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Political economy a comparative approach, 3rd edition

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Political Economy
Third Edition

Barry Clark

Copyright © 2016 by Barry Clark
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without
prior permission in writing from the publisher.
Library of Congress Cataloging-in-Publication Data
Names: Clark, Barry Stewart, 1948– author.
Title: Political economy : a comparative approach / Barry Clark.
Description: 3rd edition. | Santa Barbara, California : Praeger, [2016] | Includes bibliographical references and index.
Identifiers: LCCN 2015044996 | ISBN 9781440842726 (hardcover : alk. paper) | ISBN 9781440843266 (ebook) | ISBN
9781440843433 (pbk. : alk. paper)
Subjects: LCSH: Comparative economics.
Classification: LCC HB90 .C52 2016 | DDC 330—dc23
LC record available at http://lccn.loc.gov/2015044996
ISBN: 978-1-4408-4272-6 (hardcover)
ISBN: 978-1-4408-4343-3 (paperback)
EISBN: 978-1-4408-4326-6










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Chapter 1

Politics, Economics, and Political Economy
Politics and Economics
The Revival of Political Economy

Chapter 2

The History of Political Economy
Origins of Political Economy
Classical Political Economy
The Radical Extension
The Conservative Response
Neoclassical Economics
Modern Political Economy

Chapter 3

The Classical Liberal Perspective
Architects of Classical Liberalism
Principles of Classical Liberalism
Classical Liberalism Today
An Assessment of Classical Liberalism

Chapter 4

The Radical Perspective
Architects of Radicalism
Principles of Radicalism
Radicalism Today
An Assessment of Radicalism

Chapter 5

The Conservative Perspective
Architects of Conservatism

Principles of Conservatism
Conservatism Today
An Assessment of Conservatism
Chapter 6

The Modern Liberal Perspective
Architects of Modern Liberalism
Principles of Modern Liberalism
Modern Liberalism Today
An Assessment of Modern Liberalism

Chapter 7

Government and the Market
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 8

Inflation and Unemployment

The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 9

Poverty and Inequality
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 10

Labor and Industry
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 11

Minorities and Discrimination
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective

The Modern Liberal Perspective

Chapter 12

The Political Economy of Gender
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 13

Education and Culture
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 14

Pollution and the Environment
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective
The Modern Liberal Perspective

Chapter 15

International Trade and Development
The Classical Liberal Perspective
The Radical Perspective
The Conservative Perspective

The Modern Liberal Perspective

Chapter 16

Science, Ideology, and Political Economy

Economics as Ideology
Rejoinders from Economists
The Science of Political Economy
Selected Bibliography


Political economy was the original social science. Theorists such as Adam Smith, John Stuart Mill,
and Karl Marx developed broad visions of the social system. Not until the latter half of the 19th
century did political economy splinter into economics, political science, sociology, social history,
social psychology, and social philosophy. The motives for this reorientation were mixed. By
partitioning the study of human behavior and society into narrower subdisciplines, social scientists
hoped to emulate the analytical power and precision of the natural sciences. However, ideological
motives also played a role in the disintegration of political economy. The all-encompassing visions
of Smith, Mill, and Marx revealed conflict and tension in society. As political resistance to free
markets mounted in the mid-19th century, social scientists hoped to resolve divisive political issues
by adhering to logic and factual data to establish a body of knowledge from which public policy
could be derived.
Proponents of each of the new social sciences recognized the importance of defining the scope and
method of their discipline to establish clearly demarcated boundaries. As the most immediate heir to
the legacy of political economy, economics held the greatest potential for emulating natural science

because its scope was confined to behaviors most amenable to observation and measurement. The
political, social, cultural, historical, and psychological dimensions of human existence were
relegated to other disciplines, while economists focused on the individual pursuit of material wellbeing in the market. The assumption of individual rationality and the use of money as a yardstick for
measuring cause and effect enabled economists to construct an impressive body of theory.
Yet, modern economics often elicits skepticism from the general public and from other social
scientists. Criticism is directed toward its simplistic assumptions about human behavior, its focus on
material and pecuniary interests, its blindness to social relationships, and its esoteric jargon, graphs,
and mathematics. Simultaneously, many social scientists tacitly proclaim their admiration of
economics as they increasingly borrow concepts, theories, and methods of analysis from the so-called
dismal science.
These conflicting attitudes are evident even among economists. On one hand, economics has been
labeled the “queen of the social sciences,” and economists have extended their scope of analysis to
include issues ranging from government and law to marriage and family life. Yet, underlying this
hubris is a caldron of internal dissension. In addition to the expected attacks by heterodox economists,
various Nobel Prize winners and respected scholars have expressed qualms about the direction in
which modern economics is moving. The focus on mathematics and theoretical rigor, they charge, has
rendered much of contemporary economics irrelevant to real-world issues, as revealed by the fact
that most of the economics profession failed to foresee the financial collapse of 2008 and the ensuing
Great Recession. Despite the increasing elegance of economists’ models and statistical techniques,

