What Is Political Economy?

How does politics affect economic outcomes? This question has been asked probably as long as people have been interested in economics itself. Ž From Adam Smith’s Wealth of Nations in 1776 or perhaps the Physiocrats . even earlier until at least John Stuart Mill’s Principles of Political Economy in 1848, what we now call ‘‘economics’’ was in fact generally referred to as ‘‘political economy.’’ This terminology in large part reflected the belief that economics was not really separable from politics. This was more than an administrative classification of disciplines; it arose from the widespread view that political factors are crucial in determining economic outcomes. Hence, as a discipline economics historically viewed political forces not only as influencing economic outcomes, but often as a determining influence. With the division of economics and political science into distinct disciplines, economists abstracted from political and institutional factors. The desire for methodological progress and for a more rigorous basis for economic analysis were important motivations in this separation. The development of neoclassical economics stressed optimization by consumers and firms subject to well-defined constraints and a market environment,