Power over workers. Platform-based employment (Uber, Deliveroo) is controlled by algorithms. "The boss is the app". Workers are subordinate yet legally "independent contractors".
·Power over competitors. Platforms are simultaneously market and participant. Amazon both sells third-party goods and competes with those sellers, having access to sales data.
·Monopoly and market power. Concentration in the tech sector is unprecedented. Antitrust authorities are trying to respond: cases against Google, Facebook, Amazon, Apple. But traditional tools (focu...
·Taxation. Transnational platforms minimize taxes by moving profits to low-tax jurisdictions. Ireland, Luxembourg, the Netherlands are tax havens for tech companies. The OECD's initiative for a glob...
·Privacy and data. The platform business model is based on data collection. This creates privacy risks. GDPR in the EU is an attempt at regulation; however, its effectiveness is contested.
·Disinformation and content moderation. Platforms are the main channels for information dissemination. Algorithms are optimized for engagement, which favors sensational and polarizing content. How t...
·Democracy. Manipulation in social networks (Russian interference, Cambridge Analytica) threatens democratic processes. Targeted political advertising is a new tool of manipulation.
·Antitrust regulation. The EU imposes multi-billion fines; the US is increasing antitrust prosecution. Ideas include breaking up platforms, interoperability, bans on acquiring competitors.
·Data regulation. GDPR — the right to access, correct, erase data; consent for processing. Other countries are following suit (CCPA in California).
·Content regulation. The Digital Services Act (DSA) in the EU obligates platforms to remove illegal content and ensure algorithmic transparency.
·Tax reforms. The global minimum tax of 15% (OECD pillars) is an attempt to limit tax arbitrage.
·Platform cooperativism. The idea: platforms owned and managed by users or workers. Examples exist (Stocksy, Fairmondo), but scale is limited.
·Public platforms. Governmental or public platforms for critical functions (social networks, search). However, there are risks of state control.
·Decentralization. Blockchain protocols, decentralized networks (Mastodon, Web3) are attempts to create alternatives to centralized platforms. Currently, they remain niche.

Digital Capitalism and the Platform Economy Digital transformation is changing the economy and society no less profoundly than the Industrial Revolution. Platform companies — Google, Amazon, Facebook, Apple, Microsoft (GAFAM), as well as Chinese giants Alibaba, Tencent, ByteDance — have become th...

What are platforms? Platforms are digital intermediaries connecting various groups of users: buyers and sellers (Amazon, eBay), passengers and drivers (Uber), advertisers and audiences (Google, Facebook), developers and users (App Store). The key feature is network effects: the value of a platfor...

Data as a resource. Platforms collect enormous volumes of user data. Data are used for personalization, advertising, and training algorithms. The metaphor "data is the new oil" is popular (though inaccurate: data is inexhaustible and reproducible).

Multisided markets. Platforms serve several groups simultaneously. Google is free for users; revenue comes from advertisers. Pricing is asymmetric.

Populism and Economic Nationalism

The Economic Roots of Populism → Economic Nationalism → Anatomy of the Electorates → Consequences for Economic Policy → Responses to Populism

·Inequality. The growth of inequality since the 1980s, especially in Anglo-Saxon countries. Stagnation of middle-class incomes amid an explosive increase in the incomes of upper groups.
·Deindustrialization. The loss of industrial jobs—due to automation and globalization. Former industrial regions ("Rust Belt" in the US, North of England) are the electoral base of populism.
·Globalization. Trade competition, especially with China, is perceived as a threat. Immigration—pressure on the labor market and social systems (real or imagined).
·The 2008 financial crisis. The crisis undermined trust in the elites. Banks were rescued at taxpayers' expense; the guilty went unpunished; austerity hit the population.
·Protectionism. Tariffs and import restrictions. Trump’s tariffs on steel, aluminum, Chinese goods. Protecting "jobs" from foreign competition.
·Restriction of immigration. Walls, quotas, visa restrictions. Brexit is largely about controlling borders.
·Skepticism towards international agreements. US withdrawal from TPP, threats to withdraw from NAFTA, negotiations for "better deals". Brexit—leaving the EU.
·"America First." Rejection of multilateralism; bilateral deals; ignoring international obligations.
·The "losers of globalization". Workers from shrinking sectors, regions that have lost manufacturing. But it's not only the poor—many Trump and Brexit supporters are middle class.
·Cultural discontent. Not only the economy, but also status anxiety, loss of privileges (whites, men, locals), reaction to cultural changes (minority rights, gender equality).
·Territorial divide. Metropolises—open, cosmopolitan, vote for globalization. Provinces, small towns—closed, local, vote for populism.
·Rollback of globalization. Increase in tariffs, restriction of immigration, skepticism towards trade agreements. Although a complete reversal is unrealistic.
·Expansionary fiscal policy. Populists promise spending: infrastructure, social programs. This may contradict fiscal discipline and create deficits.
·Pressure on independent institutions. Central banks, courts, regulators—the "elite" that must be subordinated to "the people". The erosion of the independence of institutions threatens macroeconomi...
·Uncertainty. Unpredictable policies, sharp turns, conflicts with allies—all this creates uncertainty, depressing investment.
·Address real problems. Inequality, deindustrialization, stagnation of incomes are real. To ignore them is to strengthen populism. Redistribution, investment in regions, social protection are possib...
·Protection of institutions. Rule of law, independence of courts and central banks, freedom of the media—values that populism undermines. Protecting institutions is not elitism, but defending everyone.
·Reform of globalization. Not rejection, but "globalization with a human face": social standards, capital controls, international coordination against tax evasion.
·Political renewal. Mainstream parties must renew themselves, be closer to voters, offer alternatives. Technocratic disregard is a recipe for failure.

