Political Economy | RBI Grade B Phase 2 Preparation - Bank Exams PDF Download

Introduction

Political economy refers to the distribution of power and the influence of capital in both policy-making and politics. In urban contexts, it specifically examines the relationship between local governments and various forms of capital, including financial and real estate. This relationship is not confined to a specific local area; rather, it is shaped by the broader functioning of cities, states, nations, and both national and international capital.

In this unit, we will explore the fundamental concepts of political economy, with a particular focus on its application in urban settings. We will trace the historical development of political economy from the 17th century perspectives of thinkers like Adam Smith to the 19th-century insights of Karl Marx. Additionally, we will outline the foundational principles of political economy and discuss its key elements: production, distribution, exchange, and consumption. By examining these aspects, we aim to provide a framework for analyzing economic systems through the lens of political economy. Furthermore, we will delve into political economy in urban spaces using two significant approaches: the Neo-Marxian approach and the Neo-Weberian approach.

Understanding the Terms Politics and Economy

Politics: Narrow vs. Broad Conceptualization:

• Narrow Conceptualization: Some theorists believe that politics is limited to the actions of politicians and the machinery of government. In this view, politics is seen as something only the state engages in, excluding those who do not participate in decision-making processes.
• Broad Conceptualization: Others argue that politics occurs both within and outside the institutional boundaries of the state. According to this view, politics is not confined to the government but is a broader activity that involves various actors outside of state institutions.

Evolving Understanding of Politics:

• The understanding of politics varies depending on the context and changes over time. It is difficult to draw a clear line between what is considered political and what is not. Politics is generally seen as a means to achieve societal goals, rather than merely an act of governance.

Economy: Definition and Role:

• The economy refers to a system of institutions responsible for the production and distribution of commodities within a society. It plays a crucial role in determining how resources are allocated, the value of goods and services, and the identification of tradable goods.
• The organization of an economic system is fundamentally a political issue, as political and legal institutions govern how the economy can be strengthened and resources distributed.

Categories of Economic Systems:

• Market System: In a market system, individuals own and control the means of production. The economy is governed by supply and demand, where prices fluctuate based on the relationship between supply and demand.
• Command System: In a command system, economic decision-making is centralized within the state. The government exercises control over the means of production and makes decisions regarding resource allocation.

With these concepts of politics and economy clarified, we can now delve into the history of political economy.

Historical Account of Political Economy

Adam Smith and Karl Marx on Political Economy:

Adam Smith and Karl Marx had different views on political economy. Smith saw it as managing national resources to create wealth, while Marx focused on how the owners of production control historical processes.

Evolution of Political Economy in the 20th Century:

• In the 20th century, political economy was viewed as the study of the relationship between economics and politics.
• It was also seen as a methodological approach, divided into economic and sociological perspectives.
• The economic approach focused on individual rationality, while the sociological approach emphasized institutions.

Emergence as an Independent Discipline:

• Political economy became an independent discipline in the 17th century during the transition from feudalism to capitalism.
• Thinkers like Adam Smith and David Ricardo, who are regarded as the founders of political economy, initially viewed it as the distribution of goods and resources within a nation.

Shift in Understanding: From Distribution to Production:

• Over time, the understanding shifted from distribution to production as the primary source of the economy.
• It became clear that the production of goods and commodities is fundamental to societal development.

Marxist Perspective on Political Economy:

• Marxists rejected the classical view and defined political economy in terms of the relations of production and their developmental laws.
• Karl Marx and Frederick Engels, witnessing the extreme poverty and poor conditions of workers, focused on the conflict between classes under capitalism and the production of goods for a minority of capitalists.

Dialectical and Historical Materialism:

• Marx and Engels used dialectical and historical materialism to explain societal inequalities and the struggles between different classes.
• They believed that the capitalist system is not permanent and will eventually transform into a society free from class struggles, exploitation, and domination.

Political Economy as a Separate Discipline:

• Over time, political economy emerged as a distinct field within political science and economics.
• The focus on how politics influences the economy became more prominent, with political factors being seen as determining economic outcomes, not just influencing them.

Understanding Political Economy

Political economy offers a framework for analysing the economy that is broader than conventional economics, which places the market at its core. While political economy also addresses issues like production methods, market value, distribution claims, and national income growth, it does so from a different perspective.

