➜ economies are complex and involve the interactions and decisions of millions of individuals and firms, in addition to the government’s economic policies.
➜ “the right” and “the left” economic ideologies battle over how much economic freedom or economic equality to emphasize in an economy’s markets, monetary policy, welfare-state policies, trade policies, and regulatory policies.
➜ an individual’s position “on the right” or “on the left” on economic issues is often determined by their place in society or source of income.
➜ political-economic systems are created reflecting the values of the society’s economic ideology.
➜ no single statistic or data set can give the full picture of an economy’s performance, but there are many useful pieces of data for comparison between countries.
Defining “the economy” is a difficult task, but one thing is clear: the economy is not a monolithic institution that can easily be controlled and manipulated by policymakers. When people discuss what is going on in the economy, they could be referring to any number of specific details, including employment and wage data, price inflation or deflation, the level of public debt, the value of the dollar, the rise or fall of prices on the stock market, and innumerable other metrics. What all of these pieces relate to is the production and consumption of goods and services. An economy is a system in which billions of individual choices are being made by individuals, firms, and governments about what will be produced, how it will be produced, and who will consume the goods and services produced. Many of these choices are made at the most minor “micro” level (often referred to as microeconomics), such as whether a person will choose to buy a pack of gum for a certain price at a local convenience store. Other choices are made on a large scale, affecting multitudes of people at once, at the “macro” level (macroeconomics), such as the decision by policymakers on what income tax rate to charge wage-earning individuals. These choices are constantly made and remade, interacting with one another to shape what we refer to as the economy.
In the AP Comparative Government and Politics course, the focus is on political economy, which is the way in which politics and policymaking interact with the economy, particularly with regard to how the choice is made to balance two competing economic values: economic freedom and economic equality.
Ideological debates in economics center primarily on the conflict between economic freedom and economic equality. Economic freedom refers to the degree to which individuals and private firms are free to own property and make decisions about how to use, consume, or invest it without interference from the state. The state still plays a role in economic activity, but the role it plays is primarily in defining and protecting property rights through providing a legal system and law enforcement, and not in determining how resources will be distributed or used. This freedom heavily incentivizes people to take actions that will earn high wages or profits by providing goods and services to others that are highly in demand. The forces of supply and demand interact freely to determine the prices people must pay if they want to purchase goods and services. Often, these incentives have very positive effects on an overall economy, as they motivate innovation, development, and progress by incentivizing people to, in effect, get more for themselves by serving others. However, when an economic system grants a high degree of economic freedom, it invariably leads to at least some economic inequality. Some people go into successful industries or professions; others are less fortunate (or perhaps less wise) in the choices they make for how to earn a living. Some people are extraordinarily talented in their professions; others are not. Some are born into families and inherit use of property and money the family already possesses; others are born into poverty. The most efficient way to reduce economic inequality is through state action.
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Political-economic debates are usually divided between the “right,” who prioritize economic freedom, and the “left,” who prioritize economic equality.
Those who value economic equality prefer to move more toward a society in which neither poverty nor extreme wealth exists, but rather the resources of the society are collectively used to eliminate the struggles of poverty through redistributive state actions. For example, a mild version of policies based on this value might include imposing a small tax on all income earned in excess of a certain amount of money, followed by the state using that money to fund a program that provides income to the poor, elderly, or unemployed. In a more extreme form, the state might deny the right to own private property altogether and collectivize the ownership of all industry, assigning jobs and making production decisions based on a central plan the state has made for what is needed. Every decision made by the state to reduce economic inequality infringes in some way upon people’s economic freedom, and every decision to liberalize state control over the economy to give more freedom results in some way in an increase in economic inequality.
The conflict between these two values often defines the political climate in a state, and from this conflict has emerged a common terminology: right and left. Those who are “on the right,” so to speak, are those who prefer to move the current policy climate more toward economic freedom. Those who are “on the left” want policies that will reduce economic inequality. There are a number of grounds on which the battle between these two sides is fought.
The ideology of the current regime, as well as the current government, will determine to what extent the state chooses to act in each of the following components, and also what actions it will take.
