What is Comparative Political Economy?

The following is an extract from a paper I am writing for the European Sociology Association (ESA) Conference in Geneva: ‘Social Relations in Turbulent Times’. 

Political economy at its most basic examines the political, institutional and cultural underpinnings of the economy. It does not start from the assumption that the market operates free from politics but that markets are social constructs and embedded in specific institutional contexts made up of diverse actors with specific interests in culturally defined spaces. This leads to a research programme that seeks to explain the ‘diversity of capitalism’. Why is the Irish political economy different to Sweden? Why is Germany different to Brazil? Can we identify general commonalities in ‘Europe’ that are different to the USA or Japan? What explains this difference? The institutional and cultural variation between countries is what requires explanation.

In this regard, the difference between market economists and those who adopt an institutional or political economic perspective is that the latter do not assume a one size fits all approach. They do not construct abstract models based on deductive assumptions of individual or company behavior in a perfectly competitive market. On the contrary, they examine the actual economy and seek to explain a variety of questions such as why wages are set by the market in the USA but collective bargaining in Germany. Or, why Slovenia constructed a coordinated rather than an IMF adjustment to the crisis.

Political economists identify actors, institutions and politics as central to explaining diverse regimes of capitalism. Unlike the mainstream economic profession it openly discusses the configuration of market conforming policies in an economy as ‘capitalist’. Describing a specific social system or social order as ‘capitalist’ does not automatically equate to being ‘anti-capitalist’. In fact, most political economists normatively favor an economy constructed around market coordination but recognize that there are alternatives modes and specific practices through which this can occur.

Therefore, political economists are much better placed to explain the current economic crisis or why some countries are affected more than others. A social scientist attuned to the comparative institutional differences between the Irish labour market and those of the Netherlands, Denmark and Germany can provide better policy advice on how to tackle unemployment than a classical economist. They understand the qualitative difference and public policies underpinning these economies. Most macro, micro and financial economists use a ‘one sixe fits all’ deductive model of ‘perfect markets’. Comparative institutional studies can identify the precise causal mechanisms through which policies translate into outcomes whereas deductive reasoning based on logical inference cannot. This is particularly the case when examining policies associated with industrial relations and the welfare state.

Broadly speaking the five main areas of study for political economists interested in explaining the domestic variation within and across European varieties of capitalism are; macroeconomic, fiscal, labour, wage and social policies. This leads to a focus on tmonetary policy and effects of interest rates on the type of economic growth model, composition of government revenue and priorities for expenditure, the employment relationship and how work is organised, the diverse public policies aimed at those unable to access the labour market and the governance mechanisms through which all of these policies are regulated. It also seeks to explain the industrial and sectoral evolution of specific regions or countries.  

So, in Ireland, a political economic analysis seeks to explain the weakness of indigenous industry in export markets when compared to indigenous industry in Sweden. Or, it seeks to explain the evolution of Pirelli in Northern Italy as a niche market in a larger Italian economy historically premised on agriculture. History becomes a central unit of analysis and time itself an independent variable. Thus, unlike classical economists, those adopting an institutional or cultural perspective do not operate according to a timeless universe. Methodologically, they recognize the complex causal process of historical institutions underpinning the organisation of an economy. Time and history do not lend themselves to a research design based on mathematical models of isolated variables. They require specific case studies focusing on the complex relationship between actors, institutions and cultural practice.

In addition, political economists seek to explain the different levels through which macroeconomic policy (which as will be argued later, equates to fiscal policy for national governments in the EMU) and domestic policies are negotiated. The unit and level of analysis is directed at multi-national companies, sectoral industries, national governments, regional-European and global-transnational institutions.

Given the complex interaction between these levels political economists increasingly adopt a ‘multi-level governance’ perspective. For example they seek to explain the various ways in which the nation state interacts with employers or how government departments such as the ministry of finance interact with the ECB – and the effect these have on policy outcomes. Actors make decisions within given set of institutional constraints. These enable and constrain the opportunity structures within which policymakers operate. For example, European constraints such as the construction of the EMU impact upon the capacity of member states to manage macro-economic policy.

But, governments can respond to this European constraint by increasing their domestic capacity for governing wage and income policy through the construction of corporatist policy making or national social pacts in the interest of employment growth. The general point is that the strategic interactions between actors (whether they are MNC companies, national governments or monetary authorities such as the ECB) are often taken through non-market forms of coordination. The system of multi-level governance includes market decision making but also non-market forms of strategic interaction that include corporatist wage bargaining. This governance rather than market perspective has the advantage that it makes clear the political interests and power relations underpinning political economies. A technocratic market masks power relations and therefore – democratic accountability.

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