What is Political Economy?
Political economy is a social science that studies production, trade, and their relationship with the law and the government. It is the study of how economic theories affect different socio-economic systems such as socialism and communism, along with the creation and implementation of public policy.
Different groups in an economy have different beliefs as to how their economy should be developed; hence, political economy is a complex field that covers a broad range of political interests. In simple terms, political economy refers to the advice given by economists to the government on either general economic policies or on certain specific proposals created by politicians.
Components of Political Economy
Political economics is split into two sections: Classical Political Economy and Modern Political Economy. Classical Political Economy studies the works of philosophers such as Machiavelli, Adam Smith, and Karl Marx. Modern Political Economy, on the other hand, studies the work of modern philosophers, economists, and political scientists such as John Maynard Keynes, Milton Freidman, and Friedrich Hayek.
The study of political economy is influenced by game theory, as it involves different groups competing for finite resources and power that assess which policies will provide the most beneficial results. It also relates to the capability of the economy to achieve the desired results. The study of political economy focuses on three major areas:
1. Interdisciplinary study
From an interdisciplinary standpoint, political economy focuses on economics, sociology, and political science to understand how economic systems, political institutions, and the environment affect and influence each other. The three areas in interdisciplinary study include economic models of political processes, the international political economy and how it affects international relations, and resource allocation in different economic systems.
2. New political economy
The new political economy area treats economic policies as a belief or action that must be further discussed rather than as a framework that needs to be analyzed. It unites the ideologies of classical economics and new advances in the field of politics and economics. The approach dismisses old ideals about agencies and the interest of states and markets and aims to encourage political debates about societal wants and needs.
3. International political economy
International political economy study, also known as global political economy, analyzes the relationship between economics and international relations. It uses ideas from economics, sociology, and political science. International political economy focuses on how states and institutions use global economic interactions to shape political systems.
Political Economy Behavior
Political economists are very interested in gains and losses incurred with the implementation of a certain policy. It gives them an idea as to which groups support the policy and which groups don’t. They also examine how individuals increase their utility by participating in political activity.
Capital and labor are used to influence political processes and generate policy outcomes with the most benefit. The political behavior in an economy is shaped by:
They include the interest of individuals and groups who are able to use their power to influence policy. Individuals in government tend to promote their own economic and political interests that will help them retain power. People outside the government are often more concerned with the outcome of the economic policies implemented.
Ideas are considered an important influence on policy, in addition to economic and political interests. It is assumed that individuals are self-seeking and rational and that they are unable to assess the outcomes of all the choices available to them.
Ideology allows an individual to decide what they should do in order to remain consistent with their basic values and beliefs. Incorporating ideology into economic models allows some political action to be guided by factors other than self-interest. Some people want to enter politics simply because they want to make a change in the world.
There are political rules that include the Constitution and define how leaders are chosen and how a new policy can be implemented. Institutions help structure incentives facing individuals and groups within the economy.
Political Economy Theory
The modern economist’s theories are split into three ideologies, namely:
The liberal ideology stems from the concept of labor and exchange and the use of land, labor, and capital to produce durable goods. Liberal economists believe that economics can benefit everyone and that society can progress with the improvement in the standard of living.
They think that the wants of the community rather than of individuals are most important for decision-making. They also believe in equal opportunity for everyone and are concerned with the structure of civil society.
Marxism states that inequality is bad, and wealth is generated from labor and exchange. It does not support the private ownership of resources, which it believes leads to inequality and only favors the needs of the elite and not of the whole society.
3. Economic nationalism
This is the belief that the state possesses all the power and that individuals should work to make use of the economic benefits. The ideology states that the government should control all resources and that individuals are ignorant and cannot create a cohesive society without a strong state.
Thus, political economy provides us with an understanding of how a country and household are managed and governed by considering both the political and economic factors associated with each.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: