"Political economy" is a term often used as a synonym for "economics," however the term may be used in a more nuanced context to refer to the relationship between a country's economic production, its buying and selling patterns and its law, customs and government. Contemporary research on political economy seeks to understand how political forces affect the choice of a government's economic policy.
Origins of the Term
The concept of political economy developed in the 18th century in moral philosophy. As the study of the economics of particular states -- or polities -- political economics symbolized the complex relationship between trade and government policy. In the late 19th century, the generic term "economics" replaced political economy in everyday usage. In modern times, however, the term has seen something of a resurgence. In the late 1970s, academic literature on economics began to examine how and why governments and political planners choose various economic models and how those models impact domestic and international conflicts.
Political economy is an interdisciplinary field drawing upon economics, law and political science to explain how political institutions and economic systems influence one another. The three main forms of economic systems -- capitalist, socialist and mixed -- dominate the field of study. Capitalism is the form of economics most familiar to Westerners. In Capitalism, assets are privately owned and goods and services are sold on the market for profit. Socialist systems, on the other hand, rely on common or cooperative ownership of the means of production. Mixed economic systems take elements of both Capitalism and Socialism so that both the state and private sector direct parts of the economy.
Marxism and Game Theory
Many political economists use a Marxist lens to examine the interplay between government and monetary policy. Marxism is a belief that the struggle between social classes shapes economics and political power. Marxists generally advocate that there should be something approaching a classless society. Coupling Marxism with some of the common ideas in game theory -- including rational-choice assumptions and government's failure to have a positive impact on its citizens -- can help to explain policy issues such as economic regulation, market protection and company monopolies.
Sociologists, anthropologists and historians often use political economy to describe how politics and economic values affect and grow out of regional and local governments. A country's political economy may have direct impact on small social groups and social networks, but in turn those groups influence broader social and economic capital. For example, Detroit's once-booming automobile industry had a deep impact on national economic and political policy when it came to things such as export, trade and outsourcing in developing countries.
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