Political Economy

Political Economy Definition

Political economy is the interlinkage between mainstream economics and other social sciences. The main focus of the political economy is to define the aspects of economic and social phenomena with the help of an interdisciplinary lens. But how did a field with such diversity emerge?

• Political Economy is an active branch between economics and other social sciences.
• Core elements of political economy have been studied since Ancient Greece. Nonetheless, the crucial turn in political economy happened when physiocrats approached the topic in a scientific manner.
• The most well-known authors of classical political economy are Adam Smith, John Stuart Mill, Karl Marx, and David Ricardo.
• Contemporary political economy tries to solve contemporary political issues with statistical methods while combining political science and economics.

Origins of Political Economy

To understand the core aspects and origins of political economy, it is better to start and trace the word itself. Since the political economy is directly related to the institutions and the state, we can trace its origins back to Ancient Greece.

We can come across the term economics as early as the works of Xenophon. Xenophon mentions economics while using the word "Oeconomicus". The word Oeconomicus is the combination of the words "okios" (household) and "nemein" (administration, management). Written in a Socratic manner, the dialogue takes us to the humans' relationship with institutions, religion, education, and with each other.

In a similar period, we can find Aristotle's work, titled similar to Xenophon's work, "Oeconomica". The treatise is constructed with two books. In the first book, Aristotle focuses on the definition of economics, the roles of the members of the family, and the impact of the citizens on society while selling and buying things. The second book separates the economies and inspects the details of different types of economies.

Fig. 1 - Statue of Xenophon located outside the Austrian Parliament

After some time, we can track similar approaches to political economy in the works of 13th Century Arabian historians and 17th Century French philosophers. Nonetheless, the story of the political economy, as we define it today, starts with the works of physiocrats.

Classical Political Economy

The most well-known physiocrat, François Quesnay, tries to explain the relationship in the economy with his work "Tableau économique". His work can be summed up as a table that roots the wealth in a nation to agricultural output. Quesnay traced the relationship between artisans, merchants, landlords, and farmers. Nonetheless, the most important aspect of his work was his method and formulation of explaining the relationship between different classes of society.

As you can see, Quesnay, unlike his predecessors, approached the matter with a formulation, nearly in a scientific manner, to uncover the relationship between different strata of society. We shouldn't be surprised by Quesnay's approach. At the end of the day, Quesnay was a physician and a surgeon who served King Louis XV.

Fig. 2 - F.Quesnay "Master of Medicine"

After approaches made by Quesnay, surely the most known author in the field of economics, Adam Smith, published his work "An Inquiry into the Nature and Causes of the Wealth of Nations" in 1776 and structured the political economy on a whole different level. Similar to Quesnay, Adam Smith took a scientific approach to uncover the aspects of a country's economy and its relationship with the political and institutional structure.

It is important to note that Adam Smith was a philosopher. He was interested in history, religion, and politics, and he gave lectures on the theory of morality. His other famous work, "The Theory of Moral Sentiments," was the ground for his future publications. During this period, we can see similar approaches from David Ricardo and Thomas Malthus, which can be seen as the pillars of contemporary economics together with Adam Smith. Similarly, John Stuart Mill, the author of the "Principles of Political Economy", was interested in economics in a moral and sociological sense. Therefore political economy was redefined at the moment when economics was born.

Nonetheless, the birth of modern economics affected the progress in the field of political economy. Political economy was cast into the shadow after Alfred Marshall's book, "Principles of Economics". This period within the history of economic thought is generally named as the marginalist turn.

Nonetheless, during the 20th century, political economy shined again. While its theory stays loyal to its roots, it merged with contemporary political science. Now the theory of contemporary political economy contains many elements, both from political science and economics.

Contemporary Political Economy

The contemporary political economy focuses on the problems with two different approaches. One is micro-based, and the other is macro-based. The micro-based approach analyses the markets and focuses on consumer decisions and products, individual decisions, and their relationship with the institutions. The macro-based approach focuses on the concepts like development, growth, and unemployment while paying attention to their linkage with political systems and various institutions. To tackle the issues of modern-day governments, political economy uses a statistical arsenal with the help of a rigorous scientific approach.