A market is the common term used to describe any setting in which supply and demand (sellers and buyers, workers and firms, etc.) interact with one another. Markets function to determine the price that must be paid for a good or service, and thus also play a role in the distribution of resources. Markets freely allow people to buy, sell, and trade what they produce in exchange for what they will consume. Prices rise or fall based on current supply and demand in the market. For example, if a company publishes a report that indicates it has had a “down” year, many of the shareholders who own the company stock might post that stock for sale. Meanwhile, very few investors would want to buy those shares at the current price. The result would naturally be that sellers would have to reduce the price of the stock in order to attract buyers. Markets for everything including food, land and housing, and even employee wages work similarly. The state will sometimes attempt to disrupt market behavior when it sees outcomes it does not prefer, such as high prices for a good perceived by consumers as necessary (such as housing, or food, or gasoline in the developed world). The state may artificially hold the price down through law, or by providing a subsidy, a payment from the state to assist consumers in purchasing the product or a payment directly to the producer to help them keep prices lower. There is great difficulty in controlling markets, though. Markets arise spontaneously due to the incentives apparent to the private actors. For example, a narcotic drug market has emerged in many developed countries bringing with it numerous negative outcomes, including violence, addiction, poverty, and child neglect, among others. The state’s response in many cases has been to ban the sale, purchase, or possession of these drugs altogether. Has that action eliminated the market? Certainly not. A black market continues to operate illegally despite the laws of the state. The drug example aside, many heated conflicts between the right and left spring from the question of whether the market or the state is better suited to make production and consumption decisions on behalf of people.
Property is, quite simply, ownership of goods and services. The state may choose to limit its role to the protection of private property rights, take the full ownership of all property, or much more likely, some balance of options in between, provided that they can maintain the legitimacy of rule while they are doing so. The degree to which the state protects and allows private property ownership is a key factor in determining the right/left nature of the state’s policies. This all presupposes that the state has the capacity to do so, though. In many Less Developed Countries (or LDCs), where there is significant poverty and a lack of resources compared to developed countries, the state may lack the capacity to take on even the minimal function of private property protection, which leads to property decisions being made at a much more local community level among the individuals involved.
Public goods are those goods and services that are provided to citizens, either free of charge or at heavily subsidized rates, by the state. Which goods should be provided in this manner, rather than by the market, is a major focus of argument between the left and right sides of the political spectrum. At a minimum, states are likely to provide goods for which there is no market profit motive, such as a military for national defense, road systems, and law enforcement, provided that the state has the resources to do so. After that, every state is unique in the programs and funding levels they choose to enact as public goods. The United Kingdom provides all of its citizens with access to health care without charge. Nigeria has secured its oil under public ownership and heavily subsidizes the cost of gasoline. In Maoist China, virtually all goods and services were public goods, strictly rationed by the state to guarantee economic equality.
Social expenditures are similar to public goods, in that both involve the state providing some kind of economic good or service to their people, but public goods are provided to all people regardless of their status. Social expenditures, by contrast, are given to some members of society, but not others, in the name of helping achieve more economic equality. Social expenditure programs are commonly referred to as the welfare state, implying that the state is taking the welfare of its poor and most vulnerable people on as a responsibility to correct, or in other cases, the state is providing a universal benefit as a guaranteed right to all of its people. Commonly administered welfare-state programs can include old-age pensions, unemployment insurance, low-income food or housing assistance, or reduced school tuition fees for children of low-income parents. This type of assistance is regularly the subject of political battles because it specifically gives a benefit to one group at the expense of others. Someone’s tax dollar had to pay for each dollar of benefits awarded.
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The “left” tends to support a higher level of state spending on public goods and social expenditures than the “right” do. The “right” prefers to spend less on these components in order to keep taxes low.
Everyone knows the old aphorism that “nothing in life is certain except death and taxes.” Equally certain is the political argument that stems from taxation in every political society. Like social expenditures, taxes involve very specific choices that may result in “winners” and “losers,” who will pay, how much will be paid, and who will not pay at all. These battles often fall along ideological lines, with the left generally favoring taxes that are more progressive, meaning they charge higher percentages in taxes against wealthier people in the country, while the right prefers to reduce the progressivity and move closer to flat taxation, where all individuals pay the same rate regardless of their wealth or income. What gets taxed and how to collect those taxes are equally contentious political fights as determining whom the tax policy should target and how much to charge.
