Defining comparative political economy at its most basic examines the political, institutional and cultural underpinnings of the society. The assumptions do not start with the notion that the market operated free from politics, but that the markets are social constructs which are embedded in specific institutional contexts that are made up of players who are diverse in nature and have particular interests in culturally defined spaces. In examining the exogenous and endogenous factors of the political acts of market-making, it is embedded in the involvement of the government in the standardization of currencies, formulation of laws and regulations in the economy, control of financial markets which affect the supply and demand factors in the market. The role of the state actors was in the management of the process of freeing up the markets and the development of the international, legal and regulatory frameworks that were to enable these markets to operate and sustain the impetus amidst any opposition that would arise (Clift, 2014).
Most of the proponents of capitalism support some level of influence from the government in the economy. It has been argued that while capitalism is the best way of distributing resources by many of the classical liberals, the governments existence is paramount in ensuring the protection of private property rights through its arms. According to Polanyi in the great transformation, he demonstrates that a market separated from the political sphere is not possible (Polanyi, 2001). States and markets cannot be taken to be separate entities from each other; this is in line with the approach to CPE compared to neo-classical economics that often put the state as exogenous to its models. Thinkers like Smith, Marx and more notably Karl Polanyi who emphasizes on the political acts of market-making, direct their thinking into the mutual constitution of both the state and the market. The claim herein made is then that it is inconceivable to think that markets could exist outside state action. From the onset of his works, Polanyi points out that the liberal political, economic character of Britain as was supposed is often misleading because the ensuing spread of the markets was as a result of both political forces and interventions in shaping the markets. He vividly points out that there was nothing natural in the free markets and that they could not have existed by merely allowing things to take their cause, and emphatically underlining that they were planned (Polanyi, 2001).
There has always inevitably and historically existed political intervention in and shaping the operation of markets. As alluded to earlier, the markets have never been a natural phenomenon and as will be established they have been both politically constructed and maintained. What this in essence means is that markets have had to be made, which in essence has been an intensely political process. An argument by Ben Clift is that not only is understanding the political economy regarding operations of markets or the reproduction of market relations important but also that the processes that accompany such activities of importance too (Clift, 2014). The spread of markets and the rise of modern capitalism came after the chain of historical developments that that climaxed in the national revolutions that saw the formation of modern European states (Lipset & Rokkan, 1967). What resulted to the modern industrial capitalism was as a result of these political developments that had facilitated market-making through political acts. There was a need to smoother the operation of markets on a larger scale and to this effect, there had to be a series of political, legislative and regulatory reforms that had to go hand in hand and in fostering them at each phase. The actions included the standardization of currency, regulation of financial markets and transactions, as well as the development of the much awaited modern company laws.
Tracing back to Friedrich Lists National system of political economy, he saw that political intervention existed among different nations in their struggle for wealth and power, market relations, and institutions in their international economic ties. He criticized the British free trade liberalism as being very selectively liberal underscoring how the political intervention will always be pervasive in the economic activity of a country. In the real world, which is set up around national political economies and their strive for civilization and power, what is termed as free trade is not free (List & Henderson, 1983).
Current free market economy (ubiquitous markets)
From historical precedence as explained above, the establishment of markets had to payback or eliminate the losers for the socioeconomic change along the way. Thus, the road that saw the development of the free market had been opened but more importantly was kept open through the massive continual central organization and controlled interventionism. Understanding the varieties of capitalism in regards to market-making will help in incorporating some insights from the classical political economy. This understanding also helps us draw some facts on how the political and economic natures work inseparably in the operations of markets in the real world (Hall & Soskice, 2001).
A case in example is the ubiquitous markets existence in the third world countries or what we refer to as the weak economies. It is widely accepted as a fact that all of the prosperous economies of the world are market economies and for those that are familiar with markets know that it is the source of prosperity. However for the ubiquitous markets in the weak economies, wealth is very rare. To understand this, Cooper and Olson (2000) in their work Power and Prosperity states that there are different types of markets that regularly emerge even when the participants have anything in common. A typical school of thought that has its origin from Talcott Parsons contends that often markets are often derived from communities that share a common religion or basic values. However, according to Cooper and Olson (2000), there are self-enforcing, socially contrived and spontaneous markets. This kind of markets result in silent trades, and markets that are not under the regulation of any courts or government institution. The gains that are presupposed to be attained from the markets cannot however be realized through these form of markets as there are no court or legal systems to facilitate contracts between parties. Interestingly these kind of markets are irrepressible, and together with the smaller scale, spontaneous markets that are not necessarily illegal constitute the informal sector. It is in no doubt that informal activities in the poor economies are substantial and although lower in the developed countries might be increasing though not a trivial rate.
Evidently the markets exist almost anywhere and because of the misguided government interventions in the third world countries, they are made useless explaining why most of the economies with this kind of markets poor. Therefore to realize the full gains from trade, there undeniably has to a legal system in place as well as a political order that enforces contracts and protects the property rights of the individuals. There is also a need for liability corporations and active capital markets that facilitate the liquidity investments and loans. Further for the gains to be enjoyed fully, individuals in society not only need the freedom to trade but also require the right to establish security over title to the property and to mortgage it too. They also need to enjoy the full access to the courts to protect them in the case of any drawbacks out of legal claims. In short, in any market economy, many of the important gains derived from trade will only happen if the individuals and firms secure individual rights, that which can only be guaranteed by the government through political structures.
Clift, B. (2014). Comparative political economy. Basingstoke: Palgrave Macmillan.
Cooper, R. & Olson, M. (2000). Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships. Foreign Affairs, 79(3), 163. http://dx.doi.org/10.2307/20049751Hall, P. & Soskice, D. (2001). Varieties of capitalism. Oxford [England]: Oxford University Press.
Lipset, S. & Rokkan, S. (1967). Party systems and voter alignments: cross-national perspectives. New York: Free Press.
List, F. & Henderson, W. (1983). The national system of political economy 1837. London: Cass.
Polanyi, K. (2001). The great transformation. Boston, MA: Beacon Press.
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