consensus on how to resolve key social issues remains as elusive as ever. A question arises, how can
a discipline in such internal disarray merit emulation by other social scientists?
The answer to this paradox lies in the allure of science. Scientific analysis carries tremendous
weight in settling intellectual disputes and formulating public policy. In the social sciences, the
quality of scholarship is often judged by its resemblance to the physical sciences, and no other social
science has been able to match the rigor and elegance of economic theory. Economists have been
successful in large part because their simplistic assumptions and narrow focus permit them to borrow
mathematical techniques from the physical sciences.
Historians, political scientists, sociologists, and psychologists have been unable to achieve a

single scientific paradigm within their respective disciplines. Economists, however, formed such a
consensus from the 1950s to the early 1970s, and their advocacy of Keynesian policies propelled
them into positions of influence at the highest levels of government. Yet, the breakdown of the
Keynesian consensus during the 1970s and economists’ inability to converge on a new paradigm have
diminished the scientific status of economics even as other social scientists increasingly rely on its
reputed scientific models and methods.
The quest for a science of economics has not been futile. The sophistication with which empirical
data are gathered and analyzed, the construction of elaborate macroeconomic models, and the
application of microeconomic theory to decision making have all been impressive. Yet, the public
image of economics remains clouded. If economists are indeed scientists, then citizens expect the
same expertise and objectivity exhibited by engineers or medical professionals. When economists
pronounce widely divergent assessments, forecasts, and policy prescriptions, public reaction ranges
from skepticism to disdain. However, economists disagree not because they are incompetent but
because they are humans who embody the conflicting values present in modern societies.
The claim that value judgments underlie economics does not necessarily imply that economists
consciously seek to advance their personal visions of the good society. For the most part, economists
are committed to scientific research in which the facts are permitted to speak for themselves.
However, values enter into economics even before research commences. Values affect the choice of
issues to be investigated, the theoretical concepts to be used, and the selection of variables to be
measured. Although the scientific method of controlled experimentation is designed to keep values out
of research, this method has limited applicability in economics, where the laboratory is human
society with its complex interaction of innumerable and often unmeasurable variables.
Economists may deny or suppress ideological disputes within their profession for several reasons.
First, the reasoning and conclusions of economists lose the aura of scientific authority if they reflect
the same unresolved value conflicts confronting all citizens. Most economists view themselves as
social scientists seeking to objectively analyze and improve the workings of the economy. Any
admission of value commitments might undermine their status as experts possessing higher forms of
Second, economic education is transformed when alternative values are introduced into the
classroom. The principles and applications of microeconomics and macroeconomics that now occupy

a substantial portion of the curriculum can no longer be treated as the whole of economic wisdom.
Students face the challenge of grasping several competing perspectives from which to understand the
economy, and professors can no longer rely on their own mastery of a single theoretical approach if
students are to be fully exposed to the breadth of economic thought.

Finally, many economists suppress the ideological dimensions of their discipline because they
believe that ideological debate can have no resolution. Without scientific appeals to objective
evidence, disagreements may degenerate into open conflict. If economics were perceived as merely
sophisticated ideology, authoritative decisions by policy makers could be replaced by chaotic
struggles for power among competing interests.
Despite these concerns, maintaining the myth of value-free economics poses corresponding
dangers. First, economics embodies ethical judgments that would be controversial if made explicit.
When these judgments are introduced into policy under the guise of science, one set of values prevails
without public debate, violating the principles of a democratic society.
Second, in the realm of economic education, students may gain impressive technical sophistication
while remaining naive about the values underlying their knowledge and skills. Lacking this
awareness, students believe they have acquired a genuinely scientific technique for analyzing social
issues and making policy recommendations. Those students who become professional economists or
policy analysts may be baffled when their scientific prescriptions are regarded by others as simply
one viewpoint among many.
Third, the effort to minimize public dissent by maintaining the scientific status of economists’
expertise reflects a low opinion of citizen participation in democratic societies. By promoting one set
of values and portraying other values as merely “special interests,” economists narrow the scope for
popular input into political decision making. Citizens biased by personal interests are portrayed as
incapable of making responsible choices in political matters. However, by sealing important
decisions from democratic input, policy makers offer little incentive for citizens to develop
knowledge and to engage in public dialogues concerning competing visions of the good society.
Moreover, scientific analysis of social issues contains an inherent bias. Policy makers relying on
scientific methods inevitably focus on observable and quantifiable aspects of an issue while deemphasizing or ignoring intangible or ethical considerations. The method of science tends to limit the

