Political Economy Definition, History, and Applications

What Is Political Economy?

Political economy is an interdisciplinary branch of the social sciences. It focuses on the interrelationships among individuals, governments, and public policy.

Political economists study how economic theories such as capitalism, socialism, and communism work in the real world. Any economic theory is a means of directing the distribution of a finite amount of resources in a way that benefits the greatest number of individuals. These ideas can be studied both theoretically and as they are used in the real world. In the real world, public policy is created and implemented around these economic theories. Political economists study both the underlying roots of these policies and their results.

In a wider sense, political economy was once the common term used for the field we now call economics. Adam Smith, John Stuart Mill, and Jean-Jacques Rousseau all used the term to describe their theories. The shorter term "economy" was substituted in the early 20th century with the development of more rigorous statistical methods for analyzing economic factors.

The term political economy is still widely used to describe any government policy that has an economic impact.

Types of Political Economy

Political economy is a branch of social science that studies the relationship that forms between a nation's population and its government when public policy is enacted. It is, therefore, the result of the interaction between politics and the economy and is the basis of the social science discipline.

As mentioned above, there are several notable types of political economies:

• Socialism: This type of political economy promotes the idea that the production and distribution of goods and wealth are maintained and regulated by society, rather than a particular group of people. The rationale behind this is that whatever is produced by society is done so because of those who participate, regardless of status, wealth, or position. Socialism aims to bridge the gap between rich and poor, eliminating the ability of individuals or groups to control the majority of power and wealth.
• Capitalism: This theory advocates profit as a motive for advancement and the ability of free markets to regulate and drive the economy on their own. The idea behind capitalism is that private individuals and other actors are driven by their own interests—they control production and distribution, set prices, and create supply and demand.
• Communism: Individuals often confuse communism with socialism, but there is a distinct difference between these two theories. Communism was a theory developed by Karl Marx, who felt that capitalism was limited and created a big divide between rich and poor. He believed in shared resources, including property. Unlike socialism, however, under communism production and distribution are overseen by the government.

Those who research the political economy are called political economists. Their study generally involves the examination of how public policy, the political situation, and political institutions impact a country's economic standing and future through a sociological, political, and economic lens.

History and Development of Political Economy

The roots of political economy as we know it today go back to the 18th century. Scholars during the period studied how wealth was distributed and administered between people. Some of the earlier works that examined this phenomenon included those by Adam Smith and John Stuart Mill.

But the term is probably best ascribed to the French writer and economist, Antoine de Montchrestien. He wrote a book called "Traité de l'économie politique" in 1615, in which he examined the need for production and wealth to be distributed on an entirely larger scale—not in the household as Aristotle suggested. The book also analyzed how economics and politics are interrelated.

Smith was a philosopher, economist, and writer who is commonly referred to as the father of economics and of the political economy. He wrote about the function of a self-regulating free market in his first book, which was called "The Theory of Moral Sentiments." His most famous work, "An Inquiry into the Nature and Causes of the Wealth of Nations" (or "The Wealth of Nations") helped shape classical economic theory. It was also used as the foundation for future economists.

Mill combined economics with philosophy. He believed in utilitarianism—that actions that lead to people's goodwill are right and that those that lead to suffering are wrong. In essence, he believed that economic theory and philosophy were needed, along with social awareness in politics in order to make better decisions for the good of the people. Some of his work, including "Principles of Political Economy," "Utilitarianism," and A System of Logic" led him to become one of the most important figures in politics and economics.

Importance of Political Economy

Political economy studies both how the economy affects politics and how politics affect the economy. As political parties come to and leave power, economic policy often changes in a country based on the ideology and goals of the party in power.

Political changes can impact many areas of the economy, which can in turn impact elections and government policies. These include:

• Monetary and fiscal policy
• Food security
• Global trade
• Labor supply, demand, and crises
• Gross domestic product (GDP)
• Financial inequality
• Disaster management
• Environmental stability

As the economies of more countries become interconnected through globalism and international trade, the politics of one country can have a strong impact on the economy of another. Understanding the relationship between political power and economic decisions in one country can help other countries predict how their own economies will be impacted.

Understanding political economy can also help a country's economy become more resilient. If the government leaders in power at any given moment are forward-thinking, they can put laws and policies in place that create the greatest possibility for economic stability and growth, regardless of changing political power.

Political Economy in Academia

Political economy became an academic discipline of its own in recent years. Many major institutions offer the study as part of their political science, economics, and/or sociology departments.

Research by political economists is conducted in order to determine how public policy influences behavior, productivity, and trade. Much of their study helps them establish how money and power are distributed between people and different groups. They may do this through the study of specific fields such as law, bureaucratic politics, legislative behavior, the intersection of government and business, and regulation.

The study may be approached in any of three ways:

• Interdisciplinary studies: The interdisciplinary approach draws on sociology, economics, and political science to define how government institutions, an economic system, and a political environment affect and influence each other.
• New political economy: This approach is studied as a set of actions and beliefs, and seeks to make explicit assumptions that lead to political debates about societal preferences. The new political economy combines the ideals of classical political economists and newer analytical advances in economics and politics.
• International political economy: Also called global political economy, which is slightly different, this approach analyzes the link between economics and international relations. It draws from many academic areas including political science, economics, sociology, cultural studies, and history. The international political economy is ultimately concerned with how political forces like states, individual actors, and institutions affect global economic interactions.

Modern Applications of Political Economy

Modern applications of the political economy study the works of more contemporary philosophers and economists, such as Karl Marx.

As mentioned above, Marx became disenchanted with capitalism as a whole. He believed that individuals suffered under regimented social classes, where one or more individuals controlled the greater proportion of wealth. Under communist theories, this would be eradicated, allowing everyone to live equally while the economy functions based on the ability and needs of each participant. Under communist regimes, resources are controlled and distributed by the government.

Most people confuse socialism and communism. It's true there are some similarities—notably, that both stress bridging the gap between rich and poor, and that society should relegate equilibrium among all citizens. But there are inherent differences between the two. While resources in a communist society are owned and controlled by the government, individuals in a socialist society hold property. People can still purchase goods and services under socialism, while those who live in a communist society are provided with their basic necessities by the government.

The Bottom Line

Political economy is a branch of the social sciences that studies the relationships among individuals, governments, and public policy. It examines how politics impacts the economy and how the economy impacts politics.

As political parties change, a country's economic policy often changes as well, based on the ideology and goals of the party in power. This can impact areas of the economy such as monetary and fiscal policy, food security, labor crises, rising inequality, GDP, and disaster management. These changes in the economy can in turn prompt new political laws, policies, or election outcomes.

The rise of globalism and international trade means that the politics of one country can have a strong impact on the economy of another. Understanding political economy can help countries become more resilient in the face of global economic changes.