I made this summary based on the course 'Economy and Society' by Mattias Vermeiren from the second year in the bachelor of Social Sciences. It's based on the slides from the class to which I added my notes from each class. Extra information is taken from the book. I made it in the academic year of ...
Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
ECONOMY AND SOCIETY
Table of content
Chapter 1 – Introduction ................................................................................................................................. 4
What is comparative political economy? .................................................................................................... 4
Measures of inequality ................................................................................................................................ 5
Gini-index and the Lorenz curve ................................................................................................................. 6
US wealth inequality: perception vs. reality ............................................................................................... 9
Kuznet curve .............................................................................................................................................. 10
Rising inequality: explanations .................................................................................................................. 11
Inequality: consequences (I) ..................................................................................................................... 12
Inequality: consequences (II) .................................................................................................................... 13
Chapter 2 - schools of political economy; liberalism, Marxism and Keynesianism....................................... 14
Schools of political economy ..................................................................................................................... 14
Economic liberalism: outline ..................................................................................................................... 15
The rise of the global economy in the 19th century .............................................................................. 15
Economic liberalism: efficiency of free markets ................................................................................... 17
Economic specialization ........................................................................................................................ 19
Liberal economic policy ......................................................................................................................... 21
Steven Pinker – Enlightenment now ..................................................................................................... 24
Marxism: Outline ....................................................................................................................................... 24
Marxism: labour exploitation ................................................................................................................ 25
Marxism: extraction of surplus-value mechanisms............................................................................... 26
Marxism: concentration of capital ........................................................................................................ 29
Marxism: demise of capitalism.............................................................................................................. 30
Chapter 3 – Keynesianism and social democracy ......................................................................................... 32
Keynesianism: outline ............................................................................................................................... 32
Paradigm shifts as battle of economic ideas? ....................................................................................... 33
From the classical to the Keynesian model ........................................................................................... 34
Pillars of social democracy .................................................................................................................... 36
Keynesianism and the Bretton Woods regime...................................................................................... 39
1
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
Rise of shareholder model in US economy ........................................................................................... 94
Labour share in USA .............................................................................................................................. 97
Rise of shareholder model in US economy ........................................................................................... 97
CEO pay for firm with 1 billion dollar revenues (2006). ...................................................................... 100
Corporate governance in varieties of capitalism .................................................................................... 100
“institutional complementarities”....................................................................................................... 102
Profit distribution I-phone 6................................................................................................................ 105
Labour share of value added (manufacturing) .................................................................................... 105
China’s LSVA (manufacturing) ............................................................................................................. 105
Foxconn’s LSVA and profit share ......................................................................................................... 106
Share of production cost of Apple Iphone 4: assembly in China versus United States....................... 107
3
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
Chapter 1 – Introduction
What is comparative political economy?
(Inflation = a general increase in prices and fall in the purchasing value of money)
(Stagflation = persistent high inflation combined with high unemployment and stagnant demand in a
country’s economy)
It is an interdisciplinary subfield in social sciences. It studies the interaction between political/social
and economic dynamics. Assumption that it is impossible to say much sensible about the economy
and the functioning of “markets” without taking into account the broader political and institutional
context in which these markets are always embedded. It breaks down the boundaries of political/social
and economics plus it poses basic questions about distribution.
➔ Harold Laswell’s definition of politics – “who gets what, when and how?” – applied to the
economy
Impact of political/social events on the economy (global financial crisis 2008, rising inequality in the
Western world)
Impact of economic events on politics and society (rise in populism)
➔ The political economy compared with neoclassical economics (its main contender); too
simplistic and unrealistic which causes controversy
➔ Might be as bad as neoclassical economy
➔ Takes into account non-economic factors
4
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
Measures of inequality
gini-index of disposable income inequality
➔ Most often-used measure of inequality before Thomas Piketty’s capital in the 21st century
Share of different income groups (e.g. “top 1%”) in national income
➔ Data of Thomas Pikkety and colleagues
Share of labour versus capital in national income (GDP)
Wealth inequality: share of different wealth groups (e.g. “top 1%”) in national wealth
These are measures of inequality, but how can they be explained and why does it matter?
