Political economy was the original term for the study of production and the relationships of buying and selling and their relationship to laws, customs and government. Rousseau gives the etymology of it as coming from oiko - house plus nomos law - the laws of living. As such it was used by Adam Smith, John Stuart Mill, David Ricardo and Karl Marx, along with the term "economist", to mean someone who believed that political and social problems could be solved by means of political economy. The original basis of political economy was the relationships between different roles of production, which attracted attention as technology and its role in Europe became more important. Its development is related to the doctrines of the physiocrats, who based their theories of value on land, where as political economy began with assertions of the "labor theory of value" and the "quantity theory of money".
In the late 19th century, the term "political economy" was generally superseded by the term economics, which was used by those seeking to place the study of economy on a mathematical and axiomatic basis, rather than studying the structural relationships within production and consumption. (See marginalism, Alfred Marshall)
In the present, political economy refers to a variety of different, but related, approaches to studying economic behavior, which range from combining economics with other fields, to using different fundamental assumptions which challenge those of orthodox economics:
Political economy is most commonly used to refer to interdisciplinary studies that draw on economics, law and political science in order to understand how political institutions and the political environment influence market behavior.
- Within political science, the term refers to modern liberal, realist and Marxian theories concerning the relationship between economic and political power among states. This is also of concern to students of economic history and institutional economics.
- Economists, however, often associate the term with game theory. "International political economy" is a branch of economics that is concerned with international trade and finance, and state policies that affect international trade, such as monetary and fiscal policy.
- Others, especially anthropologists, sociologists and geographers, use the term "political economy" to refer to neo-Marxian approaches to development and underdevelopment set forth by Andre Gunder Frank and Immanuel Wallerstein.
History of the term
The term political economy originally meant the study of the conditions under which production was organized in the nation-states of the new-born capitalist system. The term was first used in England in the 18th Century, to replace the earlier approach of the (French) physiocrats. The main exponents of Political Economy are Adam Smith, David Ricardo and Karl Marx.
By the second half of the 19th century, laissez-faire theorists started to argue that the state should not regulate the market; that politics and markets operated according to different principles; and that political economy should be replaced by two separate disciplines, Political science and Economics, in a move that has been seen, especially by Marxist thinkers, as the beginning of the fragmentation of social science. Around 1870 neoclassical economists such as Alfred Marshall began using the term economics instead of "political economy." Institutions which taught politics and economics jointly, such as Oxford University, did not adopt this terminological preference and appointed the mathematical economist Francis Edgeworth to the Drummond Chair of Political Economy in 1891.
The term "liberal" during the 18th and 19th centuries meant the removal of barriers to trade and capitalist economic activity. This included ideas such as reduction of tariffs, standardized systems of weights and measurements, the metric system, central banking and the establishment of a gold standard to facilitate trade. These theories were part of the move to the first age of Globalization based on the theory of comparative advantage put forward by Ricardo. The present-day term "classical liberal" refers to 19th century liberalism.
At the same time with the rise of classical liberalism, and in opposition to it, the theories of socialism and communism developed, which stated that unregulated ("laissez-faire") capitalism, the kind of system advocated by the classical liberals, could not correctly allocate resources and products without resulting in unsustainable misery for the vast majority of the people. In the communist school, the most important thinker was Karl Marx. Marx regarded himself as being in the tradition of Adam Smith, focusing on the labor theory of value and on structures of production and the struggle to control those structures (which he named "class struggle").
Political Economy remained in use for the study of economies seen through the lens of government action, even though many economists also study the effects of government.
The scope of political economy
Political economy is centrally focused on the development of the polity. It pays particular attention to whether the polity is running a surplus or a deficit, since in the view of most political economy, any deficit must be met by selling assets, such as gold or other capital, to other polities - or by some form of borrowing or externalization.
Political economy, then, studies the mechanism of human activity in organizing material, and the mechanism of distributing the surplus or deficit that is the result of that activity. Note the difference between this paradigm and that of economics which sees human wants as unlimited, resources as generically scarce, historical context as not particularly important, and income distribution issues as less important than efficiency and growth. While for some there is no difference between the two terms, for others the difference is one of basic method. Economics studies trade-offs through measurable values, whereas political economy focuses on structural relationships. However, there is no generally accepted distinction between these terms, and they are most often used on a case by case basis.
Central concepts of political economy
Political economy studies the means of production, specifically capital, and how this manifests itself in economic activity. Whereas economics focuses on price, and sees production and consumption as "effects" on price, political economy sees economics as a manifestation of underlying reality which is effected by policy and law. The division into "use value" and "exchange value" makes a clear distinction between what would now be called "value" and "price" or "capital value" and "commodity value", in contrast to the denial of intrinsic values separate from prices in, for example, neoclassical economics.