Political Economy Theory

Let's dive into the theory of political economy. We can divide the political economy into three main parts, national political economy, comparative political economy, and international political economy. Contemporary literature focuses on agent choices within an economy while categorizing economies into three different main segments; capitalist, socialist, and communist economies.

While explaining the aspects and properties of different types of political systems and economies, political economists are trying to uncover the concepts like social welfare, utility, distribution of wealth and equality, and public choice theory.

For example, the public choice theory is interested in how agents prefer one thing over another or with the questions like can the individuals' preferences be demonstrated as a whole? Since such a question is heavily related to the political system itself, the political economy becomes a perfect fit for inspecting and researching the topic. In this case, political economy derives the utility and preferences theory from the microeconomics literature and the voting systems from the political science literature.

Another famous research area of political economy is the allocation of resources. This field is interested in questions like how the government should interact with the economy. This is a long-lasting question debated throughout the centuries. Is the market economy efficient? Does it allocate the resources with respect to individuals' best interests? Why do inequalities occur? How can we overcome inequalities, or should we overcome them?

As you can immediately realize that these questions are directly related to moral principles, political structures, institutions, and culture. Thus, without political economy, economics literature will fail to answer such complex questions.

Importance of Political Economy

The importance of political economy is underlined by its return as a school of economics in the 20th century.

After the marginalist turn, economics became a set of axioms and the relationship between agents and markets. Nonetheless, after some debates within the 20th century, political economy has returned as the new school of economics. The return of the political economy is related to the need for its existence. This sounds contradictory in the beginning. Why do we need it if we have already overcome it? The truth is we didn't overcome it at all.

The set of axioms set by the marginalists failed to explain the extremely complex events happening within the societies. Every society has different cultural aspects, different markets, and different institutions altogether.

For example, a policy suggestion made for one country may fail to explain the phenomena in another. Similarly, due to different types of institutions, expected agent behavior within markets may change. This is similar to writing a pill for all types of diseases. This is why the political economy is so important. Because we only can understand the economies if we see the picture as a whole. Therefore, political sciences, sociology, and international relations are now inseparable from economics.

Components of Political Economy

We can divide the components of political economy into three main parts. Nonetheless, this shouldn't imply that they are not connected. On the contrary, they are highly connected and continuously affect each other.The first part is the political or economic system's structural features. You can think of these features as the fundamental building blocks of a country. They are resilient to change, and they need a vast amount of time to adjust to new policies.

In addition to structural features, institutional features are highly important in political economy. We should think of institutions as the rules of the social game. It is highly important to notice that institutions aren't just physical phenomena but include all rules. These structures are highly effective on individual behaviors. These are relatively less resilient to change when we compare them with structural features.

And finally, political economy focuses on individuals and organizations while considering their decisions within a society. This part of political economy is highly important, and it links microeconomics with political economy. This area uses approaches from game theory too.

Political Economy of Development

One prominent field that is highly important is the political economy of development since the development of a country is correlated with the institutions that it contains, the allocation of resources, the structures of the market, and obviously, its regime.

Political Economy and Public Choice

Another crucial area for political economy to shine is its application in the public choice theory. As we all know, economics assumes that agents act with a utility-maximizing behavior for their decisions. Public choice theory is interested in this utility-maximizing behavior's application in the voting theory. It focuses on questions like how agents vote. What are their preferences, and how can we rank their preferences? Which voting system is more successful? Is the majority rule enough for aggregating individual preferences? To answer such questions, political economy combines political science and economics.

The most well-known theories of public choice are the Median Voter Theorem, Arrow’s Impossibility Theorem, and the Condorcet Paradox.

1. Median Voter Theorem suggests that the preferred policy of the median voter will be the elected policy if preferences do not contain a Condorcet Winner.

2. Arrow’s Impossibility Theorem suggests that there is not any social welfare function that can aggregate individuals’ preferences and represent them in an objective manner. It draws attention to the flaws of public choice while using economics as a background to support the claim.

3. Condorcet Paradox is related to the aggregation of individual votes and how it may lead to different representations of the majority's will. It suggests that even in a situation where individuals’ decisions are rational, social welfare function may be irrational or non-transitive.

These are vital theories in political sciences and even today, the vast literature of debates about these theories expands.