5
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
Gini-index and the Lorenz curve
The gini-index is very abstract, it ranges from 0 (perfect equality: all individuals earn the same) to 1
(perfect inequality: one citizen has all the income).
The Lorenz curve is a cumulative percentage of households from poor to rich (x-axis). The Y-axis shows
the cumulative income share of these households. In this example 20% of the households earn 5% of
the total income. It is calculated by the ratio of area between the line of perfect equality (45 degree
diagonal line) and the observed Lorenz curve to the area between the line of perfect equality and the
line of perfect inequality. The higher the coefficient, the more unequal the distribution is.
6
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
The Gini index is used by the OECD and it measures the distribution of “disposable income” after all
taxes have been paid. It includes income from labour and capital. The conclusions from this figure are
that the Anglo-saxon countries have higher levels of income than continental EU countries and Japan.
The rise in inequality is faster in former countries between 1985 and 2008 than the latter. Finland and
Sweden have the lowest score in the 1980s. Belgium and France are the only 2 countries where income
inequality remains the same during this period. So the rise in inequality is universal but has cross-
national differences.
The problem with the gini-coefficient is that it shapes an overly abstract view because it is summarized
into one single numerical index.
Thomas Pikkety and colleagues collected data using tax records which enabled them to track the
changes of inequality over long periods of time. It is historical data. This figure shows data on evolution
of the share of the “top 1%” in national income (“dominant class”). Anglo-Saxon countries (Australia,
Canada, UK & US): U-shaped: 1980-2007: top 1% rose by 135% in US & UK, 105% i Australia and 76%
in Canada. The income inequality is highest in the US. It is different from the EU and Japan, it is more
L-shaped:
Pikkety claims this is a good measure because it shows existence of inequality and the number of
people who enjoy such rewards. It is a small minority with dominant social and political influence
7
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
Similar cross-regional differences when looking at evolution income shares between bottom 50% and
middle 40%. The EU (40%) and US-Canada (63%): their income growth is systematically higher for
upper income groups, but for EU the growth gap between the bottom 50% and the full population is
much lower → to better understand this we should focus on the share of total growth captured by
each group over an entire period. In US-Canada the top 1% captured 35% of the total growth. In the
EU that was merely 18% (more equally distributed). Especially the experience of bottom 50 is strikingly
different. The inequality in North-America is higher in top end of distribution: the difference becomes
larger the higher we go. The share of total income captured by the top 1% is twice as large in US-
Canada than in the EU → super-elites derive income from capital rather than labour and it becomes
increasingly important.
Capital income is the predominant source of income, “9%” income from labour predominates: income
80-20 split between labour and capital representative of income structure. Why does it matter? These
groups are the main beneficiaries of declining labour share and rising capital share. The functional
income distribution measures distribution of income between the 2 factors of production: capital and
labour (inputs needed to produce goods & services). Firms make profit by “adding value” to raw
materials using both labour and capital. The GDP: Gross Domestic Product: is the market value of all
financial goods and services produced within a country in a given period. It represents the economic
size of a country every year, the material well-being of a country. But it tells us nothing about the
distribution.
8
,Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
The US has the most unequal distribution. The share by the bottom 60% is negative in several
countries: households had liabilities exceeding the value of their assets. The level of wealth inequality
has been rising since the 1980s.
, Prof. Mattias Vermeiren
Academic Year 2018-2019 Julia Steegen
The level of wealth inequality has been rising since 1980s. This level was brought down in the US during
the interwar years and continued to decline in the EU until the 1970s → postwar golden age of
capitalism was the most egalitarian period in human history. Between the 1930s and the 1970s there
has been an emergence of the patrimonial middle class: the share of the middle class has been
declining, the top 1% and the top 10% has been rising in the US.
Kuznet curve
How can the latter be explained?
The rise in inequality since the 1980s contracts Simon Kuznet’s neoclassical theory: ‘inequality
would grow only during the initial stages of industrialization and would fall after a certain level
of economic development’. The expectation was that inequality would in the long term assume
and inverted U-shaped pattern (Kuznet curve).
Explanation Kuznet curve: industrialization: a move from rural areas to cities would cause a
significant income gap between poor country sides and rich cities. The gap would decrease
when a certain level of average income is reached and developments (democratization, public
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