Money is an extraordinarily complicated topic that will not be covered in full detail in this course, but for a brief explanation, it is essentially some item that a society has generally agreed upon to be universally accepted as payment for all other goods and services. This can only occur if the public has some general faith that the value of the money will remain relatively stable, and has confidence that stored money will not lose very much of its value over time. Money, however, operates on principles of supply and demand like all other goods and services. In times past, precious commodities such as gold or silver would often serve as money because of their perceived value, and the ability to store them without fear of losing their value. (Gold doesn’t “go bad” like milk, after all.) But what if a near infinite supply of new silver were discovered, and it started to flood the economy? Would shopkeepers continue demanding the same amount of silver as payment that they used to? More than likely, prices would rise dramatically to the point that the silver would become essentially worthless. This is how inflation occurs.
These days, money is usually not a commodity, but rather a currency or legal tender issued by a central bank that manages the money supply, backed by a guarantee from the state that the currency must be accepted as payment by all people within the country. Central banks have a core responsibility to ensure that the money supply is growing just fast enough to accommodate an expanding economy and growing population without growing the money supply so much that inflation occurs. However, during times of recession when the economy is declining and less is being produced, there is a great deal of political pressure on the bank to use its powers to help spur a recovery. Flooding the economy with easily accessible cheap loans is an easy way to accomplish this, but it might grow the money supply to the point that inflation starts to occur. This is the sort of balancing act a modern central bank must play: determining whether the current priority should be fighting inflation or fighting unemployment, and then taking the appropriate action. These actions will also have important impacts on individuals and firms that count on some to “win” and others to “lose” when the central bank makes a policy shift.
Regulations are directives from the government that control the activities of people and firms in the market. Regulations can be justified as measures to improve the safety of employees on a job site, protecting consumers from harmful products, protecting the cleanliness of the environment, or preventing fraud and abuse by company insiders, among many other reasons. The state can take actions like a ban or restriction on the sale of certain goods or services, such as the requirement that someone must be a certain age to purchase alcoholic beverages. It can require companies to allow a state inspector to come onto their premises to inspect for safety violations, or require that a car achieve a certain level of reduction in carbon emissions before it will be allowed on the road. These regulations inherently raise costs to the firms, and therefore the prices of goods and services as well.
The final component involves the degree to which trade will be allowed under certain geographic constraints, especially regarding the importation and exportation of goods to and from foreign states. Those on the right tend to prefer a free-trade agenda, believing that allowing people the freedom to buy and sell whatever they please without restriction will result in the highest net economic growth, as individuals are better suited to decide what they want, or where they can sell at a high profit on their own, without constraints from the government. Those on the left are more likely to support protectionist policies by the state, meaning actions to shield domestic industries and workers from foreign competition, because they fear free trade will result in losing jobs to cheaper labor abroad. They also worry about competing with low-priced products from foreign firms that are able to take advantage of low-cost labor. Examples of protectionist policies include tariffs (taxes on foreign goods imported), import quotas (restrictions on the amount of a particular foreign good that may enter the country), or other barriers such as raising regulatory requirements for foreign products above domestic products.
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The “left” tends to favor protecting domestic industry from foreign competition, while the “right” tends to favor a free-trade policy agenda.
Ideology in the area of trade is strongly influenced by occupation and place in society, as different people are predictably likely to come out as “winners” or “losers” as a result of the expansion of globalization and trade. For example, capital investors can expect that the opening of trade with a new market might bring higher sales revenues and thus higher profits to the companies they have invested in, which of course also leads to a higher investment return. The company might also benefit from access to lower cost labor in a less developed country. Laborers in manufacturing in the developed country, however, would now face stiff competition from low-wage workers in a newly accessible country. They also would be likely to see downward pressures on their own wages, and possibly even face the loss of their jobs. This is why business entrepreneurs, investors, and managers are often optimistic about the possibilities in trade and globalization; whereas labor in the developed world is likely to resist free trade. The dynamics in the developing world are a bit different; many laborers see opportunity in the chance to work for multinational firms that pay better than regional employers, and many in the professional educated class are excited about the prospects of the upward mobility that large firms provide. Local business owners, meanwhile, may be threatened by competition from large and highly efficient multinational firms.
