Though this branch of “social philosophy,” as many would call it, has been replaced by the term “economics” using axiomatic principles and fundamental mathematical techniques to understand the functioning of the economy as a whole, “political economy” remains one of the essential tools for analyzing trends in the current global economy.
Political Economy can also be defined as an academic discipline that deals with the relationship between the individual and the society and between the markets and the state, using techniques from economics, politics and sociology. Yet another definition of Political Economy is that it is an interdisciplinary branch of study which combines branches of economics, politics and law in order to understand how political institutions, its environment and capitalism influence each other.
The term ‘political economy’ is derived from the combinations of the Greek words “polis” (city or state) and “oikonomos” (one who manages the household). The term can thus be used to analyze how countries are managed in a system where both economic and political factors are at work. Political Economy was the original term for studying the various acts of production, buying and selling and their relations with the laws, customs and governance. It was meant to study the conditions under which production was organized in the new-born capitalist states. In a way, it could be named as branch of social science dealing with the production and distribution of goods and services and their management. Political Economy assumed the definition of the study of economies of polities or nation states in the 18th century. Gradually, the concept of the Physiocrats’ that land was the source of all wealth was superimposed by the labour theory of value supported by John Locke, Adam Smith and Karl Marx. Notably, Political Economy incorporates liberal, realist, Marxian and constructivist theories from political science. Starting from the 19th century, “economics” or the study of the economy replicated the term “political economy”. The latest version of the term i.e. International Political Economy (IPE), among other things, studies the effect of domestic monetary and fiscal policies on international trade and finance in relation to a specific country. Extensive use of rational choice assumptions and game theory are an integral part of the study of IPE in today’s world.
The main pillars of the doctrine of Political Economy are noted economists like Adam Smith, David Ricardo John Stuart Mill and Karl Marx. Adam Smith in his famous book “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) shows how individuals furthering their own ends can lead to the general welfare of society by the virtue of the “invisible hand,”. David Ricardo in his “On Principles of Political Economy and Taxation” (1817) focuses on rent which he argues might grow as population increases. John Stuart Mill in his “Principles of Political Economy with some of their Applications to Social Philosophy” (1848), stresses on the umbilical linkage between political economy and social philosophy.