After decades apart, economics and politics have become inseparable once again. Growing numbers of voters are rejecting the long-held establishment consensus among economists that prosperity flows from broad free markets and free trade arrangements.
Failing to secure political support for pro-growth policies will have deeply damaging consequences for economic prospects. For decades, politics has been something of a sideshow in terms of economics. No longer, weak politics will lead to weak economies. A basic economic principle is that any policy is good for society as a whole can be made to be good for everyone in society, even if policy creates winners and losers. It requires only that the winners be taxed just a bit to compensate losers, and everyone is better off. Economics takes an open-minded and scientific approach to consider broad-ranging real-world issues such as why, as economies grow richer, people are often not any happier.
Politics is usual answer, and answer is usually right. But that is too vague like saying that some countries are rich and others poor due to economics. The distinction between economics and political economy can be illustrated by their differing treatments of issues related to international trade. The economic analysis of tariff policies, for example, focuses on the impact of tariffs on efficient use of scarce resources under a variety of different market environments, including perfect (or pure) competition (several small suppliers), monopoly (one supplier), monopsony (one buyer), and oligopoly (few suppliers). Different analytic frameworks examine the direct effects of tariffs as well as the effects on economic choices in related markets. Such a methodology is generally mathematical and is based on the assumption that an actor’s economic behavior is rational and is aimed at maximizing benefits for himself. Although ostensibly a value-free exercise, such economic analysis often implicitly assumes that policies maximize the benefits accruing to economic actors are also preferable from a social point of view.
Political economy is about how politics affects the economy and the economy affects politics. Governments try to pump up the economy before elections, so that so-called political business cycles create ebbs and flows of economic activity around elections. By the same token, economic conditions have a powerful impact on elections. Political economy is about how politics affects the economy and the economy affects politics. A basic political economic principle is that the winners don’t like being taxed to compensate losers. And the battle is not over what is best for society but rather over who will be the winners and losers.
Political economy has become 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, and legislative behavior, the intersection of government and business, and regulation. Political economists study how economic theories such as capitalism, socialism, and communism work in the real world.
At its root, any economic theory is a methodology that is adopted as a means of directing the distribution of a finite amount of resources in a way that is beneficial for the greatest number of individuals. 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 briefer 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. Political economy is a branch of social science 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.
In contrast to the pure economic analysis of tariff policies, political economic analysis examines the social, political, and economic pressures and interests that affect tariff policies and how these pressures influence the political process, taking into account a range of social priorities, international negotiating environments, development strategies, and philosophical perspectives. In particular, political economic analysis might take into account how tariffs can be used as a strategy to influence the pattern of national economic growth (neo-mercantilism) or biases in the global system of international trade that may favor developed countries over developing ones (neo-Marxist analysis). Although political economy lacks a rigorous scientific method and an objective analytic framework, its broad perspective affords a deeper understanding of the many aspects of tariff policy that are not purely economic in nature.
The study of domestic political economy is concerned primarily with the relative balance in a country’s economy between state and market forces. Much of this debate can be traced to the thought of the English political economist John Maynard Keynes (1883–1946), who argued in The General Theory of Employment, Interest, and Money (1935–36) that there exists an inverse relationship between unemployment and inflation and that governments should manipulate fiscal policy to ensure a balance between the two. The so-called Keynesian revolution, which occurred at a time when governments were attempting to ameliorate the effects of the worldwide Great Depression of the 1930s, contributed to the rise of the welfare state and to an increase in the size of government relative to the private sector.
In some countries, particularly the United States, the development of Keynesianism brought about a gradual shift in the meaning of liberalism, from a doctrine calling for a relatively passive state and an economy guided by the “invisible hand” of the market to the view that the state should actively intervene in the economy in order to generate growth and sustain employment levels. The relationship between political economy and the contemporary discipline of economics is particularly interesting, in part because both disciplines claim to be the descendants of the ideas of Smith, Hume, and John Stuart Mill. Whereas political economy, which was rooted in moral philosophy, was from the beginning very much a normative field of study, economics sought to become objective and value-free.
Indeed, under the influence of Marshall, economists endeavored to make their discipline like the 17th-century physics of Sir Isaac Newton (1642–1727): formal, precise, and elegant and the foundation of a broader intellectual enterprise. With the publication in 1947 of Foundations of Economic Analysis by Paul Samuelson, who brought complex mathematical tools to the study of economics, the bifurcation of political economy and economics was complete. Mainstream political economy had evolved into economic science, leaving its broader concerns far behind.
(To be continued)