scope of analysis to that which can be measured.
This text provides a balance to the currently dominant focus on scientific technique in economics
education. Integrating economic analysis with material from history, political theory, sociology,
psychology, and ethics reveals the underlying value commitments fueling debates over public policy.
Social science cannot be value free, but the values underlying various theories and techniques can at
least be made evident and open to discussion.
The purpose of textbooks is to present a body of knowledge nearly universally accepted within a
particular academic discipline. In the case of political economy, however, even the most basic terms
and principles are subject to debate. The variety of perspectives in political economy dictates a
comparative approach to the subject. In this text, four perspectives—Classical Liberal, Radical,
Conservative, and Modern Liberal—are covered. Political economy is introduced in the first two
chapters; the next four chapters are devoted to the theorists and ideas associated with each of the four
perspectives. Chapters 7 through 15 cover major issues in modern political economy and, for each
issue, present the analyses and policies offered by each perspective. Finally, Chapter 16 examines the
roles of science and ideology in political economy.
The contending perspectives struggling for dominance in political economy represent dramatically
different visions of the good society. Debates over economic and political issues are ultimately based
on these visions, and citizens should be aware of and consider the value commitments underlying

alternative policies before choosing among them.



Chapter 1

Politics, Economics, and Political Economy

In all the political systems of the world, much of politics is economics, and most of economics is politics.
Charles Lindblom
Economics does not usefully exist apart from politics.
John Kenneth Galbraith
There is no such thing as a purely economic issue.
Milton Friedman

As a young student of economics, I was frequently asked two questions. I could easily deflect the
question about where the stock market was headed by replying that I was majoring in economics, not
finance. But when asked about the meaning of economics, I simply reverted to the textbook definition
—the study of the efficient allocation of scarce resources among competing ends. With eyes glazing
over, the persistent questioner might then ask about the meaning of the term allocation. I would again
rely on my textbook knowledge, explaining that resource allocation resolves the three basic economic
questions—what goods shall be produced, how are they produced, and for whom are they produced?
Imagine my surprise when I stumbled across a book in the university library titled Politics—Who
Gets What, When, How.1 If politics and economics were both concerned with resource allocation,
then where was the dividing line between the two social sciences? Not until graduate school did I
realize that politics and economics are so intertwined as to preclude a full understanding of one
without the other. At that time, my conclusion was not shared by many economists and political
scientists who had a professional stake in clearly demarcating and defending their areas of expertise.
Even today, an introductory text in economics has virtually no overlap with an introductory text in
political science.
Politics and economics were not always so sharply segregated. Beginning in the 17th century,
writers used the term political economy to describe efforts to understand the relationship between
commerce and government. At that time, most European governments were actively involved in
promoting economic development through tariffs, regulations, subsidies, and even government-owned
enterprises. No person seeking to understand this “mercantilist” system would have conceived of

