Political Economy of Economic Policy Jeff Frieden
Political Economy of Economic Policy Jeff Frieden
Political Economy of Economic Policy Jeff Frieden
POLITICAL
ECONOMY
OF ECONOMIC POLICY
We should pay closer attention to the interactions between politics, economics, and other realms
Jeffry Frieden
WHAT IS POLITICAL ECONOMY? the early 20th century economics and political science were
established as separate disciplines.
Adam Smith, David Ricardo, and John Stuart Mill are widely
For much of the 20th century this division reigned. With the
regarded as the originators of modern economics. But they
Great Depression and problems of development, the purely
called themselves political economists, and Mill’s Principles of
Political Economy was the fundamental text of the discipline economic issues were daunting enough to occupy economists. By
from its publication in 1848 until the end of the century. These the same token, the political problems of the era—two world
early theorists could not conceive of the economic and political wars, the rise of fascism and communism—were so serious as to
worlds as separate. require separate attention.
Two trends divided the political from the economic analysis. By the 1970s, however, it was clear that the separation
First, governments began to reduce their direct control over the between the economic and political spheres was misleading.
economy. Second, different political forms emerged: Europe That decade saw the collapse of the Bretton Woods monetary
went from almost exclusively monarchical to increasingly order, two oil price shocks, and stagflation—all highlighting
representative, and highly varied, forms of government. By the fact that economic and political matters are intertwined.
The economy was now high politics, and much of politics was activities of particular firms or industries can have an impact on the
about the economy. nature and direction of their political activity.
Over the past 50 years, political economy has become increasingly
It uses the tools of economics to study politics. Politicians
prominent in both economics and political science, in three ways:
can be thought of as analogous to firms, with voters as consumers,
It analyzes how political forces affect the economy. or governments as monopoly providers of goods and services
Voters and interest groups have a powerful impact on virtually to constituent customers. Scholars model political-economic
every possible economic policy. Political economists strive to interactions in order to develop a more theoretically rigorous
identify the relevant groups and their interests, and how political understanding of the underlying features driving politics.
institutions affect their impact on policy.
All three methods have profoundly affected both scholars and
It assesses how the economy affects politics. Macroeconomic policymakers. And political economy has a lot to offer both to
trends can boost or ruin an incumbent’s chances. At the more analysts of how societies work and to those who would like to
microeconomic level, features of the economic organization or change society.
next election, a party has to be concerned about The policy that economic analysis indicates
its longer-term reputation. On another dimension, is best for the economy may not be politically
where politicians are elected by the country as a feasible. To go back to free trade, virtually all
whole, as in Israel or the Netherlands, the focus economists would recommend that a small
is on national policy. Where politicians represent country’s best bet is to remove all trade barri-
narrower geographic locations, as in the US House ers unilaterally. Yet it is almost certain that a
of Representatives, the general view is that “all government that attempted to move to unilateral
politics is local” (usually attributed to 1970s–80s free trade would face massive opposition from
Democratic Speaker of the House Tip O’Neill). special interests and from many in the public
These different electoral systems can drive politics who would regard such a move as dangerous.
toward more national or more local concerns. The result might well be the collapse of the
Electoral institutions affect the identity of the government and its replacement with one that
people politicians need to attract to win an election. could be relied on to maintain and even expand
The US Electoral College makes middle-of-the-road trade barriers. In this case, pursuit of the first-
voters in the Midwestern industrial states pivotal best policy could lead to a much worse outcome.
in presidential elections, driving the emphasis on Politicians, analysts, observers, and just regular
protection for manufacturing. In a multiparty par- people who are interested in economic policy are
liamentary system, the pivotal voters may be the well advised to evaluate not only the economic
supporters of a small party that can swing back and implications of policy initiatives but also their
forth between coalition partners, such as the fringe political feasibility. If the pursuit of a first-best
parties for the formation of Israeli governments. policy is bound to fail and perhaps provoke a
Whichever voters the electoral system makes pivotal backlash, then truly the cure may be worse than
are likely to have outsize influence over politics the disease. It makes more sense to consider the
and policy. political realities the government faces and to struc-
The character of legislative institutions also ture policy with those realities in mind. It is better
matters. For example, while a unitary parlia- to settle for second-best than to insist on first-best
mentary system can deliver big and fast change, and end up worse—or, as folk wisdom has it, to
in the US separation of powers system change is let the perfect be the enemy of the good.
more modest and slower. Federal systems—in
Australia, Brazil, Canada, Germany, the United Bottom line
States—give provincial or state governments a Political economy is the integration of political
lot of power, while centralized systems allow the and economic factors in our analysis of modern
national government to rule unchallenged. Some society. Inasmuch as just about everyone would
governments have handed off control of important agree that politics and economics are intricately
policies to independent bodies that are less subject and irretrievably interwoven—politics affects the
to day-to-day political pressures—such as central economy and the economy affects politics—this
banks and public health agencies. approach seems natural. It has proved itself power-
These institutions matter because they affect the ful in understanding governments and societies; it
weights that politicians give to different groups in can also be a powerful tool for those interested in
society. Some sociopolitical institutions give labor changing governments and societies. Policymakers
unions a great deal of influence; others privilege should hold these important lessons in mind today
farmers; still others are dominated by business asso- as they tackle the COVID-19 pandemic.
ciations. Political economists analyze the interests
in play and how the institutions of society transmit JEFFRY FRIEDEN is a professor of government at
and transform them into government policy. Harvard University.