In political economy, labor is used to mean human activity which produces change, and capital is the means by which the change from that labor is made greater. The results of labor are commodities which are exchanged and consumed, which leads to the problem of disposal of the results of consumption.
Private exchange occurs in the market, and is based on a legal framework of possession and title, this is also called the private sector. Government exchange occurs through politics, and influences market decisions through policy. The government as a player in the market economy is called the public sector.
Political economy in its normative form focuses on the necessities of production, exchange, consumption and disposal, referred to as infrastructure. In its descriptive form it focuses on the classification and detailing of the workings of production, for example as in David Ricardo in On the Principles of Political Economy .
Political economy, because it is concerned with a view of underlying reality, is often required to be multi-disciplinary in its approach. Political economy often talks in terms of "systems" of economy, either Wallerstein's world system or emergent systems, and the free market is often an important subject of discussion.
In political economy, production refers to the use of labor, with the aid of capital, to create a determinate and recognizable thing which has use, or utility (see Utilitarianism). Studying the relationship of production is crucial to political economy, since economics only recognizes general demand, while production is often bottlenecked by specific resources, and political activity is often centered around securing of resources perceived to be creating a bottleneck.
Political economy views production as the central activity of an economy, and views the labor available as the ultimate bottleneck for state activity. The polity must supply its needs from its available stock of labor, and thus must have sufficient capital available to allow that labor to be sufficient. Thus the basic equation of political economy may be phrased as:
Labor involves not only time in the abstract sense, but the realities of human beings, both as social and economic beings. The basic formula of political economy was described by Adam Smith in his "Wealth of Nations":
capital(labor) - investment - consumption = surplus/deficit
Capital is the function, into which is put labor. Investment is the amount spent developing the stock of capital, and consumption is the use of utility. A polity which has a surplus is then able to buy assets or capital from abroad, or increase investment or consumption. A polity where investment and consumption taken together are greater than the production will run a deficit, and must borrow or sell assets to make up the difference.
The study of production then focuses on how capital interacts with labor, in the broad, rather than narrow sense. This is because labor must, to make use of capital, have the necessary skills and social infrastructure. In Marxian terms, social infrastructure is referred to as consciousness and societies with sufficient social infrastructure to produce what they consume and control their own capital are said to have the "objective" basis for production.
Capital may be said to be any tool which increases the ability of labor to organize material into usable form. Physical capital refers to tangible objects which, when employed, allow greater production. Intellectual capital refers to concepts, ideas, designs, theories and information which allows an individual to act with greater effectiveness. Physical capital implies an intellectual capital required to use it. Human capital can be described as the readiness of labor to use capital, and includes education, social norms, ethical understanding, networks of relationship and communication, health and general well being.
Capital can be for positive production, but, in political economic terms, weapons are also capital. States pursue political economy, in no small degree, to be able to produce the capital of projecting power and force. Often the projection of force is to acquire resources required for production, or the opening of labor to be utilized in production, or to open markets for the results of national production.
Labor and resources need to be able to get to capital, and commodities need to be moved to where they can be exchanged and consumed. This creates the need for transport - of people, things and information.
The need to move labor and resources to within range of capital is seen in the creation of transport grids, such as trains and roads. The need to coordinate production is seen in the creation of communication grids.
From the view of political economy, exchange is the process where the producers of commodity or investment exchange with consumers. Each producer is then a consumer, and each consumer is a producer. The market provides a mechanism for exchange, and money provides a medium of exchange. Consequently, the dynamics of monetary exchange are a central focus of much of political economy.
The infrastructure of exchange determines the possible range of market possibilities. Political economy views the long term of economic activity as the successive creation of political capital sufficient to manage the range of monetary exchange required by the society. In simple terms, the money is a commodity which a society produces, and in order to function, the money it produces must be capable of sustaining the market which the society uses. Adam Smith enumerates early in Wealth of Nations a list of requirements for the functioning of a market, which include stability of exchange and expected rates of profit in various enterprises.
The mechanisms of exchange are generally studied through a framework rooted in economics.
Consumption is the return of material organized by production back to a state of being unusable. Consumption is based on the utility of that which was consumed, and is the goal or purpose that people seek to attain.
Disposal is the least glamorous area of political economics, but in many respects the most vital. People produce waste. Waste, if allowed to accumulate, creates disease and other undesirable effects. Providing the infrastructure of removing that waste, or neutralizing its harmful effects, is a large fraction of the history of urban development. As Fiorella LaGuardia famously remarked "there is no Republican or Democratic way to collect the trash on time".
