Robin Hahnel - The ABCs of Political Economy: A Modern Approach

The ABCs of Political Economy

The ABCs of Political Economy: A Modern Approach is an accessible introduction to modern, radical, political economy. It draws on the work of Karl Marx, Thorstein Veblen, John Maynard Keynes, Michael Kalecki, Piero Sraffa, Joan Robinson, and other great political economists, but requires no prior familiarity with political economy, and concentrates on modern concepts and models best suited to understanding economic issues today. The ABCs provides readers who are dissatisfied with the economics of competition and greed and mistrustful of conventional economic theory with the essential tools they need for a critical evaluation of the major economic institutions and policies of our day. The ABCs also teaches readers who want to make our economies more democratic, equitable, sustainable and efficient what they need to know to evaluate how effective different policies and institutional reforms are likely to be at accomplishing their goals. In other words, The ABCs of Political Economy empowers people who are dissatisfied with todays economies and mainstream theories to think through how we can move from the destructive economics of competition and greed toward an economics of equitable cooperation.

No previous economics background is assumed, and everything is explained verbally in eight core chapters. Simple theoretical models that illustrate the logic of key relationships are confined to three chapters which are not necessary to follow the rest of the text. Even the models in these three chapters require no mathematical skills beyond arithmetic and high school algebra. But while technique has been reduced to a minimum, and confined to chapters that can be skipped or postponed, there is much to be learned about important aspects of modern economies and policy debates from the simple political economy models in chapters 3, 5, and 9. I urge readers who want to empower themselves as economic thinkers, that is, readers who want to be able to analyze economic issues and debates for themselves rather than always look to others to provide them with a politically correct conclusion, to invest the time to explore the simple models in these three chapters. These chapters help you to become a player rather than a spectator in the game of modern political economy.

Chapter 1 develops a social theory designed to understand the relationship between economic, political, kinship, and cultural activities, and the forces behind social stability and social change in a way that neither over nor underestimates the importance of economic dynamics, and neither over nor underestimates the importance of human agency compared to social forces.

Chapter 2 carefully examines what is meant by economic justice, economic efficiency, economic democracy, and environmental sustainability. Since these are the measuring sticks we will use to judge economic performance, it is crucial to be clear about our goals.

Chapter 3 uses a simple corn model to explore the relationship between efficiency and inequality. The corn model allows us to see how labor and credit markets affect efficiency and inequality, and provides a convenient context to see how conservative, liberal, and radical conceptions of economic justice give rise to different conclusions about when unequal outcomes are unfair and when they are not.

After teaching readers the laws of supply and demand necessary for understanding how markets work, chapter 4 explores what lies behind the debate between enthusiasts, who see markets working as if they were guided by a beneficent invisible hand, and critics, who see markets often working as if they were guided by a malevolent invisible foot.

Chapter 5 presents three micro economic models. The concept of a dominant strategy equilibrium in a simple, static public good game illustrates how the free rider problem leads markets to produce too little public goods. Backward induction in a simple, dynamic Price of Power Game illustrates how the logic of preserving an unequal power advantage can lead to a loss of economic efficiency in both patriarchal households and capitalist firms. Finally, a Sraffian model using an inputoutput framework illustrates why there is a negative relationship between the wage rate and rate of profit, why the relative prices of goods depend on the bargaining power between capitalists and workers, and why profit maximizing capitalists sometimes make socially counterproductive technological choices.

Chapter 6 explains the importance of aggregate demand in explaining why economies sometimes fail to produce all they could, the origins of cyclical unemployment and demand pull inflation, and the logic of fiscal policy. The chapter also explains why wage-led growth is possible in the long run and dispels popular myths about inflation and the national debt.

Chapter 7 unravels the mystery of money and banks and explains the logic of monetary policy. Besides explaining how the financial sector can improve productivity in the real economy, the chapter also explains how the financial sector can lead to efficiency losses in the real economy something mainstream finance theory seldom bothers to point out.

Chapter 8 tackles the question of whether international trade and investment deserve to be described as mutual benefit the mainstream view or imperialism the political economy view. Understanding how international trade and investment can affect global efficiency both positively and negatively, and how international trade and investment affect inequality between and within countries, is crucial for people who want to understand the raging debate about globalization. While the balance of payment accounts and a simple open economy macro model prove critical to understanding controversies surrounding IMF conditionality programs.

Chapter 9 contains a number of simple macro economic models illustrating the logic of bank runs and international financial crises, the problematic relationship between the financial and real economies, both domestically and internationally, and the logic of fiscal and monetary policies in both closed and open economy models. The chapter concludes with a long run political economy macro model incorporating the insights of Keynes and Marx that illustrates the possibility of wage-led growth.