Political economy
Political economy was, historically, an older and alternative name for the analysis of wealth and monetary policy, now called economics. Many technical economists view the two terms as synonyms, while others prefer the use of the term political economy which they see as having a wider meaning.
Political economy is also sometimes used to to mean the application of economics to the study of politics, i.e. 'the economy of polities' especially as related to the mercantalist economic assumptions of Napoleonic and earlier regimes.
The term was first widely used in the 18th Century by early economists such as the physiocrats and Adam Smith, in their critiques of such regimes of economic assumptions. The term was universally used to describe what we now know as economics until around 1870 when the term economics was coined, and brought into common use by influential neoclassical economists such as Alfred Marshall. Marshall and most other economists used both terms as synonyms, with the term political economy gradually falling out of favour in the English speaking world during the twentieth century.
Use of the term underwent something of a revival during the 1960s when it was used increasingly by the libertarian economists of the Chicago School. Political economy is also sometimes preferred by other radical groups with widely differing views, such as Post-Keynesian economists and Marxists. In green economics the term is used to refer to the infrastructure and assumptions by which living things, including human lives, are assigned a price in the human economy, and metrics which are used in measuring well-being of that population of humans.
Given the differences in political ideology and scientific methodology, the only definition of political economy may be 'those qualitative analyses which challenge the assumptions and axioms of conventional technical economics', which is concerned mostly with the matching of supply and demand curves to achieve Pareto-optimal outcomes. A good summary of these assumptions is found in Hawken, Lovins, Lovins analysis, which they call 'natural capitalism'.
In this broader sense, shared by many radical critiques of economics proper, the term refers to the legal and political factor economy of pricing choices reflected in professional ethics and regulations, building standards, legal toxicity levels, etc.. in insurance terms, 'morbidity expectations', accepted and mandated by the polity and society. Although economics proper claims to consider factors like these, most economists would acknowledge that it does so only imperfectly, if at all.
Political economy reflects the patterns of interaction between wealth and power; agents that cannot earn the desired reward in the marketplace always have the option of attempting to obtain their material objectives through organizing and attempting to bargain with their electoral support for the granting of some type of subsidy or other valuable consideration by government officials. Said another way, the application of social capital tends to distort markets in other types of capital. The political ideologies of the 20th century were largely concerned with implications of trusts, monopolies, unions and cabals of 'insiders', who could exploit their social capital against public interests:
Those on the left tend to view this complex of 'influence trading' activities as a manifestation of class interests and the inveterate tendency of govenments to use the "commonwealth" to augment the fortunes of the small but economically dominant elite at the expense of the majority of non-owners.
On the other hand, right-wing political economy focuses on individuals and the incentives that they face in deciding whether to devote their next unit of effort to market activities or to the cultivation of political influence (rent-seeking).
Viewed starkly from the perspective of technical economics, both alternatives represent potential avenues for the attainment of the decision-maker's objective, the decision will ultimately turn on the balance of marginal benefits and marginal cost. This is called "public choice theory", for the development of which Professor James Buchanan received the Swedish Bank Prize in Economic Sciences, sometimes controversially called 'the Economics Nobel'.
The management of Enron represents a case study of such choices. They could have invested their time in actually pursuing the business that they promoted to investors and employees as a good investment of their money and time. Or, with less effort, make hundreds of thousands of dollars in corporate campaign contributions (sometimes referred to in lobbyist circles as "oxygen") to a relatively small group of politicians in order to assure themselves a respectful hearing when they proposed to change the company from "your mother's utility" into a hedge fund, sans required capital reserves. They chose the latter, and the larger political economy of the United States suffered massive losses of social capital in the form of trust in business and politicians and in accounting, measurable in many billions of dollars of financial capital lost to the capital markets, and many man-years of effort put into investigations and reforms.
However, it is hard to change the assumptions underlying wealth itself - wealth by definition is against such changes. So, the rewards for purchasing influence in North America are usually perceived as higher than the rewards of genuine competitive risk-taking. The resulting pattern is a "vicious cycle" (if you happen to be a bilked employee or shareholder) of wealth used to leverage more power, and power used to increase wealth, and so on, ad infinitum - a positive feedback loop gone wild. The problem lies in the fact that, while markets can (at least in principle) operate through a variety of negative feedback mechanisms to limit these types of excesses, electoral processes depend for their efficacy in such cases on the initiative of other groups of voters to organize as a counterweight. Calls for electoral reform and the rise of green parties in North America seem to be at least partially related to the collapse of public support for speculative capital structures, and 'creative accounting' methods.
One result of public choice theory is that small groups with strong preferences on any issue will generally have the greatest degree of success in using the electoral mechanisms to obtain rewards. Examples: agricultural price supports, Social Security, trade protection. A useful term to describe this state of affairs is "concentrated benefits - diffuse costs"; a member of the interested segment of the population may count on the outcome of a single legislative act for her very livelihood, while no one really has any notion regarding their share of the cost of the annual dairy subsidy program. Therefore, bet on the dairy farmers getting their subsidies, and likewise for all small, dedicated groups pursuing assistance at the public trough. This is a special case of the general rule that a tragedy of the commons results when resources are too widely shared, particularly by people who have few values or risks in common.
Regardless of the perspective chosen, the term "political economy" implies the recognition that material well-being, and even honest methods of measuring well-being, depend not only on voluntary exchange and markets, but also on the size and structure of the government and the degree to which any agent can influence government officials so as to enlist them as confederates in obtaining for themselves additional benefits (i.e., coercive power) over and above those corresponding to the values that their offerings have in the public market.