Sewage systems, garbage collection, clean air laws and recycling are all results of the need to dispose of after effects, and take up a significant fraction of the political life of most localities. On the scale of political economy, wastes produced often require more space or expertise than can be managed locally.
Green economics and other fields of study that concentrate on externalization of costs focus heavily on the carry capacity of ecological systems and the effect of human activity in them, this includes the effects in human terms of global warming, ecological diversity , soil erosion, water quality, epidemiology and pollution.
Disciplines which relate to political economy
Because political economy is not a unified discipline, there are a variety of studies that use the term which have overlapping subject mater, but radically different viewpoints.
Sociology is the study of the effects of involvement in society on individuals as members groups, and how this changes their ability to function. Many sociologists begin from a framework of production determining relationship drawn from Karl Marx.
Anthropology often studies political economy by studying the relationship between the world capitalist system and local cultures.
Psychology is frequently the fulcrum around which political economy centers, in that it deals with decision making, not as being a black box whose effects are seen only in price decisions, but as being a source of study, and therefore the assumptions in a model of political economy.
History since it documents change over time, is often used as a means of arguing in political economy, and often historical works have a framework of political economy which they assume or argue as the basis for the narrative structure.
Economics, because it studies activity and price relationships and the effects of scarcity, grew out of political economy. It is often used in political economy to argue policy effects and study the results of actions, and it is often in opposition to political economy, in that many, if not most, practicing economists see political economy as being a hindrance to the operation of economic forces. From the point of view of political economy, economics is a branch of the entire study, and economics has, at its basis, a theory of political economy which should be open to examination.
Law since it concerns the creation of policy, or the mediation of policy ends through political acts which have specific individual results, is seen, in political economy, as both political capital and social infrastructure, on one hand - and as the result of the sociology of a society on the other.
Ecology is often involved in political economy, because human activity is one of the single largest effects on the environment, and because it is the suitability of the environment for human beings which is one of the central concerns of most human beings. The ecological effects of economic activity on the environment have spurred the creation of a great deal of research studying means of changing the incentives balance of the market economy. This work is particularly controversial in its interaction with economics, since it questions the fundamental econometric assumptions of market economics and their basic validity. See the commons.
General paradigms of political economy
Political economists are divided over the nature of two paradigms: the paradigm of distribution and the paradigm of production. These paradigms may be related, especially at the extremes, but there are a vast number of individuals who hold almost diametrically opposite views on these two paradigms in the same context.
Paradigms of distribution
Societies produce more than isolated individuals, and labor with the aid of capital produces more than labor alone. Societies also generate more waste, and capital makes demands for investment and organization. The first can be referred to as the social surplus and capital surplus respectively, and the second as social costs and capital requirements. One of the most important social costs is war. Indeed the difference between political economy and economics is that, in economics, war is a temporary alteration in price variation, the old joke being that "World War III, should it come, will be noted in two sentences in the Wall Street Journal, with an article inside on its effect on soybean futures."
The paradigms of political economy may be classified based on their view of distributing the social costs and benefits, and the capital costs and benefits.
Libertarianism: Libertarianism denies that there is any significant difference between capital surplus and social surplus: it claims that all improvements to productivity are capital surplus and belong to the individual. Libertarianism further contends that by paying for inputs, an individual has already paid for the social cost of their activity, and that to avoid disutility, individuals will rationally trade effects of economic activity that are adverse. Libertarians, therefore, generally believe in an absolute standard of value, generally the gold standard. They point to John Locke, Thomas Jefferson, Adam Smith and Ralph Waldo Emerson as antecedents, and argue that they are merely continuing "classical liberalism". In the libertarian framework, since there is no social surplus, any attempt to distribute is unjustified - that is, economics is separate from the political sphere.
Libertarianism's main school of thought was the Austrian School of economists, and found expression in laissez-faire economics. Libertarians may be said to be economic and social extreme individualists. Important, or at least widely cited, thinkers in Libertarian thought include Ayn Rand, Hayek, Franz Oppenheimer and Ludwig_von_Mises
Liberalism: Liberalism believes that capital surplus should accrue to the individual, but that social surplus and cost should be distributed as widely as feasible within the context of maintaining the individuals' expectation to the surplus of their own efforts. Liberals therefore support state intervention in political economy to measure and distribute social costs and benefits. Many thinkers are, therefore, held in common between libertarianism and liberalism - since when the social surplus is perceived of as being low, or in particular areas, liberals believe that there is nothing to distribute. Liberals also agree with Conservatives about the need to protect against the ill effects of social disorganization, even though the manner of doing so differs.
