Economics And Political Economy

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 endeavoured 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.

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 the 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 behaviour is rational and is aimed at maximizing benefits for himself. Although ostensibly a value-free exercise, such economic analysis often implicitly assumes that policies that maximize the benefits accruing to economic actors are also preferable from a social point of view.

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 favour 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.

National And Comparative Political Economy

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.

From the 1930s Keynesianism dominated not only domestic economic policy but also the development of the post-World War II Bretton Woods international economic system, which included the creation of the International Monetary Fund (IMF) and the World Bank. Indeed, Keynesianism was practiced by countries of all political complexions, including those embracing capitalism (e.g., the United States and the United Kingdom), social democracy (e.g., Sweden), and even fascism (e.g., the Nazi Germany of Adolf Hitler). In the 1970s, however, many Western countries experienced “stagflation,” or simultaneous high unemployment and inflation, a phenomenon that contradicted Keynes’s view. The result was a revival of classical liberalism, also known as “neoliberalism,” which became the cornerstone of economic policy in the United States under President Ronald Reagan (1981–89) and in the United Kingdom under Prime Minister Margaret Thatcher (1979–90). Led by the American economist Milton Friedman and other proponents of monetarism (the view that the chief determinant of economic growth is the supply of money rather than fiscal policy), neoliberals and others argued that the state should once again limit its role in the economy by selling off national industries and promoting free trade. Supporters of this approach, which influenced the policies of international financial institutions and governments throughout the world, maintained that free markets would generate continued prosperity.