One notable ideological battle over trade was fought in the late twentieth century over the dependency theory of economic development. Its proponents, many from the post-colonial environments in Latin America, Africa, and Asia, suggested that former colonies of the developing world were made “dependent” on their former colonial masters for economic markets and products, and that their newly independent societies would never become developed and powerful themselves unless they protected themselves from foreign trade through tariffs, quotas, and other trade barriers. The detractors of the theory supported a free-trade ideology and asserted that the dependency theory would lead to the developing world cutting itself off from the investment, technology, and know-how that the developed world could provide in trade.
Countries that enacted protectionist policies consistent with the dependency theory’s recommendations generally suffered from poor growth and sustained poverty through the late twentieth century, and many reversed course and adopted free-trade and pro-market policies as part of the new wave of globalization and economic liberalization.
Every society must establish the rules under which the political system regulates and interacts with economic forces, and no two states answer the questions that emerge the same way. Who and how much the state will tax, whether the state will own or even regulate firms providing goods and services, and the regulation of the money supply are just a few of the decisions that must be made, necessarily picking some to “win” and some to “lose” economically as a direct result of each policy change. While no two systems are identical, there are common themes that allow social scientists to classify a set of generalized political-economic systems.
Liberal systems are liberalized, essentially meaning “freed,” in the degree to which the state might otherwise attempt to regulate the behavior of economic actors. The state takes a minimal role in economic regulation, preferring to let markets determine what will be produced, who will produce it, and who may consume it. The state defines and protects private property rights and allows for a wide degree of free exchange. Tax rates are kept relatively low, and taxes fund the basic defense and regulation necessary to protect property owners and consumers. The state allows trade to happen freely and fairly. In the AP Comparative Government and Politics curriculum, modern Britain, and increasingly modern Mexico, are excellent examples of political-economic systems rooted in liberalism. In both countries, most property is privately owned rather than state-owned. People are free to start their own businesses, invest in other businesses, buy what they want, and choose what jobs or career professions they wish to pursue. Growing liberalization has been a defining theme of the last few decades of economic policy around the world. Even former communist countries such as China and Russia have adopted most of the elements of free-market policies as the path to economic development. The 1980s and 1990s saw an explosion in the number of economic systems that abandoned state ownership and controls in favor of private enterprise.
Social democratic systems similarly value the benefits that come from private property ownership and using markets as the mechanism for resource allocation, but they also attempt to correct for the economic inequality, which by necessity accompanies a liberal capitalist system. They are often referred to colloquially as socialist systems, but the term social democracy should be distinguished from authoritarian socialism, in which the state uses political force and coercion in order to achieve more economic equality. Social democratic systems, by contrast, redistribute wealth with the consent of the people in a liberal political environment, allowing for freedom of speech and freedom for any citizen to actively participate in the political process. Social democratic systems will frequently use public regulation of wages and prices, and progressive rates of taxation (meaning they are higher on wealthier individuals) in order to transfer wealth in some way to the poorest people. Most often this wealth transfer happens through legislation for high wages, social benefit programs (such as free access to health care or higher education), and comfortable safety net programs for the elderly, unemployed, and destitute. The idea behind social democracy is to reduce the extremes that result from unbridled capitalism or complete state ownership and control. While modern Britain and Mexico have moved in a decisively liberal direction in the last few decades, during and after the Depression in the 1930s, both countries were decidedly socialist, nationalizing industries, seizing and redistributing private land and property, and building substantial welfare states. While many of the remnants of these policies are still in place in their systems today (such as free health care through the NHS in Britain), most state-owned industry was privatized under the Thatcher government in Britain, and the Zedillo and Fox administrations in Mexico in the 1980s and 1990s. Both states also sharply curtailed welfare-state policies and reduced taxes on business. Many other Western European states, though, do still employ social democratic systems.