Key Distinctions in Political Economy:

• Role of Social Classes: Individuals in a society, such as capital owners, workers, landlords, and serfs, act within the economic system in various ways. The distribution of power among these social classes influences state policies, which is a crucial aspect of political economy.
• Historical, Political, and Social Forces: Political economists believe that certain fundamental forces shape the nature and functioning of markets. These forces are historical, political, and social in nature and are essential for understanding how markets operate.
• Role of the State: The state is a vital component of the economy, acting as an intermediary in distributing interests among social classes. Conflicts of interest among different classes are often resolved by the state, making its role crucial in political economy analysis.

Interaction Between State and Market:

The primary focus of political economy is the interaction between the state and the market. The state refers to the political institutions of the modern nation-state, while the market encompasses economic institutions governed by people's self-interests, balanced through supply and demand.

Elements of Political Economy

(a) Production

Labour:

• In any society, human labour is used jointly with capital. Labour is considered a crucial part of the production process and is also essential for the subsistence of the labourer.
• Any activity performed by a labourer involves two aspects: consumption and operation. Labourers cannot be separated from their work, but there is a need for improvements in their productive capacity.
• These improvements are reflected in parts of capital and result from the division or distribution of labour. Adam Smith, in his book “Inquiry into the Nature and Causes of the Wealth of Nations,” highlighted that the division of labour leads to increased productive capacity.
• In simple terms, when a labourer focuses on one aspect of production and another on a different aspect, they are likely to achieve greater output compared to the opposite situation.

Capital:

Capital is ultimately derived from labour, but the process of production starts with hands. Thus the first part of capital was the end result of pure labour. Capital, in general, means anything which is produced by the labourer employed. Thus, capital is apparently the result of the labourer’s labour which finally becomes the saving. If there is no saving, there can be no capital; and if all the production is immediately consumed, there will remain no part of capital and there will be no further production. This means that there has to be something which must be produced and not consumed immediately. The part which is not immediately consumed becomes the saving and this saving is used for further production. Thus both the labour and the capital are jointly result in the production of something and the entire production may either be owned by one party or a part of it may be owned by another party. This means that when the capitalist owns the produce and the producer (that is, the labour of the labourers), the capitalist becomes the owner of both of these. A common example of this sort is of an individual who cultivates his land by using his own labour instead of hiring the labourers ultimately becomes the owner of both the capital and the labour. But if the same individual cultivates the land by employing labourers, then he becomes the owner of the capital only. This mode of production process gives rise to the two classes that is capitalists involving those who supply the resources to the labourers and the other class is of working men who sell their labour in the process of production.

(b) Distribution

Rent:
The entire process of distribution involves the rent, the wages and the profit.
Rent Land as such is divided into fertile and infertile land. Fertile land is the one which can yield more produce while as infertile is the barren land, which is sandy and rocky. The former can yield double the produce in a year while as the latter can at times yield nothing. So there are different kinds of land depending upon fertility. The fertile land yields rent while as the infertile land yields no rent. But the infertile land will yield rent once it has been made fertile. Or even if there is something least derived from the barren land, it can yield a little proportion of rent also.

Wages:
Wages play a crucial role in the distribution process of the produced goods. The share of the produce between labourers and capitalists is determined by the wages paid to labourers. Higher wages mean a larger share of the production for labourers, while lower wages mean a smaller share.
The division of produce between capitalists and labourers is established through bargaining, which is influenced by competition. However, the terms of bargaining can be adjusted based on the levels of demand and supply. For example, an increase in the labour force typically leads to a decrease in wages, but it may also result in an increase in capital.
Generally, if capital grows faster than the population, it leads to improved living conditions for the population. Conversely, if the population outpaces capital growth, it can lead to a decline in living conditions and a decrease in wages. This drop in wages can contribute to poverty, which may in turn lead to a higher mortality rate. It is important to note that capital tends to increase at a slower rate than population, which can result in challenging conditions for people.

Profit Distribution in Production:
Profit is the portion of produce that remains after rent and wages have been paid. The amount of profit is determined by what owners receive from the joint production of labor and resources. This means that profit depends on the share given out in wages.
Generally, an increase in wages leads to a decrease in profit, while an increase in profit results in a decrease in wages. This indicates that profits and wages are inversely related. However, it is also possible for both wages and profits to rise or fall at the same time.
To summarize, the produce generated through labor and capital investment is divided into three parts: 
1. Rent: Paid for the use of land. 
2. Wages: Paid to laborers for their work. 
3. Profit: The portion received by capitalists after rent and wages have been distributed.

(c) Exchange

Introduction:

• Exchange is a fundamental economic activity that occurs when individuals or groups have surplus goods that they do not need and wish to trade for items they require.
• For example, if one person has an excess of rice and another has an excess of wheat, they can trade their surplus to meet each other’s needs.

