On the economic discipline: How political economy and development economics fit

On the economic discipline: How political economy and development economics fit

DevP 233

Spring 2017

 

This segment of the course is about political economy. Political economy is an important part of economics and our analysis aims to be relevant to issues of development, agriculture and international relations. Economics is a scientific discipline, and political economics has evolved over the years. This chapter aims to provide some background about scientific disciplines in general, and economics in particular. It addresses the notion of disciplines and how they evolve as well as the key elements of the mechanisms of a scientific discipline. At the end, we will discuss some of the sub-disciplines of economics, and in particular, political economics and development economics.

 

Why do development practitioners need to know about the working of science?

Practitioners frequently test new research results, and conduct and initiate research. While their work is not at an academic setting, they benefit from an understanding of how universities and research works. They need to recognize that the research establishment is not given but it is changing and to understand the political economic factors affecting these changes. 

 

Science consists of many disciplines. Some of them are older, like mathematics and philosophy, while others emerged more recently, like computer science and chemical engineering. But scientific disciplines are not set in stone and they evolve over time. Moreover, much of the research that is done today can be classified as ‘interdisciplinary’ and ‘multidisciplinary.’ Interdisciplinary research integrates approaches and knowledge across disciplines to solve complex problems. For example, knowledge from biology, physics, ecology, soil science, and statistics are integrated to design crop management systems. Individuals may become interdisciplinary by incorporating knowledge and methods from different disciplines to their work. Some disciplines are interdisciplinary by nature, for example agronomy that incorporates knowledge from multiple disciplines to understand and manage agricultural systems. Multidisciplinary research occurs when people from different disciplines work in parallel to analyze the same problem. For instance, National Research Council (NRC) studies bring together experts from many fields to study the challenges of managing agricultural biotechnology. This multidisciplinary research may, at the end, generate interdisciplinary knowledge.  

 

The notion of interdisciplinary is relative. The knowledge generated by a collaboration between a soil physicist and soil chemist trying to explain soil properties is considered interdisciplinary as is the integration of economics, physics, sociology, statistics, and biology to analyze climate change. So it is useful to distinguish interdisciplinary research within a discipline, like soil science, and between branches of science, like some research on climate change.

 

Disciplines evolve over time. Emergence of major problems or discoveries beget new disciplines. For example, the discovery of DNA led to several fields, including genomics, bioinformatics, and genetic engineering. Similarly, infectious diseases that emerged in crowded cities led to the study of public health and sanitation engineering. Furthermore, some disciplines are disappearing. For example, astrology and alchemy (even practiced by Newton) are no longer considered scientific disciplines (but astronomical practices are still a viable business – just walk down Telegraph Ave).

 

Reality does not know disciplinary borders. New solutions most often integrate approaches from multiple disciplines. For example, Integrated Pest Management (IPM) merges economics, biology, entomology, climatology, and plant science. Geography by nature is interdisciplinary drawing on many physical and social sciences. Science advances when methods are imported between disciplines. For instance, economics was revolutionized by the use of advanced tools of mathematics (calculus, topology, game theory), statistics, and more recently psychology. Modern biology relies more and more on advances in mathematics, statistics, and computer science. Furthermore, applications in specific disciplines may enhance other disciplines. Many of the basic principles of mathematics were inferred or refined by research in physics or biology. Finally, interdisciplinary research leads to new disciplines.

 

Until the 1950s, the main model of research was of Archimedes – sitting in his bathtub and having a ‘eureka’ moment. But since then, we realized that innovation is affected by economic considerations and the induced innovation hypothesis is presented formally and demonstrated statistically in Hayami and Ruttan (1984). Here I’d like to argue that innovations are also induced by political economy considerations. Political considerations are crucial in investments in research and its application. The military establishment has been a major investor in research in most countries. Political considerations and agendas affect the direction of research. For example, disciplines like African Studies, to a large extent, were financed by the Belgian and French colonialists, and later on by the CIA, through the National Security Education Program, that needed to have objective research to understand Africa better. Similarly, schools of public health and research in the field were proliferated after the establishment of social security programs.

 

Multidisciplinary education forms interdisciplinary people. Exposure to several disciplines leads to flexible, creative thinking and expands opportunities. Almost all scientists need math and computer skills, and scientists must gain exposure to decision theory. Doing so allows a scientist to make socially meaningful discoveries and manage them effectively. At the same time, social criticism is more likely to be socially beneficial when it is based on sound scientific reasoning and basis. Some key disciplines, like business and engineering, are interdisciplinary by nature because they seek to provide practical solutions based on knowledge from social and physical sciences. We expect MDP students to become interdisciplinary individuals and to feel comfortable talking about several disciplines, and hopefully specializing in one or two.

