Political economy approach states that politics and economics are intertwined as politics affects economic outcomes in a variety of ways, for example the ability of the state to preserve law and order in which property rights are protected, process of planning etc. Economical factors also play an important role in political outcomes, for example – political parties contest elections by promising to increase growth, reduce inflation etc. As per President Clinton rightly recognized that the economy shaped the state affairs.
In globalization economic factors determine political outcomes.
The term political economy implies that disciplinary separation of politics from economics is ultimately unstable. Almost every level of politics is intertwined with economics. Political factors are crucial in determining economic outcomes and economic factors are crucial in determining political outcomes.
Examples of political factors in determining economic outcomes – Politics affect economic outcomes in variety of ways ranging from the ability of the state to ensure a framework of public order in which property rights are protected and contracts are upheld to the capacity of government to regulate the economy or even exert direct control over economic life through planning and nationalization. Similarly economic factors also impact political outcomes. Political parties for instance compete for power by promising to increase in economic growth, reduce inflation, remove poverty etc. President Clinton recognized election results are often determined by the state of the economy, the government wins elections when the economy booms but are likely to be defeated during recessions or slumps.
History of Political economy approach
It originated in the West in Adam Smith’s “Wealth of Nations” (1776). Smith considered political economy as a branch of science of a statesman or legislator. Other examples are David Ricardo’s “Principle of political economy and taxation”, Karl Marx’s economic and philosophical manuscripts, JS mill’s “Principles of political economy”.
The east political economy can be traced to ancient India. Kautilya’s Arthashastra is considered the first book on it. Most important political obligation of the state is to secure material well being. Thus, Political economy is the study of the interaction of politics and economics. It focuses on the relationship between States and markets. Political economy encompasses a variety of perspectives and approaches. For example, political economy may focus primarily on the responsibility of the state with regard to the economy. In this sense it considers issues such as implication of state intervention, for growth and prosperity and the respective strengths of the state and market as a means of distributing wealth. Alternatively political economy may focus on ways in which economic factors affect political decision making. In this sense it is concerned with issues such as the political influence of business groups and the extent to which global markets serve as a constraint on national government. However at a deeper level political economy encompasses a range of competing traditions.
The most important of this traditions are as following –
- State centric Political Economy
- Classical and Neoclassical Political Economy