separate analyses of politics and economics because commercial activity was firmly embedded in a
web of political and cultural constraints and supports.
By the latter part of the 18th century, however, the expansion of commerce created a dramatic shift
in the balance of political power, as merchants and manufacturers successfully challenged
government policies restraining the pursuit of wealth. Their efforts gained intellectual legitimacy with
the appearance of Adam Smith’s book The Wealth of Nations in 1776. Smith argued that government
intervention was impeding economic growth and that competition in a free market would generate
greater prosperity than could ever be attained through government management of commerce.
Adam Smith (1723–1790) was among the first theorists to perceive the contours of an emerging
new society in which the market was becoming disembedded from previous political and cultural
constraints. For the first time in human history, it was now possible to conceive of an economy
distinct from the rest of society. Smith and subsequent “classical” political economists devoted
themselves to analyzing this new capitalist system in which the individual pursuit of self-interest was
a more powerful force in shaping society than the dictates of monarchs, aristocrats, and religious
leaders. They searched for an internal logic to the operation of free markets that, once understood,
would reveal natural laws (e.g., the laws of supply and demand, the law of diminishing returns, and
the iron law of wages) that directed economic activity just as surely as the law of gravity affected
physical objects. Since these natural laws governing the economy were believed to be constant and
immutable, any attempts by government to impede their operation would be futile at best and more
often counterproductive. With some minor reservations, the classical political economists concluded
that markets operate best when left free of government regulation except for a legal system to define
and protect property rights.
Yet, within half a century, the consequences of free markets were generating intense political
opposition. In much of Western Europe and particularly England, workers found themselves toiling
for up to 16 hours per day for subsistence wages. Women and children worked alongside men in
dangerous, unhealthy factories. Tenant farmers were evicted from land to make way for large-scale
agriculture. Clergymen attributed moral decline and dehumanization to the uprooting of people from
their traditional ways of life. Many of the skills of artisans and craftsmen were rendered obsolete as

production processes were reduced to routine motions easily performed by any worker. Cities were
polluted and filled with slums and beggars, some of whom had been maimed by industrial accidents.
Growing social tensions and class conflict manifested themselves in riots, strikes, crime, and
demands for the right to vote.
By the mid-19th century, the discontent with capitalism led social reformers to initiate efforts to
regain some political control over commercial activity. Economic anthropologist Karl Polanyi
(1886–1964) described a “double movement,” in which the initial separation of the market from
political constraints was followed by a backlash aimed at restoring the primacy of politics over the
market.2 Governments enacted new laws to address issues such as child labor, length of the workday,
occupational health and safety, pollution, education, and product safety.
Politics and economics were once again becoming more obviously entwined, but some of the most
influential political economists of that era remained committed to the notion that the economy could
be understood as an arena of human activity separate from politics and culture. Beginning in 1871,
they developed mathematical models and theoretical arguments aimed at a more sophisticated
demonstration of Adam Smith’s intuition that free markets yield optimal results for society as a

To reinforce their separation of politics and economics, these “neoclassical” theorists rejected the
term political economy in favor of the simpler label economics. The field of economics would focus
exclusively on the operation of markets, leaving analysis of the remainder of society to political
scientists, sociologists, and anthropologists. To ensure that political and cultural elements would not
intrude on the field of economics, neoclassical economists refused to consider some of the most
significant determinants of market outcomes. They assumed individual preferences to be “given,”
thereby ignoring the socialization process shaping human desires. Technology was also a “given,” so
economists need not consider the effects of culture and public policy on the development of
technology. Another “given” was the pattern of ownership of productive resources, allowing
economists to disregard the historical role of power and coercion in the acquisition of property
rights. Neoclassical economists reduced individual behavior to rational calculations of self-interest,
thereby eliminating all other human motivations and goals. Finally, to exclude any consideration of

power relationships between individuals or groups, they assumed that this isolated market was
perfectly competitive. With many small buyers and sellers, no individual consumer or producer had
any control over prices, and all participants were equally powerless in the face of competitive market
In effect, neoclassical economists artificially separated politics and economics by assuming away
all the political, social, cultural, and psychological factors affecting economic activity. By making
highly unrealistic assumptions, they created an imaginary free market and a fictitious homo
economicus (economic man), who made rational choices based purely on calculations of personal
costs and benefits. Having eliminated the political, social, and cultural dimensions of human
existence, economists were able to construct impressive theoretical models bearing remarkable
similarity to 19th-century physics. These models demonstrated that the actions of rational persons in
free markets would lead to a stable economy with full employment and maximum value of output.
Mainstream economic theory continued to uphold the partition between politics and economics for
much of the 20th century. From that perspective, economics and politics were separated along three
dimensions—(1) the primary actor or decision-making unit, (2) the goal being pursued, and (3) the
institutional arena within which decisions are made. Economics dealt with the choices of individual
consumers and producers pursuing prosperity (i.e., higher income and wealth) through the market,
while politics consisted of decisions by groups ranging from local communities to nations aimed at
promoting justice (i.e., defining and protecting property, civil, and human rights) through government.
However, this proposed clear distinction between economics and politics cannot withstand closer
scrutiny of each of these three dimensions.
Primary Actors
One way to distinguish between economics and politics is to focus on who makes decisions—
individuals make economic choices, whereas political choices are the result of collective decision
making by groups. This distinction is based on the origins of the terms “economics” and “politics.”
Economics derives from the Greek words oikos, meaning household, and nomos, meaning principle
or law. As the principles of household management, economics deals with efforts by individuals to
maximize attainment of their private goals using whatever resources they own. Economizing behavior
can be directed toward any goal and practiced in any institutional arena. Reflecting this approach,

