Neoclassical Political Economy

1
Neoclassical Political Economy

• For consumers, there is a large number of bundles
  of consumer goods from which to choose
• For producers, there is a possibility of
  combining resources in different ways
• This process of substitution will go on until all
  resources yielded maximum product for producers
  and maximum utility for consumers
• MCPMB (outcome of perfect competition)

2
Neoclassical Political Economy

• What is the role of the politics (state)?
• Property rights (of ownership, use, sale etc.)
• Important for smooth functioning of market
  exchange
• Creation of incentives (what can I do with my
  capital or with my labor?)
• The political process establishes property rights
  and set their limits
• Market Failures (markets are not always optimal)
• Externalities
• If my objective is affected by another
  transaction which I am not part of
• Negative or positive externalities
• Inefficient production

3
Neoclassical Political Economy

• Public goods
• Non-excludability
• -- Free rider problem
• Underproduction
• Imperfect competition
• Monopoly or oligopoly
• Higher prices and lower output
• Asymmetric information
• Two parties to the exchange have asymmetrical
  access to the information
• Health insurance, loan contracts
• Not market clearing price

4
Neoclassical Political Economy

• Politics can correct market failures
• Is the efficiency only criterion to evaluate
  economic processes or government intervention?
• What about the role of power in neoclassical PE?
• Only market power is acknowledged.
• What about power in labor-capital relationship?
• Fallback position of the worker
• Mobility of resources
• What is firm?

5
Keynesian Political Economy

• What happens if my good is not sold in the
  markets? (Violation of Says law)
• Neoclassical answer it is an individual failure
• Reallocation of resources
• Keynesian answer it is a systemic failure and
  unemployment can be persistent
• Markets generate instability
• Circular flow (short-run)
• Resources are used to produce goods and services
  and they get income in return for their
  contribution (source of demand in a simple
  economy)
• To keep up with demand, firms change their
  production levels and buy new inputs
• Workers and firms use their revenues for
  consumption or savings
• revenuespendingdemandproduction--revenue

6
Keynesian Political Economy

• Circular flow (long-run)
• Investment in fixed capital
• Depending on profitability expectation
• Revenues over an extended production cycle
• The level of capital stock is not adjustable in
  the short run
• Fixed capital cannot be sold immediately
  (technically specific)
• Until Keynes, there was a belief in the
  identification of private wealth accumulation
  (private benefit) with the accumulation of fixed
  capital (social benefit)
• Keynes private interests can be best served by
  holding wealth in a liquid form
• Short-run versus long-run

7

• Short-run perspective
• Hold your wealth in liquid form
• No long-term commitment to a particular
  productive enterprise
• Alternative investment in financial markets
• Long-term perspective
• Irreversible investment in physical capital
• Not sure about the future return
• Fundamental uncertainty about future makes the
  forecasts impossible
• Expectations and social conventions play a much
  more important role
• The more we expect prices to rise, the more we
  act in ways that make prices rise.
• Profit goes to those best able to anticipate
  what average opinion expects the average opinion
  to be (Keynes, 1936)