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What is Political Economy?
We will define political economy as economic and social analysis which takes seriously the reality of power and vested interests
in determining economic outcomes.
Power is assumed to be held at the level of groupings or broad categories of economic agents and their representative institutions,
rather than at the level of individuals.
A common categorisation (but by no means the only one), is in terms of class interests. Rivalry has been explored between landlords
and capitalist (as in the analysis of the English classical economists), or between workers and capitalists (as in the analysis of
Marx and subsequent writers), or between industrial capitalists and financial capitalists
(as in the analysis of Keynes and Post Keynesians, and also of Marx).
At the international level economic rivalry exists both between nations, and between groups of nations with the same economic
interests. Policies may be adopted which reflect an expression of those interests. International governmental institutions,
(such as the IMF and the WTO) may also be viewed in a similar context.
The role of government and governmental institutions has also been an important subject for analysis in political economy.
Within a domestic economy, enormous economic power is held by the state by virtue of its ability to levy taxes and create laws.
But how it uses the power has been the subject of much debate throughout the history of political economy. On whose behalf does the
government use its economic power?
Mainstream analysis views the government in relation to the ‘private sector’, where the latter has been likened to a ‘unified happy
family’. Within mainstream macroeconomics there is a division between Keynesians and New Classicals concerning the motivations for
government policy. On the one hand, the Keynesian approach has been to adopt the assumption of the benevolent policymaker who always
attempts to act in the national interest. On the other hand, New Classical economists have adopted an antigovernment approach which sees
the government as having its own agenda (eg winning elections) which invariably causes it to act against the national interest.
However this version of political economy is clearly unsatisfactory, given the divisions of interests that exist between groups within
the ‘private sector’. It is by assumption biased against any notion that a particular group within the private sector may act against the
interests of the others. For example, it is not much use in helping us understand the political economy of the Global Financial Crisis. For
it not only prevents us from attributing any responsibility for the crisis to the expressions of the autonomous interests of finance, it
also denies the possibility that government policy might be designed in the interests of that group. We therefore take the view that the
private sector should not be assumed to be one big happy family.
The History of Political Economy
The term Political Economy was used nearly 300 years ago as a label for the analysis of those writers who are generally accepted to have been the first practitioners of what we now call 'economics'. Those so-called Classical Political Economists, such as Smith, Ricardo, Malthus, and Marx (to name just a few of the most well-known) are credited with providing us with the first systematic analysis of the forces that determine our economic well-being. Those writers did not use the term 'economics'. That label was adopted some generations later when thinkers in the emerging neoclassical school wished to more narrowly specify their subject matter in contrast to the analysis that had preceded them.
A comprehensive introduction and exploration of the term, political economy, is provided by Caporaso and Levine, 1992,
Theories of Political Economy,
who begin by drawing our attention to the tumultuous real-world context in which this discipline came into existence: "When political economy emerged in the 18th century, it did so to help people understand and cope with a dramatic change in the system of want satisfaction, both in the nature of wants and in the manner of production and distribution of goods for satisfying them. The shift from the older term "economy" to the newer term "political economy" marked this change. Economy, taken from the Greek usage, referred to household management. It had relevance to a society in which, to an important degree, wants emerged and the things that satisfied them were produced in the household. Political economy referred to the management of the economic affairs of the state."
But as the authors point out "the term 'political' refers to two interrelated qualities of the system of want satisfaction. First this system links persons otherwise independent: strangers rather than relatives, whom we might not even know. Second, the boundaries of want satisfaction are now political; responsibility for the system of want satisfaction devolves onto a public authority: the head of state rather than the head of the household. In its earliest period, political economy sought to advise the statesman on how he could best manage the economic affairs of state so that the wants of the citizens would be met."
The work of the early political economists was focused on the important role that a free market could play in providing a beneficial outcome to the changes in the system of want satisfaction; an outcome which they claimed to have demonstrated analytically to be superior than would result from state monopolies and patronage (as had existed previously under the system of mercantilism). Adam Smith is most famously associated with demonstrating the benefits for everyone that the arise from individuals pursuing their own self-interest; but only as long as markets were free and individual producers were not able to control their markets (through collusion or through virtue of their own size). An important debate in political economy, which has continued into the present, is over the question of what are the appropriate boundaries between free-market provision and state provision, and what roles should the state take in regulating market provision in order to protect society from the it's harmful effects. The world is clearly a different place from the one inhabited by Adam Smith. Economic relations are far more complex and there are problems, such as resource depletion, environmental damage and climate change which arise from the pursuit of self interest and which did not exist in the 18th century. But the fundamental areas of debate still remain and the discipline of political economy is arguably as important today as it was nearly 300 years ago.
Indeed, the recent global economic recession, which has resulted from the sub prime crisis and the unregulated pursuit of self-interest in financial markets, has led to renewed interest in the issues of political economy in the general population. Why did it happen? Who is to blame? Why wasn't it predicted? How can it be prevented from happening again? These are questions which are debated at dinner parties and in bars, not just in the academic seminars. Questions about justice and greed become important when one's livelihood is threatened.