Communism is rooted in the ideology of Karl Marx, the author of the Communist Manifesto, who decried what he saw as the oppression of the working-class laborer by the industrial capitalist during the Industrial Revolution in the nineteenth century. Marx called for a system in which all property would be collectively owned by the workers, since it was the workers (called the proletariat by Marx) whose labor created surplus value when they worked to create a finished manufactured product from a set of raw materials. Marx’s opposition to liberal capitalism was that the profits created by the workers, in his view, was being unjustly accrued by the business owners (called the bourgeoisie by Marx), who were not responsible for the actual labor. Business owners would get extraordinarily wealthy while paying meager subsistence wages to the workers in their factories. If workers owned all property in common through a proletarian state, then all of the people of the society could equally share the fruits of prosperity and profit that was at the time only in the hands of the capitalist. Marx believed this could never occur through political reform, regulation, and compromise. He believed this result would only come from a violent revolution organized by the global working class against capitalism and the bourgeoisie.
Both Russia and China were deeply influenced by Marxist ideology in the early twentieth century, though they eventually developed in very different directions. Vladimir Lenin developed a Marxist–Leninist ideology of democratic centralism, which would centralize political decision making into a small revolutionary elite who would make all decisions on the basis of benefiting the common man as much as possible (thus making it theoretically “democratic,” in his view). The revolutionary elite were members of the Bolshevik Party, which exerted complete political control without fair and competitive elections, freedom of speech, or any of the other institutions necessary to democracy. Under Stalin, Russia took a decisive turn toward industrialization to create a centrally planned industrial superpower, with the industrial working class at the center of the Soviet Union’s rise.
Meanwhile, in China, in the 1930s and 1940s, Mao Zedong led a proletarian revolution of agrarian peasants against the Nationalist regime that had governed China since the 1920s. While Mao employed a similar program of democratic centralism as the governing philosophy, the peasant was the center of Mao’s vision for Chinese development, and leaders were expected to stay in touch with their agrarian constituents, sometimes even forced into labor in the countryside to “learn from the wisdom of the peasants” if they were perceived to be disloyal.
What all these systems have in common is the nationalization (state ownership) of property and industry, centrally planned control of economic activity, and a complete absence of basic civil liberties. Communism appears to be near its end as a viable economic system in the modern world. While there are a few remaining states exhibiting the signs of the Marxist vision, and a few others that are nominally governed by Communist parties (such as China), most former Communist states, including Russia and China, have abandoned this model in favor of freer, less regulated, more privately driven markets.
Mercantilism emerged in the seventeenth century in association with the rise of absolute monarchies in Europe, establishing state-owned manufacturing and trading companies with the aim of bringing gold, prestige, and power to the kingdom. While most of the assumptions underlying mercantilism are absent from modern world economic systems, there are still key elements visible in some. These elements include the presence of large state-owned enterprises that exist not to produce profits for the benefit of the people at large (such as in a democratic socialist system), but rather to enrich and enlarge the power of the state. There is also a nationalistic bent in modern mercantilism, emphasizing the need for the state to be strong and powerful relative to its other national competitors. Mexico developed massive industrial parastatal companies in the era of PRI dominance (1911 to the 1980s), some of which are still state-owned today. These companies produced income for the state to enrich PRI elites, build national industrial capacity, and to grow military and security services such as federal police. Russia in today’s era of Putin exhibits many of these same characteristics, with the government increasingly taking business property away from private oligarchs, who got wealthy after the collapse of the Soviet Union, and handing it over to siloviki (former KGB and military men) who work either formally or informally for Putin’s administration. The Iranian Revolution was in many ways rooted against the mercantilist nature of the Pahlavi dynasty (1925–1979), which sold oil drilling rights to build their security forces while denying these revenues or other economic opportunities to regular Iranians.
What determines whether a political-economic system has been successful or not? This question’s answer is often in the eye of the beholder, as everyone has his or her own vision for what makes an economy “good” or “bad.” Regardless, any answer to the question requires data, and measurement and evaluation of economic performance through statistics is now common to the work of social scientists. Below are some of the most commonly cited measurements of national economic outcomes. Included with each is a table with recent data from each of the countries of focus in the AP Comparative Government and Politics course, as well as the United States for a point of reference.