 

Economics is a social science that aims to explain the behavior of individuals, institutions and states emphasizing resource allocation, trade, and valuation. Economics has a strong emphasis on rational behavior and markets. But economics is evolving in response to changes in reality, analytical tools, and insights from other disciplines. There are multiple approaches and perspectives on economics. First there is a division between micro and macro, where microeconomics analyzes individual and market behavior while macroeconomics analyzes the behavior of aggregate parameters, like unemployment, inflation, currency. An area that is between micro and macro is international trade that investigates trade and financial relationships between nations. The neoclassical theory that has been a dominant approach to microeconomics for a long time emphasizes positive modeling (i.e. behavior resulting from maximization of profit or utility subject to constraints) and normative analysis (i.e. behavior that derives from maximizing social welfare, narrowly defined). But over the past few decades, some of the neoclassical predictions were not borne out in reality; this led to the emergence of behavioral economics that borrows from psychology. Another line of economics is institutional, where emphasis is to understand the role and impact of institutions on the performance of the economy.

 

The techniques of analysis have evolved over time. Early researches relied heavily on logical arguments; mathematical tools were brought in later to refine theory and introduce new concepts like gaming and strategic behavior. Economics has always been about numbers, but with improved computing capacity, economic models rely more heavily on statistics and econometrics is a branch of statistics developed for economic analysis. Predictions frequently are based on complex numerical and statistical simulations, and there are attempts to use machine-learning and quantum computing in economics.

 

Because economics applies to many spheres of life, it has many subdisciplines that are by nature multidisciplinary. They include environmental economics, law and economics, labor economics, health economics, and agricultural and resource economics (ARE). ARE applies tools and concepts of economics to issues of agriculture and natural resources. To be effective in this area, one must embody the knowledge of economics with the sciences and practices of the natural and human systems they are investigating. To be an effective researcher, one needs to understand the problems of agriculture and natural resources, be familiar with their reality and history, and identify important issues that require economic treatment. Over time, agricultural economic research has been used to analyze and provide policy solutions to the relatively low income of farmers, to the challenges of management of farm inputs and adoption of new agricultural technologies, to the management of natural resources like water, soil, as well as pest control strategies in a way that will be economically and environmentally viable, to the regulation of new technologies, and to the new applications of agriculture and forestry to produce fine chemicals and fuel.

 

Agricultural economics, and other subdisciplines, also provide new tools and concepts to economics. For example, agricultural economics introduced the concept of human capital and the theory of technology adoption. Environmental economics introduced the technique of non-market valuation. Economic theory and thinking are evolving by interaction of the main discipline with its subdisciplines; and while ARE economists mostly publish on agricultural and resource issues, once in a while they make contributions to the mainstream and the wider profession.

 

Development economics is one of the largest subfields of economics. It aims to understand the economic reality in low-income countries and to develop strategies for development and growth. It is one of the oldest areas of economics and it is being refined all the time. It has been inspired and influenced by other areas of development studies, and has been changing in response to changes in reality, economic thinking, and the need of policy makers and other players in development. Development economics can be divided to micro and macro studies. Micro studies emphasize smallholder behavior, microeconomy of rural regions under different regulatory and institutional systems (feudal to market systems, cooperatives and collective action), economics of innovation and technology adoption, etc. Micro studies emphasize smallholder behavior, microeconomy of rural regions under different regulatory and institutional systems (feudal to market systems, cooperatives and collective action), economics of innovation and technology adoption, etcOne of the major challenges in economic development is to link between micro and macro and between static and dynamic processes.

 

It is useful to distinguish between institutional, historical, and descriptive analysis, which was very prominent in development in the past, to theoretical analysis, and now to quantitative analysis, which is very important in the present. There are several major techniques that have been used in development economics, including input-output analysis, social accounting analysis, and computable-general equilibrium analysis. Econometrics has been a major element of development economics. The type of problems addressed evolve with technology and data. In the past, there was much more emphasis on aggregate studies, but with increasing data and computing power, we have moved towards more nuanced microeconomic studies that frequently rely on GPS, which allows more dimensions of heterogeneity and better identification. There is also growing reliance on randomized control trials to better estimate impact. In spite of improvements in data and computer capabilities, our capacity to identify patterns and predict outcomes is limited. Basic statistical assumptions are approximations, and new phenomena and patterns emerge. Furthermore, numerical data tells only part of the story, and one of the major challenges of analysis is to incorporate narrative and institutional with quantitative data.

 

One important emerging field is environment and development economics, which addresses the intersection of environmental issues in the context of development. The notions of climate smart agriculture and payments for ecosystem services are key elements for this body of literature. A key issue is to what extent the economics of development is unique. At least my perspective is that basic patterns of human behavior are the same, but in developing countries there are distinct institutional and technological constraints that require special attention. Furthermore, several issues, e.g. food security, poverty, etc, are much more acute in the development context. But models of development economics may apply to many situations in developed countries. For example, parts of the Central Valley in California can be understood better with tools drawn from development economics.