Carriers and Merchants:

• The process of exchange involves two parties: Carriers. These are the suppliers who transport goods from one place to another. Merchants. These are the recipients who purchase or receive the goods.

Carriage Systems:

• Goods can be carried by land or water: Carriage by Land. This involves the use of carts or other means of transportation on land. Carriage by Water. This involves the use of ships and other vessels to transport goods across water.

Cost of Carriage:

• The manpower involved in the carriage of goods is paid, and there are maintenance costs incurred during the process of carriage.

Determining Quantity for Exchange:

• The quantity of goods to be exchanged is generally determined by the principles of demand and supply.
• For example, if there is a higher demand for rice compared to wheat, the quantity of wheat exchanged for rice will be lower.

Law of Exchange:

• The law of exchange is a crucial aspect of political economy and involves understanding how changes in demand affect the quantity of goods exchanged.

(d) Consumption

Consumption is the end goal of the political economy. It can be divided into two forms: productive consumption and unproductive consumption.

Productive consumption involves the consumption of resources in the production process, including:

• Wages of laborers, which enable them to consume the goods they produce.
• Machinery, including means of carriage.
• Raw materials used in the production process.

Unproductive consumption involves consumption that does not generate revenue or income. For example, goods produced using unproductive means of consumption result in an end to the production process. In productive consumption, resources are not lost, while in unproductive consumption, resources are lost because people consume them. Resources from productive consumption become capital, unlike those from unproductive consumption.

Urban Political Economy

Urban political economy focuses on the relationship between local politics, such as urban governments, and capital, including finance and real estate. This relationship exists at both the local and global levels and is influenced by the behavior of cities, states, nations, and the actions of national and international capital.
Urban political economy engages with two key questions in urban sociology: the factors causing urbanization and the governance of cities. It provides an economic explanation for these questions, allowing for the investigation of various urban occurrences and confirming its dominance in urban sociology. The concept asserts that the economy and political structures within a city involve a vigorous and opposing mechanism for the appropriation of wealth.
Urban political economy analyzes urban ecology, offering explanations for the growth and structure of cities and urban regions. It emphasizes competition for resources among individuals or groups, with political hierarchies, economic actors, and rules seen as vital driving forces. Institutions like urban governments, business elites, and policymakers are not considered real urban structures, as there is conflict among them due to their denial of power. Urban relations are explained through the investigation of social power and economic structures.

The Neo-Marxian Approach: 
​Urban political economy revises Marxian theoretical legacy in the urban settings. This is one of the areas that Karl Marx did not focus extensively in his writings. Neo-Marxists made it clear that the evolution of city can be traced from its historical relations of production. In order to progress and advance in terms of their class interests by avoiding rigid infrastructures in the urban areas, industrial capitalists supported the bordering of urban areas and the creation of sub-urban settlements. They also advanced their political as well as cultural interests through policies in order to promote ownership of homes and the development of sub-urban areas. The Neo-Marxists’ claims that appeared during 1970s and 1980s along with other intellectual ideas do not only convey social relations in urban areas but they also act as the driving forces of these social relations.

Neo-Weberian Approach: 
​Neo-Marxists focused on the structural aspects of capitalism, which became the main concern of urban political economy. In contrast, Weber provided a clearer conceptual framework for understanding urban political economy and social power. Marx did not pay much attention to the autonomy of politics from the material relations of production, leading structural Marxists to overlook urban political power by concentrating solely on structures and historical economic imaginings. This led to the reintroduction of the question "who governs the city?" in the 1950s and 1960s.

• Floyd Hunter (1953) and elitist perspectives argued that private urban elites consistently promoted and succeeded in their interests.
• Robert Dahl (1961) challenged this view, claiming that private interest groups could not dominate urban politics consistently.
• The debate remained unresolved until the 1970s when urban political economists began exploring how cities generate wealth for capitalists.
• Urban political economists adopted the Neo-Weberian approach to understand the social production of urban space, highlighting the role of private elites in political dominance.
• This approach suggests that governance in urban areas involves not only urban governments but also decision-making by private elites.
• Harvey Molotch's (1976) "Urban Machine Growth" theory did not address the role of urban elites in politics or the conditions for their collaboration and success.
• After the 1980s, urban political economy was significantly influenced by urban regime theory (Stone, 1989).
• Urban regimes vary, with each having its own agenda, ranging from progressive to conservative.
• The development regime, promoted by pro-growth political elites, is a key type of urban regime.
• Members of development regimes share political and business interests that foster cooperation and prevent disputes within their public-private coalition.