# Political Economy Definition, History, and Applications

> **Definition**
>
> Political economy is a branch of social sciences that studies the relationship between politics and the economy and how each influences the other.

## What Is Political Economy?

Political economy is a social science that focuses on the relationship between politics and the economy. It examines how politics and the economy influence each other. Political scientists study how economic theories like [capitalism](https://www.investopedia.com/terms/c/capitalism.asp), [socialism](https://www.investopedia.com/terms/s/socialism.asp), and communism work in the real world. These ideas can be studied theoretically and as they are used in the real world. Public policy created and implemented derives from these economic theories. Political economists study the underlying roots of these policies and their results.  

### Key Takeaways

*   Political economy involves the study of how economic theories like capitalism or communism play out in the real world.
*   Economic policy often changes due to the ideology and goals of the political party in power.
*   Political economists seek to understand how history, culture, and customs impact an economic system and vice versa.
*   Global political economy studies how political forces shape global economic interactions.
*   The rise of globalism and global trade means that the political economy of one country can impact both the economy and the politics of others.

![Political Economy](https://www.investopedia.com/thmb/sD3Knv6OynILFH--1rwC1Y_0AgE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/political-economy-2754ddb2f0cb4adeb91eb67b7849c8ab.jpg)

*— Investopedia / Zoe Hansen*

## Understanding Political Economy

Political economy is a branch of social science that studies the relationship between a nation's economy, its political landscape, and public policy and how these factors influence one another. It is, therefore, the result of the interaction between politics and the economy and is the basis of the social science discipline.

Those who research political economy are called political economists. Their study generally involves the examination through a sociological, political, and economic lens of how public policy, the political situation, and political institutions impact a country's economic standing and future.

The term political economy was widely used for the field we now call [economics](https://www.investopedia.com/terms/e/economics.asp). Adam Smith, John Stuart Mill, and Jean-Jacques Rousseau all used the term to describe their theories. Economy was substituted in the early 20th century with the development of more rigorous statistical methods for analyzing economic factors.  

> **Fast Fact**
>
> Any economic theory is a means of directing the distribution of a finite amount of resources in a way that benefits the greatest number of individuals.

## Types of Political Economy

There are several notable types of political economies: socialism, capitalism, and communism.

### Socialism

The idea behind socialism is that the production and distribution of goods and wealth are maintained and regulated by society rather than a particular group of people. Whatever is produced by society is credited to those who participate, regardless of status, [wealth](https://www.investopedia.com/terms/w/wealth.asp), or position.

Socialism aims to bridge the gap between rich and poor, eliminating the ability of individuals or groups to control the majority of power and wealth.

### Capitalism

This theory advocates profit as a motive for advancement and the ability of [free markets](https://www.investopedia.com/terms/f/freemarket.asp) to regulate and drive the economy on their own. The idea behind capitalism is that private individuals and entities are driven by self-interests—they control production and distribution, set prices, and create [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp).

### Communism

Individuals often confuse [communism](https://www.investopedia.com/terms/c/communism.asp) with socialism, but there is a distinct difference between these two theories. Communism was a theory developed by [Karl Marx](https://www.investopedia.com/terms/k/karl-marx.asp), who felt that capitalism was limited and created a big divide between rich and poor. He believed in shared resources, including property. Unlike socialism, however, under communism production and distribution are overseen by the government.  

> **Important**
>
> Political economy may draw upon sociology, economics, and political science to define how government, an economic system, and politics influence each other.

## History and Development of Political Economy

The roots of political economy as we know it today go back to the 18th century. Scholars during the period studied how wealth was distributed and administered between people. Some of the earlier works that examined this phenomenon include those by [Adam Smith](https://www.investopedia.com/updates/adam-smith-economics/) and [John Stuart Mill](https://www.investopedia.com/terms/j/john-stuart-mill.asp).

### Antoine de Montchrestien

But the term is probably best ascribed to French writer and economist, Antoine de Montchrestien. He wrote "Traité de l'économie politique" in 1615. In his book, he examined the need for production and wealth to be distributed on an entirely larger scale—not in the household as Aristotle suggested. The book also analyzed how economics and politics are interrelated.

### Adam Smith

Scottish philosopher, economist, and writer Adam Smith is commonly referred to as the father of economics and of political economy. He wrote about the function of a self-regulating free market in his first book, which was called "The Theory of Moral Sentiments."

His most famous work, "An Inquiry into the Nature and Causes of the Wealth of Nations" (commonly called "[The Wealth of Nations](https://www.investopedia.com/updates/adam-smith-wealth-of-nations/)," for short) helped shape classical economic theory. It was considered the foundation for the field of study by future economists.

### John Stuart Mill

Englishman John Stuart Mill combined economics with philosophy. He believed in [utilitarianism](https://www.investopedia.com/terms/u/utilitarianism.asp)—that actions that lead to people's goodwill are right and those that lead to suffering are wrong. He essentially believed that economic theory and philosophy were needed, along with social awareness in politics, to make better decisions for the good of the people.