economics is sometimes defined as the science of rational choice to use scarce means to maximize the
achievement of specified ends.
Politics, in contrast, derives from the Greek word polis, meaning community or society. According
to Aristotle, the public life of the polis is the arena within which true freedom and human
development occur. Although economic activities are essential to human survival, they fail to engage
the uniquely human capacities for cooperation and collective decision making based on reasoned
argument, dialogue, persuasion, and compromise. Political decisions are made by groups or
representatives of groups and, once made, are binding on all members of the group.
The attempt to distinguish between economics and politics by reference to the primary actor is
problematic for two reasons. First, most individuals function as members of groups ranging from
families to communities, corporations, and nations. Unlike Robinson Crusoe marooned on a desert
island, their decisions are based not only on their private interests but also on the collective interests
of their groups. The purpose of morality is to provide individuals with ethical guidelines for
balancing self-interest with the collective interest. To be a good parent, good neighbor, good
employee, or good citizen, individuals need to demonstrate a commitment to the well-being of the
groups to which they belong. Their behavior could be interpreted as economic by arguing that they
have simply incorporated the well-being of others into their private calculations of self-interest.
Alternatively, their actions may be considered political insofar as they sometimes forego self-interest
to promote the collective interests of the group.
Second, the boundary separating the private sphere of economic activity and the public sphere of
politics is porous. On one hand, the collective choices of democratic nations reflect the aggregation
of private individual preferences as registered through voting and poll-taking. Moreover, individuals
and corporations are able to influence public choices through lobbying, campaign contributions, and
control over the selection of candidates for public office.
Conversely, the private interests of individuals are shaped by the quality of public life. Humans
form their identities, meanings, and purposes within a social context. Private individual preferences
are not entirely private; they are also learned through social interaction within groups. Given this
interaction between public and private spheres, the distinction between individual and group as
primary actors is not fully sustainable.

Primary Goals
The distinction between economics and politics based on their respective goals fails to recognize
that prosperity and justice are inextricably linked and potentially mutually reinforcing. A prosperous
society is more likely to be perceived as a just society because the range of individual choice and
opportunity is broadened. Conversely, a just society fosters prosperity by providing equal
opportunity, fair rewards, and the security of individual rights to motivate production and
accumulation of wealth.
Governments seek to promote prosperity as well as justice. In fact, governments occasionally
violate individual rights to achieve greater prosperity by invoking the principle of eminent domain to
use land for public purposes. Similarly, markets are associated with justice as well as prosperity in
the sense that rewards are linked to productivity rather than traits such as race, religion, or ethnicity.
The history of economic thought is replete with debates either confirming or challenging the justice of
market-determined distributions of income and wealth. In summary, both economics and politics are

concerned with promoting human well-being by maintaining prosperity and justice.
Institutional Arenas
Perhaps the most common distinction between politics and economics situates economics within
the market and politics within government. From this perspective, exchanges of commodities and
money in the market constitute economic activity, while elections, campaigns, and lawmaking occur
in the political arena. Although both politics and economics may be concerned with the allocation of
resources, government has the power to make an “authoritative allocation” binding on all citizens,
while market allocation is accomplished through the price system’s ability to coordinate the choices
by individuals to buy or sell particular commodities.3 However, this distinction is not sustainable
because government takes on characteristics of a market when mutually beneficial exchanges occur
between politicians and self-interested persons or groups. For example, politicians provide
particular programs or laws in exchange for votes or campaign contributions. Indeed, with the
possible exception of establishing a constitution, government activity can be viewed as a series of
exchanges in a political market.
Conversely, the power to command is not confined to government, and the market, therefore, is not