Many present-day commentators are pointing to the wisdoms of past writers. Writing in the Financial Times in March 2009,
the Nobel prize-winning economist, Amartya Sen, points out that "the question that arises most forcefully now is not so much about
the end of capitalism as about the nature of capitalism and the need for change….. should we search for a new capitalism or for a 'new world'
that need not take a specialise capitalist form….. This is not only the question we face today, but I would argue it is also the question
that the founder of modern economics, Adam Smith, in effect asked in the 18th century". Sen goes on to remind us that Adam Smith was much
more than just a narrow free-market economist. Smith "talked about the important role of broader values for the choice of behaviour, as
well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published
exactly 250 years ago, that he extensively investigated the powerful role of non-profit values".
(Amartya Sen, Adam Smith’s market never
stood alone FT March 10 2009)
Two days later the same leading financial newspaper published another article, suggesting that "Given the enormity of the banking,
credit and trade crisis, might it be worth suggesting to Mr Obama and his fellow leaders that they study the writings of the greatest of
the world’s political economists".
(Paul Kennedy, Read the big four to know capital’s fate FT March 12 2009)
Today's advocates of a political economy approach often point to the way that the mainstream discipline of economics has become more
specialised both on technical issues and on abstract theorising, thus divorcing itself from developments which require an institutional or
historical understanding. There are clearly advantages in specialisation which might be used to justify such a division of labour between
'pure' economic analysis and the analysis of political economy. There will always be those who have a comparative advantage in quantitative
analysis or in abstract reasoning and who may not wish to get involved in the more discursive real-world issues and applications of their
work, particularly when this involves straying into what they consider to be the subject matter of other disciplines. But it is plausible
to suggest that many, if not most, people who are attracted to the study of economics believe that its purpose is to help understand the
major issues which impinge on people's economic welfare. As Professor Blaug has observed, "All the great economists, without exception,
were motivated to study economics in order to improve the world. If idle curiosity were our only reason for studying economics, it is
difficult to believe that governments and business firms would continue to hire economists in the numbers that they do."
(Mark Blaug, Disturbing Currents in Modern Economics, Challenge, May/Jun 1998). Moreover the real world is messy and cannot always be
compartmentalised along the lines determined by specialist academic disciplines of
economics, political science, sociology, psychology, history and so on. The economic issues which affect the well-being of ordinary people,
whether in Adam Smith's time or today, are not purely technical in an economic sense but require an exploration and understanding of the
power structures and social relations in which economic relationships exist.
Some writers suggest that the essence of political economy as laid down by the classical writers was a fusion of the economy with society.
Mitchie et. al. are typical in bemoaning the dominance of mainstream economics by the individualistic methodology of the neoclassical school.
"Classical political economy recognised that what needed analysing, explaining, and acting on was an economic system inextricably linked to
the wider political and social systems. Smith and Ricardo, as well as Marx, saw class and the distribution of income as a key. Neoclassical
economics replaced these social and collective categories with the individual consumer and the marginal product of labour as the fundamental
analytical categories, the 'political' having been discarded." (Michie, J., Oughton, C., & Williamson, F., Against the new economic
imperialism: Some reflections - Radical Criticisms and Reflections, The American Journal of Economics and Sociology, Jan, 2002.)
Similar charges have been laid by Hudson who argues that "what made political economy the queen of the social sciences in the 19th century was its focus on the transformation of nations. It dealt with the policies most appropriate for their long-term social evolution; their legal and institutional structure, technology and financial organization. At issue was how economic institutions should be improved. The ceteris paribus methodology of marginalism did not deal with such broad contextual issues. It presupposed that the social structure remained constant, and then implied that no change was needed, as economies would respond to disturbances automatically by settling at a new equilibrium. Such an approach does not have much appeal to social reformers, environmentalists, political regulators or historians dealing with the structural aspects of economic development". ……….."It has taken 100 years to drive out what formed the most vital concerns of classical political economy: the shape of social evolution, the strains it tends to develop and the indicated responses by the state". (Michael Hudson, The use and abuse of mathematical economics, Journal of Economic Studies Aug 2000).
So the methods of inquiry and analysis of issues affecting economic wellbeing are themselves the subject of disagreement and debate.
Indeed disagreements over so-called methodological issues have existed since the early days of classical economics.
At a major conference in 2009, a group of economists with long-standing expertise in finance and macroeconomics met to discuss the
issues arising from the economic crisis. Their contributions were varied and insightful and necessarily placed their economic analysis in
a political economy context.
(James K. Galbraith, Financial and Monetary Issues As the Crisis Unfolds
, The Levy Economics Institute, Public Policy Brief, No 103, August 2009.)
One contributor stressed the need for seeing the question of reform in a historical context, distinguishing between 'liberal' and
'neoliberal' reform. "Liberalism, he argued, was a doctrine of the 18th century middle-class, which was then rising against an oppressive
state, then dominated by landowners and the military. The liberal state that then emerged was by turns republican, democratic, progressive,
Keynesian, and social democratic - which is to say, ever more deeply concerned with the general welfare and ever more willing to take
responsibility for it. Neoliberalism, in political terms, appropriated the symbols of the liberal revolution (notably, Adam Smith) in the
new alliance of the rich against the middle-class and the poor." (Galbraith, op. cit.)
It is the motivation for this website that there has never been a more important time to study and research political economy and that the major issues that affect our economic welfare today are highly interdependent both with other contemporary issues and with those of the past.
Robert Jones (Editor),
Exploring the Connections in the Political Economy
of the Global Financial Crisis |