Some of his work, including "Principles of Political Economy, Utilitarianism," and "A System of Logic" made him one of the most important figures in politics and economics.

## Importance of Political Economy

Political economy studies both how the economy affects politics and [how politics affect the economy](https://www.investopedia.com/terms/e/equityefficiencytradeoff.asp). As political parties come into and leave power, economic policy often changes in a country according to the ideology and goals of the party in power.  

Political changes can impact many areas of the economy, which can in turn impact elections and government policies. These areas include:

*   [Monetary and fiscal policy](https://www.investopedia.com/ask/answers/100314/whats-difference-between-monetary-policy-and-fiscal-policy.asp)
*   Food security
*   Global trade
*   Labor supply, demand, and crises
*   [Gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp)
*   Financial inequality
*   Disaster management
*   Environmental stability

As the economies of more countries become interconnected through [globalization](https://www.investopedia.com/terms/g/globalization.asp) and international trade, the politics of one country can have a strong impact on the economy of another. Understanding the relationship between political power and economic decisions in one country can help other countries predict how their economies will be impacted.

Understanding political economy can also help a country's economy become more resilient. If the government leaders in power at any given moment are forward-thinking, they can try to put laws and policies in place that create the greatest possibility for economic stability and growth, regardless of changing political power.  

> **Fast Fact**
>
> Political economy is still a widely used term that describes any government policy that has an economic impact.

## Political Economy in Academia

Political economy has become an academic discipline of its own. Many major institutions offer the study as part of their political science, economics, and sociology departments.

Political economists research to determine how public policy influences behavior, [productivity](https://www.investopedia.com/terms/p/productivity.asp), and trade. This work helps them establish how money and power are distributed between people and different groups. They may study specific fields such as law, bureaucratic politics, legislative behavior, the intersection of government and business, and regulation.

The study may be approached in any of three ways:

*   **Interdisciplinary studies:** The interdisciplinary approach draws on sociology, economics, and political science to define how government institutions, an economic system, and a political environment affect and influence each other.
*   **New political economy:** This approach studies actions and beliefs, and seeks to make explicit assumptions that lead to political debates about societal preferences. The new political economy combines the ideals of classical political economists and newer analytical advances in economics and politics.
*   **International political economy:** Also called global political economy (which is slightly different), this approach analyzes the link between economics and international relations. It draws from many academic areas including political science, economics, sociology, cultural studies, and history. The international political economy concerns how political forces like states, individuals, and institutions affect global economic interactions.

## Modern Applications of Political Economy

Modern applications of political economy involve the study of later philosophers and economists, such as Karl Marx.

As mentioned above, Marx became disenchanted with capitalism as a whole. He believed that individuals suffered under regimented social classes, where one or more individuals controlled the greater proportion of wealth.

Under communist theories, this would be eradicated, allowing everyone to live equally while the economy functions based on the ability and needs of each participant. Under communist regimes, resources are controlled and distributed by the government.

### Socialism vs. Communism

Many people confuse socialism and communism. It's true there are some similarities—notably, that both stress bridging the gap between rich and poor, and that society should relegate equilibrium among all citizens.

But there are inherent differences between the two. While resources in a communist society are owned and controlled by the government, individuals in a socialist society hold property. People can still purchase goods and services under socialism, while those who live in a communist society are provided with their basic necessities by the government.

## Is Fascism a Form of Political Economy?

Fascism can be viewed as a form of political economy because it blends political and economic principles. It is defined as a form of government that is controlled by one individual or a small group of people. Fascism extols nationalism and the rights of the nation over those of individuals. The government controls investments and industries and promotes social classes and policies that are favorable to corporations, including privatization.

## What Is the Primary Concern of Political Economy?

The main concerns of political economy are the relationship between governments and individuals, and how public policy affects society. These are determined through the study of sociology, politics, and economics.

## What Are the Characteristics of Political Economy?

Some of the characteristics or themes of a political economy include the distribution of wealth, how goods and services are produced, who owns property and other resources, who profits from production, supply and demand, and how public policy and government interaction impact society.

## Who Coined the Term Political Economy?

Adam Smith is generally considered the father of economics and of political economy. But the term is generally ascribed to French economist Antoine de Montchrestien, who wrote the book "Traité de l'économie politique," which translates to the treaty of the political economy.

## The Bottom Line

Political economy is a branch of the social sciences that examines how politics and the economy impact one another. A country's economic policy often changes when political parties change. This can impact things like monetary and fiscal policy, food security, labor crises, rising inequality, GDP, and disaster management. These changes can prompt new laws, policies, or election outcomes.

The rise of globalism and international trade means that the politics of one country can have a strong impact on the economy of another. Understanding political economy can help countries become more resilient in the face of global economic changes.

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