 

Development economics provides many important tools for economics. A few key elements are the notions of human capital, social capital, and natural capital. Other elements include the behavior of households, economics of collective action, migration, and the use of tools like social accounting matrices. Study of development economics emphasizes the role of institutional economics and recognizes that it is one among many disciplines. It also emphasizes the importance of governance and political systems.

 

Political economy is becoming a new, and very important part, of economics. Increasingly, people realize that market outcomes are not the only mechanism that affect resource allocation in real life, and the world is not ruled by economics, and constraints are crucial to understanding reality. Political economy aims to integrate both ideas from political science as well as aspects of the political reality that economists model and introduce to their analysis. Political economy is becoming a fertile area for multidisciplinary collaboration. Many concepts of economics and game theory were introduced to political science. And many notions of political science have been incorporated in economics. For example, political economy analysis emphasizes the important role of political systems like voting, in resource allocation. Different voting systems result in different outcomes. And furthermore, we recognize that economic mechanisms aim to affect political outcomes, and that both outcomes co-evolve.

 

In the next lecture, I will speak in more detail, but one key element in political economic analysis is to look at the economic behavior of a political who wants to win elections and gain power, as well as to be well-off economically. This decision maker is maximizing his well-being subject to constraints. He knows that people vote, and he must affect their behavior but that costs money, so the politician also must satisfy and recruit donors. At the same time, there is also analysis of voter behavior and how much they are influenced by pocketbook outcomes, identity politics, beliefs, as well as promotion. The interaction between politicians and voters result in political outcomes, and these outcomes affect economic reality. So political considerations make analysis of economic reality more complex.

 

Thus far, I have described political economy analysis in the context of a democracy, where political outcomes are affected by votes. But political economy operates differently in different political systems. It will be different in a democracy versus a dictatorship, and within democracy, between a presidential vs parliamentary system. Political economy analysis has elements of theory as well as quantitative analysis. Econometric models try to estimate the different parameters of political choice and how they affect economic outcome, and vice versa.

 

The term political economy is old. David Ricardo, in On the Principles of Political Economy and Taxation (1821), established basic principles of international trade and economics uses the term political economy because he realized that economic forces affect political reality. The University of Chicago economics journal is the Journal of Political Economy, even though it was the flagship of neo-classical economics. In the 1960s, the radical left used the term ‘radical political economy’ and started an association called the Union of Radical Political Economics, with a journal, other media, and conferences. Modern political economics that combined political science and economics emerged as a major field in the 1970s. An important book on political economics is “Political economics: explaining economic policy” by Peresson and Tabellini. Leading writers of political economics, like Gerard Roland at Berkeley, publish in mainstream economic journals, like American Economic Review, as well as the Journal of Comparative Economics and European Journal of Political Economy and Economics of Transition, which emphasize political economics. They also publish in journals like American Journal of Political Science. The field of political economics is becoming prominent in development as people realize the importance of institutions in politics, and one of the most important contributors to this field is Daron Acemoglu. Much of the research support in political economics is by the World Bank as well as different foundations that have various agendas, such as the Heritage Foundation.

 

On the organizational structure of a discipline

 

To understand the working of economics, it is important to recognize that someone has to pay for economic research and that people need means to communicate it. Because reading most of the economic research is work, not fun, someone has to pay people to read it and/or people to recognize the value of it in their work. The same is true of other scientific disciplines. To be viable, a scientific discipline needs three elements: an association, journals, and benefactors (‘sugar daddy’). The association organizes professional meetings that include presentations as well as labor markets. It also sponsors journals. Participation in conferences and publications are crucial for the viability of an academic. The research that scientists are doing depends on support from individuals, organizations, and government. In a large discipline, there are international, national, and regional associations, as well as associations of subdisciplines. Research is supported, in part, by tuition since professors at universities are paid to teach as well as do research. But much of the research in every field comes from government agencies or foundations. For example, much of medical research is supported by the National Institute of Health as well as various foundations and donors. Some research is supported by royalties for patents and by service to private industry. The most important service that the benefactors of a discipline are doing is hiring credentialed professionals from relevant disciplines. The prices and demand for professionals in every discipline affect the investment universities are making in programs and faculty salaries in each discipline. No wonder that professors of business earn more than those in English.

