Political Economy Theory

Studies on political economy theory are now commonly referred to as International Political Economy (IPE). The gradual shift in paradigm from studying the politics of economic relations, the political relations between different nation states in framing their respective economic policies, has largely been the result of globalization and the emergence of a rapidly integrated and interconnected world. [br]

Studies on political economy theory are now commonly referred to as International Political Economy (IPE). The gradual shift in paradigm from studying the politics of economic relations, the political relations between different nation states in framing their respective economic policies, has largely been the result of globalization and the emergence of a rapidly integrated and interconnected world. [br]

The origin of the term “Political Economy” dates back to the period when it was used to study the way production was carried out in countries born out of the new capitalist system. More specifically, it was the relation between the production system and law, customs and the government. Theories of political economy were used to study the production, distribution and consumption of goods and services and their effective management in a country or a government system.

In the 18th century, the term underwent a major change when the “Labour Theory of Value” came into being, brushing aside theories of the Physiocrats who claimed “Land” to be the source of all wealth. Thus, the theory of profits on land which was up till now only a pattern of distributing wealth accrued from land in a capitalist system framework and collecting rents on land, changed, giving way to the theory of political economy.

The word Political Economy is the coming together of two Greek words “polis”(city or state) and “oikonomos”(one who manages the household). This explains the modern definition that political economy is the relationship between economics and politics in nation states or across different nation states.[br]

The theory of political economy now draws heavily on the subject of economics, political science, law, history and sociology or different closely related branches of economics to explain the politico-economic behaviour of a country. By the 19th century, economics took over the field of political economy in which axiomatic methods and fundamental techniques of mathematics were used to understand the functioning of the economy. But as mentioned earlier, the social science of political economy has not lost its weight in today’s world where international trade and finance, and bilateral trade agreements can be analyzed using the logic of International Political Economy. This branch mainly draws on Marxian liberalism and realism from the theory of Political Science and Rational Choice assumption and also Game Theory from the field of advanced economics.

For example, free trade between countries or among many countries in a particular region is the result of economic and political considerations. Countries may undertake free trade agreements to promote sale of goods between them which will result in increased export earnings. It may also lead to specialization on the lines of “comparative advantage” and large scale production with falling costs. The benefits of the economies of scale can also be reaped through this process.

In this situation, the theory of “Positive Political Economy” investigates how observed differences in institutions affect economic and political outcomes in various economic, social and political systems. These institutional differences might arise in the polity of a respective economy or any other structural differences in the system. Political Economy which formerly rested on:

• Adam Smith-  An Inquiry into Nature and Causes of the Wealth of Nations (1776)

• David Ricardo-On the Principles of Political Economy and Taxation (1817)

• John Stuart Mill- Principles of Political Economy with some of their Applications to Social Philosophy (1848)

• William Stanley Jevons-The Theory of Political Economy (1871) has come a long way from the “invisible hand” of Adam Smith as a discourse on Capitalism, the theory of “rent” of David Ricardo, the “social philosophy” aspect of J.S. Mill and the “utility as the origin of value” put forward by W.S Jevons.

The theory of political economy now encompasses a wide range of subjects from anthropology to history from psychology to human geography and from law to ecology. The theories of International Political Economy, if applied properly, can lead to the solution of issues such as immigration, environmental degradation, AIDS control and other developmental issues pushing Third World Countries into the low level equilibrium trap. The theory can also effectively and efficiently handle the issues of Intellectual Property Rights and trade liberalization in this globalised world.

The political economy theory is one of the most comprehensive theories in the world which can become a successful tool in combating the complex and serious issues threatening to nullify the bounties of liberalization and globalization.