ECONOMY GOVERNMENT & POLICY

Political Economy Definition, History,

and Applications
By WILL KENTON Updated September 25, 2023

Reviewed by MICHAEL J BOYLE

Fact checked by MELODY KAZEL

What Is Political Economy?

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

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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 actually used.
Public policy that is created and implemented derive from these economic
theories. Political economists study both the underlying roots of these policies
and their results.

KEY TAKEAWAYS
The field of political economy involves the study of how economic
theories such as capitalism or communism play out in the real world.
As political parties come to and leave power, economic policy often
changes due to the ideology and goals of the party in power.
Those who study political economy seek to understand how history,
culture, and customs impact an economic system, and vice versa.
Global political economy studies how political forces shape global
economic interactions.
The rise of globalism and global trade means that political economy of
one country can impact both the economy and the politics of others.
Investopedia / Zoe Hansen

Understanding 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. [1]

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

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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. [2] The shorter term
"economy" was substituted in the early 20th century with the development of
more rigorous statistical methods for analyzing economic factors. [3] [4]

Types of Political Economy

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. [5]
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 entities are driven
by their own interests—they control production and distribution, set prices,
and create supply and demand. [6]
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. [7]
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Important: Political economy may draw upon sociology, economics,

and political science to define how government, an economic
system, and politics influence each other.

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 include those by Adam Smith and John Stuart Mill. [8] [9]

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Antoine de Montchrestien
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.
[10]

Adam Smith
Smith was a Scottish 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. [11] 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 considered the foundation for
the field of study by future economists. [8]

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John Stuart Mill

The Englishman 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. [9] In essence, he believed that economic
theory and philosophy were needed, along with social awareness in politics, 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 made him
one of the most important figures in politics and economics.

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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 in accordance with the ideology
and goals of the party in power. [12]

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

Monetary and fiscal policy

Food security
Global trade
Labor supply, demand, and crises
Gross domestic product (GDP)
Financial inequality
Disaster management
Environmental stability [13]
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.

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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 try to put laws and policies in place that create the
greatest possibility for economic stability and growth, regardless of changing
political power. [12]

FAST FACT
Political economy is still a widely used term that describes any
government policy that has an economic impact.

Political Economy in Academia

Political economy has become an academic discipline of its own. Many major
institutions offer the study as part of their political science, economics, and/or
sociology departments.
Political economists conduct research to determine how public policy
influences behavior, productivity, and trade. This work helps them establish
how money and power are distributed between people and different groups.
They may study specific fields such as law, bureaucratic politics, legislative
behavior, the intersection of government and business, and regulation. [14]

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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. [15]
New political economy: This approach studies 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 concerns how political forces like states,
[16]
 individuals, and institutions affect global economic interactions. [16]

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Modern Applications of Political Economy

Modern applications of the political economy involve the study of later
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. [7]

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Socialism vs. Communism

Many 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. [17]

What Does Political Economy Mean?

The term "political economy" refers to a branch of social sciences that focuses
on relationships between individuals, governments, and public policy. It is also
used to describe the policies set by governments Ad
that affect their nations'
economies.

What Is the Primary Concern of Political Economy?

The main concerns of political economy are the relationship between
governments and individuals, and how public policy affects society. These are
determined through the study of sociology, politics, and economics.
What Are the Characteristics of Political Economy?
Some of the characteristics or themes of a political economy include the
distribution of wealth, how goods and services are produced, who owns
property and other resources, who profits from production, supply and
demand, and how public policy and government interaction impact society.

Who Coined the Term "Political Economy"?

Adam Smith is generally considered the father of economics and of the political
economy. But the term is generally ascribed to French economist Antoine de
Montchrestien, who wrote the book Traité de l'économie politique, which
translates to the treaty of the political economy. [11] [10]

The Bottom Line

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

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ARTICLE SOURCES

Related Terms
Social Science: What It Is and the 5 Major Branches
Social science is a group of academic disciplines that examine human behavior and
includes anthropology, economics, psychology, and sociology. more

What Is Communism? Learn Its History, Pros, and Cons

Communism is an ideology that advocates a classless system in which the means of
production are owned communally. more

Who Was John Stuart Mill, and What Is He Best Known For?
John Stuart Mill was an influential 19th-century British philosopher, political economist,
and author of the leading economics textbook for 40 years. more

Socialism: History, Theory, and Analysis

Socialism is an economic and political system based on public or collective ownership of
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What Is Capitalism: Varieties, History, Pros & Cons,

Socialism
Capitalism is an economic system in which monetary goods are owned by individuals or
companies, and workers earn only wages. more

Economics Defined with Types, Indicators, and Systems

Economics is a branch of social science focused on the production, distribution, and
consumption of goods and services. more

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