devoid of politics. A significant amount of market activity is pursued by large groups of people
working for corporations. The organization of the modern corporation is typically a hierarchical
power structure, creating an “island of command in a market sea.”4 Corporate executives have the
power to formulate goals and rules binding on all employees. Just as governments punish those who
violate the law, employers rely on sanctions such as dismissal or demotion to maintain control over
workers. To the extent that corporations are successful in suppressing competition, they gain market
power (i.e., the ability to control the prices of their products). In addition, many market activities
have public consequences (e.g., pollution and plant closings) and therefore become political issues of
concern to the nation as a whole. Finally, the more unequal the distribution of income and wealth
generated by the market, the greater the power of employers to command the obedience of employees.
Based on these observations, sole reliance on the separate institutional arenas of market and
government does not provide an adequate basis for differentiating between politics and economics.
Politics and economics cannot be clearly distinguished; these terms simply provide two
perspectives on the process of coordinating human interaction to provide society with goods and
services. Both are concerned with organizing human activity, marshaling resources, resolving
conflict, allocating burdens and benefits, and providing for the satisfaction of human wants and needs.
However, politics and economics are not the same; although individual/group, prosperity/justice, and
market/government may be interrelated, they are not identical. The separation of economics and
political science as academic disciplines serves the purpose of advancing knowledge through
specialization of scholarly activity. Yet, despite their important contributions, each discipline needs
the other to develop a more robust and comprehensive understanding of human affairs. Fortunately, in
recent decades, political economy has once again gained a legitimate place in both academic research
and the curriculum.
Political economy never disappeared despite the efforts by neoclassical economists to exclude

politics from economics. Indeed, the argument can be made that all economic theory contains a
political element.5 The neoclassical effort to separate politics from economics was dictated by the
desire to demonstrate that free markets yield an optimal allocation of resources. The implication is

that government should not interfere with the market, but to suggest that laissez-faire is the
appropriate role for government is just as much a political stance as is the claim that government
should actively intervene in the economy.
Although neoclassical economics continues to dominate the mainstream of economic theory, its
influence has declined substantially. It was challenged in the 19th century by historical economics in
Germany, socialist economics in France, and institutional economics in the United States. In the 20th
century, the Russian Revolution and the Great Depression led to a resurgence of interest in Marxian
economics. Keynesian economics explicitly recognized a significant role for active government
policies in maintaining a healthy market economy. In contrast, a school of thought known as Austrian
economics rejected the neoclassical assumptions of rational decision makers and perfectly
competitive markets, but defended free markets for their ability to stimulate innovation and growth.
Finally, economists working in Latin America, Asia, Africa, and the Middle East proposed theories
of economic development that challenged the neoclassical focus on free markets.
Beginning in the 1960s, a resurgence of political economy developed along three broad paths. The
first applies neoclassical economic theory to understand political and cultural institutions. “Public
choice theory” assumes that politicians, bureaucrats, and voters are rational maximizers of selfinterest and views the political process as a market in which these individuals engage in mutually
beneficial exchanges. A related but more recent approach called “new institutional economics”
explains political and cultural institutions as arising from the rational, self-interested choices of
individuals formulating rules to coordinate their activities more efficiently.6
In sharp contrast, theorists following a second path portray the economy as a political process in
which the formation of individual preferences, the development of technology, the pattern of resource
ownership, and the structure of markets are all determined by social and political processes in which
power differentials determine the outcomes. Power arises from unequal holdings of assets,
differences in information, unequal access to government, and suppression of competition. Included in
this second path are post-Keynesian economics, social economics, and post-Marxian theory. These
varieties of political economy challenging the dominance of neoclassical economics are referred to
collectively as “heterodox economics.”7
According to a third form of contemporary political economy, economic and political problems
are symptoms of cultural and moral decline. From this perspective, the neoclassical assumption of
autonomous individuals maximizing their self-interest is merely a description of the disintegration of

traditional institutions such as families, churches, neighborhoods, and communities. Without these
“mediating structures” to restrain self-interest and harmonize social relations, politics degenerates
into a clash of private interests and the economy deteriorates.8
The presence of so many schools of thought within modern political economy attests to the absence
of a dominant paradigm guiding research into the interaction between government and the market. As
the foregoing survey suggests, the very definitions of politics and economics are contested, and the
boundary separating them is a matter of ideological dispute. However, underlying the various
approaches is a consensus that the interdependence between politics and economics dictates a more
holistic method of analysis, encompassing the broad matrix of economic, political, and cultural

