Politics and economics intersect. Every government has some form of fiscal policy or economic regulation. This intersection is called political economy. Political economic systems are based on political ideologies and seek to resolve tensions between the state and market forces. Effectively implementing pure theory is difficult, so mixed political economies are common, if not necessary. In order to understand the basis of mixed political economies, here are some political economic theories.
Liberalism is the belief that the main purpose of government is protecting individual rights and liberties. The key concepts of this theory are the right to private property and equality of opportunity. If everyone has the right to own property and has an equal chance at earning that property, then the economic policy should focus on protecting that property.
Economic liberalism asserts that the market is the most efficient economic force. Any government intervention creates inefficiency and disrupts the pursuit of self-interest. Thus, the theory embraces laissez-faire policy: a hands-off government approach in favor of the ‘invisible hand’ of the market. This sounds a lot like capitalism. So, why not just call it capitalism? Economic liberalism is the theory. Capitalism is the theory in practice.
Since economic liberalism hails the market as indisputably efficient, inequality of outcome as a result of market forces is not just accepted but expected. The goal is to ensure equal opportunity, not equal outcome. Any difference in economic gain is earned private property: just-desserts.
Socialism is a response to economic liberalism. It rejects markets as perfectly efficient and instead insists that markets are inherently exploitative. The labor theory of value asserts that labor imparted on a good/service is what determines its value; since laborers create the value, they should be compensated appropriately. Capitalism neglects this by diverting all profit from that labor to a business owner, not to the workers that created that value. Instead of equality of opportunity, equality of outcome is the goal. As a political economic theory, socialism rejects the idea of private property since it’s thought to be the seed of capitalist exploitation.
Isn’t this… communism? Yes and no. This is the political economic theory of socialism which in practice can be pure communism. Communism holds all collective ownership to the state, which in theory is also ‘the people’. However, socialist democracies maintain the right to private property.
Also called mercantilism, statism, and protectionism, economic nationalism is all about state interest. It focuses on neither equality of opportunity or outcome. The goal is to enhance state power through state intervention in the economy. Economic nationalism is a zero-sum theory of economics: if one country’s economy is doing well, another’s is doing worse. Essentially, there can only be one winner, and the goal of this theory is to be that winner.
Economic nationalism emphasizes self-sufficient economies. It favors an export based economy. In the realm of zero-sum thinking, if a country exports, another country is buying those exports and therefore losing money; exports = profit, imports = lost revenue. All economic policy should be aimed at the empowerment of the state, regardless of the will of market forces. If the state wants to beat another country at basket weaving, you bet there will be subsidized basket weaving classes.
This theory has obviously fallen out of favor. Export based economies work only if the country has a comparative advantage in production.