The gross domestic product (or GDP) is the total value of all goods and services produced within a country for a given period of time (usually measured per year). It can be calculated either by adding together the value of all final prices paid by consumers for goods and services (without including the price of intermediate goods, such as raw materials), or by adding together the annual incomes of all people in the country (since people are theoretically paid for the productive work they do). It is an aggregated statistic, meaning it measures the entirety of the country, so it doesn’t reveal much about the life or standard of living for the average person in the country.
Dividing the GDP total by the population of the country can show the average income and standard of living for the average person. While this gives a clearer picture of life for the average person, it does not account for trends such as widespread economic inequality, or the number of people living in poverty compared to those who are wealthy.
Whereas GDP shows the production of the aggregate economy, GDP per capita is a measure of the standard of living of the average person in the economy.
| Country | GDP in Trillions of U.S. Dollars | Population (est. as of 2013) | GDP per Capita in U.S. Dollars |
|---|---|---|---|
| United States | $20.41 | 328,434,000 | $62,152 |
| Britain | $2.94 | 66,466,000 | $44,177 |
| Russia | $1.72 | 143,965,000 | $11,946 |
| China | $14.09 | 1,396,982,000 | $10,087 |
| Mexico | $1.21 | 124,738,000 | $9,723 |
| Iran | $0.42 | 82,360,000 | $5,086 |
| Nigeria | $0.41 | 193,875,000 | $2,108 |
The Gini index is a coefficient that attempts to measure the degree to which income is distributed from the top to bottom of a society. In a society in which one single individual earned every dollar of income produced, the coefficient would be 1.0. In a society in which every single individual earns the exact same amount of money, the coefficient would be 0.0. Every country will finish somewhere in the middle of this index, but the higher the coefficient, the greater the inequality.
“Extreme poverty” may seem like a subjective term, but it is often defined as living below the equivalent of two dollars per day, which can be a good indicator of the degree to which daily survival is difficult for a number of people in a country. Conquering extreme poverty is often a top policy consideration for developing countries.
| Country | GDP Per Capita | Gini Index | Extreme Poverty Rate |
|---|---|---|---|
| United States | $62,152 | 0.41 | 0% |
| United Kingdom | $44,177 | 0.33 | 0% |
| Russia | $11,946 | 0.38 | 0% |
| China | $10,087 | 0.42 | 1.9% |
| Mexico | $9,723 | 0.48 | 2.5% |
| Iran | $5,086 | 0.38 | 0% |
| Nigeria | $2,108 | 0.43 | 53.5% |
In developing countries, most people still work in agriculture, as most of the resources of the country have to be devoted to the task of feeding people. Many people work doing subsistence agriculture, producing enough food on their land to feed their own family, but little more to sell at any profit. As the country develops economically, people increasingly transition into work in factories or other types of industrial production, especially as farm work adopts new technologies that can produce more food with fewer human labor hours. Workers migrate to cities, preferring the higher and steady wages of factories to the unpredictability of farming. By the time countries are developed economically, people increasingly work providing services to one another in specialized fields, as machinery and technology are increasingly capable of producing food on the farm and products in the factories. As a result, data on what percentage of the country’s GDP comes from agriculture, industry, or services can reveal a great deal about the level of economic development in a country. (See table on the following page.)
| Country | Agriculture as a % of GDP | Industry as a % of GDP | Services as a % of GDP |
|---|---|---|---|
| Britain | 0.6% | 19.0% | 80.4% |
| Russia | 4.7% | 32.4% | 62.3% |
| China | 8.2% | 39.5% | 52.2% |
| Mexico | 3.9% | 31.6% | 64.0% |
| Iran | 9.8% | 35.9% | 54.3% |
| Nigeria | 21.6% | 18.3% | 60.1% |
*Note: Terms with an asterisk (*) are those that consistently appear on the AP Comparative Government and Politics exam as tested concepts.
The “left” versus “right” divide in debates over the political economy is fundamentally a divide between the values of
The dependency theory suggests that
Compared to a liberal political-economic system, a social democratic political-economic system would likely
GDP cannot be used to describe the standard of living in a country because
Which of the following statistics could be used to compare the relative level of income inequality in two countries?