Liberalism sees the expansion of individual rights (from the philosophy of Jean-Jacques Rousseau and Thomas Jefferson) as being the entitlement to a certain reasonable standard of life for all members of society. From the pragmatic viewpoint, this is the necessity of human capital sufficient to engage in the full range of production.
Liberalism has been proposed by such thinkers as John Dewey, John Rawls, Isaiah Berlin, economists such as John Maynard Keynes and educators such as Mortimer Adler.
Conservatism: Conservatism believes that capital surplus accrues to the individual, and that there is little or no social surplus, but that there are significant social costs, which must be distributed across the society. Examples of this include military service, standards of personal morality and charity.
Conservative thought became established in English philosophy with the work of Thomas Hobbes, but became a political doctrine with Edmund Burke. Conservatism in the modern period looks to libertarian economic thinkers, but toward the absolute need for social structure enforced by normative institutions such as religion and nationalism. Prominent modern schools of Conservative thought include the work of Leo Strauss in the USA.
Socialism: Socialism believes that the ratio of capital surplus to social surplus is very low, that most of the surplus involved in human production is predicated on the producer being a member of society, and therefore argues for social control of the means of production and an egalitarian distribution of wealth, in order to provide benefits to all members of a society.
Socialism evolved from critiques of human misery in the late 18th century, such as those of the political philosopher Fourier. In the view of the socialists, the market could never efficiently distribute the social surplus, and private ownership merely substituted one form of tyranny for another (the tyranny of the capitalists replaced the tyranny of feudal lords). In the present day, many social democratic parties believe in some form of socialism which requires that corporations and major public works be guided by political as well as economic factors, for social goals. In addition, most socialists adhere to some form of utilitarian philosophy, which states that the best form of society is the one that produces the best results for the greatest number of its members.
Communism: Communism believes that there is no difference between capital surplus and social surplus, which is a view it shares with libertarianism. But, in the reverse of the libertarian viewpoint, it argues that all surplus is socially created. The most prominent communist thinker was Karl Marx, who was the founder of the school of thought known as Marxism. Other important Marxists include Friedrich Engels, Vladimir Lenin and Leon Trotsky.
Paradigms of production
The ability of some individuals to create capital or perform work with a far greater impact on society than others creates the question of the basis on which production should be measured.
Individualism: Individualist paradigms state that the single person, with his or her will and his or her own desires, is the basis of production, and that only individual accomplishment and happiness matter. Society is an instrument in so far as it produces individual happiness or utility. In addition, the individualist paradigm relies on the assumption that individual contributions to production are always measurable, so it makes sense to view one individual's contribution as separate from those of others.
Communitarianism: Communitarian paradigms state that it is the action of a group, with particular exceptional individuals, which forms the basis of production. Communitarian thinkers work in concepts such as inter-subjectivity and the dynamics of group production. The individual, within a community, is considered to be the basic unit.
Collectivism: Collectivist paradigms state that it is impossible to show with any degree of precision what the contribution of each individual is, and all artifacts and accomplishments must therefore be regarded as the result of a group effort.
The two issues of production and distribution generally move in this same direction. However, this is far from being always the case. It is entirely possible, for example, to take the stance of an individualist, and then conclude that individuals will be happiest in a communist society.
One of the central conflicts in political economy is, of course, the role and functioning of the market economy in society. It is here where the broad range of paradigmatic assumptions collide, and on particular issues, individuals and groups with widely differing views will find common intellectual and practical political cause. In the political world, the fulcrum is on the ownership of capital surplus and production.
In the context of political economy, capitalism takes on a very broad meaning: the focus of the state on the maintaining and creating of capital and the means of its utilization. Many paradigms use the word in a much narrower context to mean private ownership and the self-justifying results of market operation, and deny that any other use of the word is appropriate. However, the vast majority of governing and major opposition parties in the industrialized world see the maintaining of capital capability as an area for legitimate state interest, and therefore maintain that government intervention in the market to prevent its disintegration, and even to promote certain aspects of its advancement is a proper use of state power.
Socialism, viewed as a system of political economy, states that the forms of production (on which labor is dependent to sell to) should be maintained, or overseen, by political power, and generally state power, in order to give their benefits to the many rather than the few. This brings socialism into conflict with ideologies in the classical liberal tradition, which believe that production for capital profit is best left in private hands.
Communism sees the necessity of social control over all surplus generating activity. Communist parties exist in most industrialized nations, while communist revolutionary movements are more common in less industrialized ones. Within the paradigm of communism there are a host of particular theories. Not all Marxist theories are communist, and not all communists are necessarily Marxist in their orientation.