institutions through which humans coordinate their interaction.
Both the market and government are sufficiently flawed institutions to require a balancing of
political and economic processes to sustain a healthy society. In a positive sense, each institution
serves to complement weaknesses of the other. However, the market and government also generate
powerful forces reverberating throughout society with potentially damaging consequences. Since the
market and government interact with each other, efforts to analyze them separately will yield only
partial, and therefore distorted, understandings of the social system.
The complex connection between politics and economics increases as industrial societies mature.
The Great Depression and two world wars transformed issues such as growth, income distribution,
and stability from economic into political issues. More recently, a growing recognition of the public
consequences of private decisions (e.g., environmental degradation, increasing inequality, and urban
blight) is causing the public sector to encompass an ever-larger realm of human activity. Given the
conflict over renegotiating the appropriate boundaries between public and private sectors, the holistic
approach offered by political economy is increasingly relevant in analyzing and responding to the
problems confronting modern societies.
1. Harold D. Lasswell, Politics—Who Gets What, When, How. New York: Meridian Press, 1958.
2. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Times , 2nd ed. Boston: Beacon Press,

3. For elaboration on the concept of “authoritative allocation,” see David Easton, A Framework for Political Analysis. Englewood
Cliffs, NJ: Prentice-Hall, 1965.
4. Charles Lindblom, The Market System: What It Is, How It Works, and What To Make of It . New Haven, CT: Yale University
Press, 2001, p. 78.
5. See Gunnar Myrdal, The Political Element in the Development of Economic Theory, reprint edition. Piscataway, NJ:
Transaction Publishers, 1990.
6. New institutional economics is presented in Douglas C. North, Institutions, Institutional Change and Economic Performance.
New York: Cambridge University Press, 1990; Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective
Action. New York: Cambridge University Press, 1990; and Rudoph Richter, Essays on New Institutional Economics. New York:
Springer, 2015.
7. For more on heterodox economics, see Ingrid Rima, A Primer on Heterodox Economics. New York: Routledge, 2016; Frederic
Lee, A History of Heterodox Economics: Challenging the Mainstream in the 20th Century. New York: Routledge, 2009; and JulienFrancois Gerber and Rolf Steppacher, eds., Towards an Integrated Paradigm in Heterodox Economics: Alternative Approaches to
the Current Eco-Social Crisis. New York: Palgrave Macmillan, 2012.
8. The concept of “mediating structures” is detailed in Peter L. Berger and Richard J. Neuhaus, To Empower People: The Role of
Mediating Structures in Public Policy, 2nd ed. Washington, DC: American Enterprise Institute, 1996.

Barma, Naazneen H., and Steven K. Vogel, eds. The Political Economy Reader: Markets as Institutions. New York: Routledge,
Basu, Kaushik. Prelude to Political Economy: A Study of the Social and Political Foundations of Economics. New York: Oxford
University Press, 2003.
Kuttner, Robert. Everything for Sale: The Virtues and Limits of Markets. New York: Alfred A. Knopf, 1997.
Nooteboom, Bart. How Markets Work and Fail, and What to Make of Them. Northampton, MA: Edward Elgar, 2014.
Persson, Torsten. Political Economics: Explaining Economic Policy. Cambridge, MA: MIT Press, 2002.
Postell, Joseph, and Bradley C. S. Watson. Rediscovering Political Economy. Lanham, MD: Lexington Books, 2011.
Przeworski, Adam. States and Markets: A Primer in Political Economy. New York: Cambridge University Press, 2014.
Rodrik, Dani. Economics Rules: The Rights and Wrongs of the Dismal Science. New York: W. W. Norton, 2015.
Sandel, Michael. What Money Can’t Buy: The Moral Limits of Markets. New York: Farrar, Straus and Giroux, 2012.
Stillwell, Frank. Political Economy: The Contest of Ideas. New York: Oxford University Press, 2011.

