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Political economy is a branch of political science and economics studying economic systems (e.g. markets and national economies) and their governance by political systems (e.g. law, institutions, and government). Widely studied phenomena within the discipline are systems such as labour markets and financial markets, as well as phenomena such as growth, distribution, inequality, and trade, and how these are shaped by institutions, laws, and government policy. Originating in the 16th century, it is the precursor to the modern discipline of economics. Political economy in its modern form is considered an interdisciplinary field, drawing on theory from both political science and modern economics.
Political economy originated within 16th century western moral philosophy, with theoretical works exploring the administration of states' wealth; "political" signifying the Greek word polity and "economy" signifying the Greek word οἰκονομία; household management. The earliest works of political economy are usually attributed to the British scholars Adam Smith, Thomas Malthus, and David Ricardo, although they were preceded by the work of the French physiocrats, such as François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781).
In the late 19th century, the term "economics" gradually began to replace the term "political economy" with the rise of mathematical modeling coinciding with the publication of an influential textbook by Alfred Marshall in 1890. Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated economics for brevity and with the hope of the term becoming "the recognised name of a science". Citation measurement metrics from Google Ngram Viewer indicate that use of the term "economics" began to overshadow "political economy" around roughly 1910, becoming the preferred term for the discipline by 1920. According to economist Clara Mattei, this shift was driven by the increasing consensus of classical liberalism as natural-law; and persisted despite evidence to the contrary during the First World War. Today, the term "economics" usually refers to the narrow study of the economy absent other political and social considerations while the term "political economy" represents a distinct and competing approach.
Originally, political economy meant the study of the conditions under which production or consumption within limited parameters was organized in nation-states. In that way, political economy expanded the emphasis on economics, which comes from the Greek oikos (meaning "home") and nomos (meaning "law" or "order"). Political economy was thus meant to express the laws of production of wealth at the state level, quite like economics concerns putting home to order. The phrase économie politique (translated in English to "political economy") first appeared in France in 1615 with the well-known book by Antoine de Montchrétien, Traité de l’economie politique. Other contemporary scholars attribute the roots of this study to the 13th Century Tunisian Arab Historian and Sociologist, Ibn Khaldun, for his work on making the distinction between "profit" and "sustenance", in modern political economy terms, surplus and that required for the reproduction of classes respectively. He also calls for the creation of a science to explain society and goes on to outline these ideas in his major work, the Muqaddimah. In Al-Muqaddimah Khaldun states, “Civilization and its well-being, as well as business prosperity, depend on productivity and people’s efforts in all directions in their own interest and profit” – seen as a modern precursor to Classical Economic thought.
Leading on from this, the French physiocrats were the first major exponents of political economy, although the intellectual responses of Adam Smith, John Stuart Mill, David Ricardo, Henry George and Karl Marx to the physiocrats generally receive much greater attention. The world's first professorship in political economy was established in 1754 at the University of Naples Federico II in southern Italy. The Neapolitan philosopher Antonio Genovesi was the first tenured professor. In 1763, Joseph von Sonnenfels was appointed a Political Economy chair at the University of Vienna, Austria. Thomas Malthus, in 1805, became England's first professor of political economy, at the East India Company College, Haileybury, Hertfordshire. At present, political economy refers to different yet related approaches to studying economic and related behaviours, ranging from the combination of economics with other fields to the use of different, fundamental assumptions challenging earlier economic assumptions.
Political economy most commonly refers to interdisciplinary studies drawing upon economics, sociology and political science in explaining how political institutions, the political environment, and the economic system—capitalist, socialist, communist, or mixed—influence each other. The Journal of Economic Literature classification codes associate political economy with three sub-areas: (1) the role of government and/or class and power relationships in resource allocation for each type of economic system; (2) international political economy, which studies the economic impacts of international relations; and (3) economic models of political or exploitative class processes. Within the field of political science, there is generally a distinction between international political economy (studied by international relations scholars) and comparative political economy (studied by comparative politics scholars).
Public choice theory is a microfoundations theory closely intertwined with political economy. Both approaches model voters, politicians and bureaucrats as behaving in mainly self-interested ways, in contrast to a view, ascribed to earlier mainstream economists, of government officials trying to maximize individual utilities from some kind of social welfare function. As such, economists and political scientists often associate political economy with approaches using rational-choice assumptions, especially in game theory and in examining phenomena beyond economics' standard remit, such as government failure and complex decision making in which context the term "positive political economy" is common. Other "traditional" topics include analysis of such public policy issues as economic regulation, monopoly, rent-seeking, market protection, institutional corruption and distributional politics. Empirical analysis includes the influence of elections on the choice of economic policy, determinants and forecasting models of electoral outcomes, the political business cycles, central-bank independence and the politics of excessive deficits.
A rather recent focus has been put on modeling economic policy and political institutions concerning interactions between agents and economic and political institutions, including the seeming discrepancy of economic policy and economist's recommendations through the lens of transaction costs. From the mid-1990s, the field has expanded, in part aided by new cross-national data sets allowing tests of hypotheses on comparative economic systems and institutions. Topics have included the breakup of nations, the origins and rate of change of political institutions in relation to economic growth, development, financial markets and regulation, the importance of institutions, backwardness, reform and transition economies, the role of culture, ethnicity and gender in explaining economic outcomes, macroeconomic policy, the environment, fairness and the relation of constitutions to economic policy, theoretical and empirical.
Other important landmarks in the development of political economy include:
Because political economy is not a unified discipline, there are studies using the term that overlap in subject matter, but have radically different perspectives:
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