Populism and economic nationalism The rise of populism is one of the defining features of the politics of the 2010s. Brexit, Trump, the successes of populist parties in Europe are manifestations of deep discontent with economic and political elites. Economic nationalism—the demand to "take back c...

What is populism? Populism is a "thin ideology" (according to Cas Mudde), which divides society into two antagonistic camps: the "pure people" and the "corrupt elite". Populists claim to speak on behalf of "the people" against "the elites", "the establishment", "the system".

Left-wing populism (Podemos, Syriza, Sanders, Mélenchon) is directed against economic elites: oligarchs, corporations, financiers. Their demands are redistribution, fighting inequality, control over capital.

Right-wing populism (Trump, Le Pen, Orbán, AfD) adds a cultural dimension: the enemy is not only the economic elite, but also the cultural one (liberals, media, intellectuals) and "outsiders" (migrants, minorities). Economic nationalism is combined with cultural conservatism.

The Future of Political Economy as a Discipline

The Big Questions of the 21st Century → Methodological Trends → Theoretical Developments → Normative Questions → Public Role → Conclusion

·Climate and sustainable development. How can the decarbonization of the economy be carried out? How should the costs and benefits of the green transition be distributed? How can national interests ...
·Inequality and justice. Will inequality return to Belle Époque levels? How do technologies influence distribution? Is "inclusive" capitalism possible?
·Technology and labor. Will AI replace human labor? How should the platform economy be regulated? Who owns the data?
·Democracy and authoritarianism. Is capitalism compatible with democracy in the 21st century? How does the economy affect political regimes? Why is democracy in retreat?
·Globalization and fragmentation. Will deglobalization continue? Will the world economy break up into blocs? Is a new international order possible?
·Great power rivalry. How will the rivalry between the USA and China transform the world economy? Can the "Thucydides trap" be avoided?
·Integration of quantitative and qualitative methods. The best research combines econometric analysis of big data with in-depth case studies. Quantitative methods answer "what"; qualitative — "how" ...
·Causal identification. The "credibility revolution" in empirical economics — the focus on causal identification through experiments, natural experiments, instrumental variables — is spreading to po...
·Machine learning and big data. New data sources (texts, images, transactions) and methods of their analysis open up new possibilities. Algorithms discover patterns invisible to traditional methods.
·Historical perspective. Long-term data (Piketty, Milanovic) have shown the importance of historical analysis. Understanding today's institutions requires knowledge of their origins.
·Interdisciplinarity. The boundaries between economics, political science, sociology, history are becoming blurred. Political economy is, by definition, interdisciplinary.
·Institutional economics. The emphasis on institutions — the "rules of the game" — as determinants of economic outcomes. Nobel Prizes to North, Ostrom, Williamson testify to the recognition of this ...
·Behavioral political economy. Integration of psychological insights: bounded rationality, cognitive biases, social preferences. How does irrationality affect policy and institutions?
·Political economy of inequality. The work of Piketty and his school — a huge array of data and theoretical developments on the distribution of income and wealth.
·International political economy. The analysis of globalization, trade conflicts, international institutions, transnational corporations — an active area of research.
·What kind of capitalism? Variants of capitalism differ in the degree of inequality, the role of the state, social protection. The choice between them is a value judgment.
·Growth vs distribution? Is a trade-off between efficiency and equality possible? Or do they complement each other?
·Sovereignty vs integration? How much national sovereignty are we willing to give up for the sake of global governance of climate, inequality, finance?
·Technocracy vs democracy? Should experts decide complex issues (monetary policy, regulation)? Or should the people decide?
·Informing the public. Explaining the complex interrelationships between economics and politics to a wide audience. The books of Piketty, Rodrik, Milanovic are examples of public political economy.
·Advising policymakers. Political economists work in governments, international organizations, think tanks. Their ideas influence policy.
·Critical function. Political economy raises questions about power and distribution that mainstream economics often ignores. This is a critical function — analyzing who wins and who loses.

The future of political economy as a discipline Political economy is experiencing a revival. After decades of domination by "pure" economic theory, which ignored politics and power, the interconnection between economics and politics is again at the center of attention. What questions will shape t...