 

The evolution of disciplines is based on the demand for research and education in each discipline. Some disciplines may die because they are proven wrong, but most rise or fall because of demand for the practitioners and knowledge produced by the discipline. The journals are used as mechanisms to communicate results and thus enhance knowledge generation, to educate, and to allow members of the discipline to demonstrate their skills. The associations are used as leadership of a discipline, set the direction of their research, and lobby for budgets. The structure that we portray for academic disciplines, with publications, associations, and benefactors, is typical for almost all professions. For example, teachers in every country have unions, which are very strong, the unions have publications and training, and then there are buyers of the services, which are governments, churches, and individual families. Teacher associations also support schools of education that provide training and principles of operation. The same thing can be said about doctors and lawyers. One of the challenges of development practice is the develop an institutional set up like this.

 

In the case of economics, we have a major association (the American Economic Association) that publishes several journals, including the American Economic Review (AER) and the Journal of Economic Perspectives (JEP) and now three subject journals. The specialized econometrics society publishes the prestigious journal Econometrica. Furthermore, there is an association for agricultural economists (the Agricultural and Applied Economics Association, AAEA), which owns the American Journal of Agricultural Economics (AJAE), which is more academic, as well as the Applied Economic Perspectives and Policy (AEPP), which is policy oriented, and the Choices magazine, which appeals to a broad public audience. Similarly, there is an Association of Environmental and Resource Economics (AERE) and an association of energy economists with their own journals. And then there are European associations of economics, agricultural economics, environmental economics, and their respective journals. Furthermore, within the US we have Atlantic, Western, and Southern regional associations with their own journals in each of these subdisciplines.

 

The multidisciplinary nature of agricultural economics lead scholars in this field to publish in specialized publications. They may include special natural resources journals like Water Resources Research or Natural Resources Modeling, the prestigious Nature Biotechnology or Nature Climate Change. Sometimes agricultural economists are able to publish to the general journals like Science, Nature or the Proceedings of the Natural Academy of Science.

 

The proliferation of journals and associations reflect that there are many people doing research and many research topics are covered. Publications in journals both convey information and signal the quality of individual researchers and research groups. Different journals vary in their prestige – the major association journals more so than regional ones. And in addition to association-sponsored journals there are journals sponsored by universities and industry. In the case of economics, the prestigious Quarterly Journal of Economics is sponsored by Harvard and the Journal of Political Economy is sponsored by University of Chicago. The RAND Journal of Economics is sponsored by RAND. Frequently publishers initiate a journal when they identify a gap in an area of research not covered proficiently by existing journals.

 

Economics is a paper-based discipline where economists publish their work in journals after being reviewed by referees (i.e. peer-reviewed). Sociology is book-based and the status of the book depends on the publisher as well as the reviews of the book. The electronic age is changing the way professions operate. Journals are evaluated by their impact factor. Individuals are evaluated by number of citations (in websites like Google Scholar and the Web of Science), and the prestige of journals where they are published. In some disciplines, key publications are the proceedings of conferences. There is a growing movement towards internet-based journals and with the low cost of publication, some predict that relatively soon, scholars will issue their papers on the web and key criteria for evaluation will be downloads and responses. This means that the refereeing process of journals may play a diminished role and will be replaced by open-access reviews. Understanding the supply chain of papers will be an interesting topic of research.

 

Basic research in Economics is supported by the National Academy of Science. Various government agencies, at federal and state levels, support economic research and employ economists on their staff. The Federal Reserve is a major supporter of economic research and employer of economists as is the World Bank. The USDA has a large unit conducting agricultural and resource economics research called the Economic Research Service (ERS), which supports the National Institute of Food and Agriculture (NIFA). NIFA is a major source of funding for academic research in agricultural economics.  Many firms in the private sector hire economists to analyze market outcomes, to assist with trading and resource allocation, etc. There is a growing demand for economists as legal consultants to assess damages or testify in antitrust law cases. Agricultural and resource economists are employed by agribusiness, land and resource developers, mineral companies and water utilities, and NGOs active in the environmental areas.

 

The segment on political economy in this course emphasizes its emergence as a hybrid between economics and political science, as well as the interaction between markets and political organizations. The political economics literature is rather young, and it still relies on some of the basic work of economics and political science – in order to conduct political economic analysis, it is important to have basic understanding of welfare economics as well as the foundations of political systems. Political economics emphasizes understanding policy transitions, economic growth, and processes of development. Therefore, the early work in this field compares the economic performance of capitalist and socialist systems, and emphasized understanding the economics of liberation after colonialism, and since the 1980s emphasized understanding the process of political transition in China and Eastern Europe. The political upheaval of the current period opens new frontiers for political economic research.

 

 

References

Ricardo, David. On the principles of political economy, and taxation. John Murray, 1821.

 

Ruttan, Vernon W., and Yujiro Hayami. “Toward a theory of induced institutional innovation.” The Journal of Development Studies 20, no. 4 (1984): 203-223.

 

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