Political economy has never been and cannot be "value-neutral." Issues of justice, freedom, democracy are inevitable:

The Digital Economy and New Challenges

Platform Economy and Big Tech

The Economy of Platforms → Market Power and Antitrust Challenges → Data and Privacy → Platforms and Democracy → Labour and Gig Economy → Global Governance Challenges

·EU Digital Markets Act (DMA)—designates gatekeepers, imposes obligations (interoperability, non-discrimination).
·US antitrust lawsuits (Google search, Meta acquisitions).
·UK Digital Markets Unit.
·Japan, Korea—platform-specific regulations.

Political Economy of Platforms: The Power of Big Tech Digital platforms—Amazon, Google, Apple, Meta, Microsoft—have become the dominant economic institutions of the 21st century. Their market capitalization exceeds the GDP of most countries. The platform economy creates new forms of market power,...

Network effects: the value of a platform grows with the number of users. Positive feedback loop: more users → more value → even more users. This creates winner-take-all dynamics.

Multi-sided markets: platforms connect different user groups (buyers/sellers, users/advertisers). Cross-side network effects reinforce lock-in.

Data as asset: platforms accumulate massive data about users, transactions, and behaviour. Data enables personalization, targeting, prediction. Economies of scale in data—more data → better algorithms → more users → more data.

Cryptocurrencies and State Sovereignty

·Prohibition: China banned crypto trading and mining (although enforcement is imperfect). Motivations: capital controls, financial stability, state control.
·Restrictive regulation: many countries impose strict requirements on crypto businesses. Licensing, compliance, reporting.
·Embrace: El Salvador adopted Bitcoin as legal tender. UAE and Singapore are positioning themselves as crypto hubs. Regulatory arbitrage plays a role.
·Coexistence: regulated crypto alongside fiat, CBDCs. Different use cases. Most likely medium-term outcome.
·Marginalization: strict regulation confines crypto to niche uses. Possible if a major scandal or systemic risk event occurs.
·Mainstream adoption: crypto becomes a significant part of the financial system. Requires regulatory clarity and institutional infrastructure.

Cryptocurrencies and the Challenge to State Sovereignty Cryptocurrencies present a unique challenge to state sovereignty. Unlike previous technological innovations, crypto directly challenges one of the core state functions — monetary sovereignty. The political economy of cryptocurrencies touches...

Money and State Power Historically, control over money has been a central element of state power. Seigniorage (profit from currency issuance), monetary policy (influence over the economy), financial surveillance (tracking transactions), sanctions enforcement — all depend on monetary sovereignty. ...

Central Bank Digital Currencies: the state’s response to private crypto. Maintaining monetary sovereignty in digital form. China's e-CNY is the most advanced — part of a strategy for the digital yuan's internationalization.

Sanctions and Financial Crime Crypto enables sanctions evasion in theory, but in practice it is more complex. Blockchain transparency makes large-scale evasion detectable. North Korea, ransomware groups use crypto, but face difficulties converting to fiat. Chainalysis, Elliptic — blockchain analy...

AI and the Future of Work

Artificial intelligence and the political economy of labor. Artificial Intelligence represents a potentially transformative technology for labour markets. Unlike previous waves of automation, AI threatens not only manual, but also cognitive work. Political economy of AI-driven automation encompas...

AI and Automation: What's Different Previous automation waves: mechanization replaced physical labour, computers — routine cognitive tasks. AI can automate non-routine cognitive work: analysis, judgment, creative tasks. Large Language Models (ChatGPT): demonstrate capabilities in writing, coding,...

Labour Market Impacts Occupations at risk: studies estimate 10-50% of jobs significantly affected by AI. High exposure: clerical, legal, financial analysis, customer service, some creative fields. Lower exposure: physical tasks requiring dexterity, judgment in unpredictable environments, high-tou...

Distribution and Inequality Capital vs labour: AI increases productivity, but who captures gains? If AI substitutes labor, capital share may increase. Already rising pre-AI. Concentration: AI development concentrated in few companies (OpenAI, Google, Microsoft, Meta). Oligopoly dynamics. Access t...

Deglobalization and Reshoring

Deglobalization: the end of the liberal world order? After three decades of intensifying globalization, there is a partial reversal. Trade tensions, pandemic supply disruptions, geopolitical conflicts accelerate trends toward regionalization, reshoring, strategic autonomy. The political economy o...

Drivers of deglobalization Geopolitical competition: US-China rivalry transforms economic relations. Decoupling in technology, scrutiny of investment, export controls. Economics subordinated to security. Supply chain vulnerabilities: COVID-19 exposed dependence on concentrated suppliers. Chips, p...

Forms of deglobalization Reshoring: bringing production back to the home country. US CHIPS Act ($52B subsidies) aims to restore semiconductor manufacturing. Expensive, but strategic. Nearshoring: moving production closer, but not home. Mexico benefiting from China+1 strategies. Eastern Europe for...

Economic Implications Efficiency costs: globalization enabled specialization, scale economies, low prices. Reversing costs consumers, reduces productivity growth. Estimates: 5-10% GDP cost from full decoupling. Inflation: higher production costs, redundant capacity, supply disruptions — all infla...