Weingast, Barry R., and Donald A. Wittman, eds. The Oxford Handbook of Political Economy. New York: Oxford University Press,

Chapter 2

The History of Political Economy

A study of the history of opinion is a necessary preliminary to the emancipation of the mind.
John Maynard Keynes
He who knows only his own side of the case knows little of that.
John Stuart Mill

Current political and economic issues cannot be fully understood without some knowledge of the
historical evolution of both institutions and ideas. Although the history of political economy remains
obscure for most citizens, many of its ideas have been incorporated into the collective wisdom of
society. In the words of John Maynard Keynes, “practical men who believe themselves to be quite
exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in
authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a
few years back.”1 Before beginning a survey of the history of political economy, a word of caution is
in order. All history is subject to interpretation, and the history of ideas is particularly controversial.
No single interpretation of the history of political economy commands universal agreement among
The period between the 14th and 19th centuries witnessed a “great transformation” in Western
Europe as the feudal economy of the Middle Ages gradually transformed into capitalism. 2 The newly
emerging market economy provided opportunities for the expression of individual aspirations
previously suppressed by the laws and moral precepts of church, state, and community. Although
political and religious leaders struggled to maintain control over society by placing limitations on the

accumulation and use of property, the growing desire of individuals to free themselves from social
constraints led to diminishing popular support for medieval institutions.
Along with changes in technology and commerce, new ideas were emerging. The Renaissance of
the 14th century paved the way for the scientific inquiries of Copernicus, Galileo, Bacon, and
Newton. Another impetus for change came from the Protestant Reformation initiated by Martin Luther
in Germany. By the early 18th century, the Age of Reason, or Enlightenment, had arrived, and with it
came a rejection of the medieval view of society as a divinely ordered hierarchy in which each

person had a proper role and purpose. The new worldview was based on the autonomous individual
and the human capacity for rational thought.
The Enlightenment was most prominent in France, where thinkers such as Voltaire, Diderot,
D’Alembert, and Condillac sought to demolish superstition and tradition by subjecting all aspects of
human existence to the scrutiny of reason. These philosophers believed that most human problems
were attributable to poorly structured institutions and to uncritical acceptance of traditional authority
emanating from church and state. They blamed prejudice, intolerance, and emotions for suppressing
the human capacity to envision and construct a better society. The leaders of the Enlightenment were
optimistic about the power of reason to clear away the debris of past oppression and error, leaving an
open path for continual social improvement.
To liberate the human capacity for reason from the shackles of existing beliefs and traditions,
Enlightenment thinkers demanded a critical reassessment of all social, political, and religious
institutions. Only then could humans choose rationally without the taint of prejudice, habit, or
superstition, and they would presumably choose to abolish all institutions failing to promote the
enlightened interests of mankind. Leaders of the Enlightenment called for nothing less than a total
restructuring of society.
Science rose to prominence during this period because it seemed to offer a method for
distinguishing between truth and superstition. By revealing the universal laws that govern nature and
society, science would liberate mankind from both material deprivation and social oppression.
Although the scientific method was initially used to understand the natural environment, it
subsequently was applied to human existence, first to understand the functioning of the human body

and then to investigate human behavior and social institutions. As Enlightenment thinkers began to
discern predictable regularities in human interaction, they anticipated the construction of a science of
society that would come to be called political economy.
The term political economy was introduced in 1616 by French writer Antoyne de Montchretien
(1575–1621) in his book Treatise on Political Economy. The first known English usage occurred in
1767 with the publication of Inquiry into the Principles of Political Economy by Sir James Steuart
(1712–1780). These early political economists sought to develop guidelines and offer policy
recommendations for government efforts to stimulate commerce. Markets were still relatively
undeveloped at the time, so governments took on significant responsibilities for opening new areas
for trade, offering protection from competition, and providing control over product quality. The ideas
and policies developed for this transitional stage between feudalism and capitalism came to be
known as mercantilism. The early political economists thought that active involvement by government
in the economy was necessary to promote economic prosperity.
By the late 18th century, however, the prevailing attitude toward government changed
dramatically. Many manufacturers and merchants perceived government not as a beneficent director
of economic activities but as a major obstacle to the pursuit of wealth. Their hostility toward
government was based on changing economic and political conditions. A flourishing market economy
required that producers have access to resources in the form of easily purchasable commodities. In
addition, both producers and consumers needed freedom to pursue their interests relatively
unencumbered by social customs and political authority. Both these conditions were rapidly
materializing in England by the second half of the 18th century.
The formation of markets for resources proceeded along three lines. First, as landowners evicted

tenant farmers from the land in order to graze sheep to supply wool for the emerging textile industry, a
market for cheap and mobile labor developed. Second, the accumulation of wealth through piracy,
looting, and early successes in commerce created a mass of financial capital available for investing
and borrowing. Third, the confiscation and subsequent sale of church property and public land that
had previously been available for common use created a market for land. As for political freedom,
the combination of the Magna Carta, the English Civil War, and the Glorious Revolution of 1688

greatly diminished the power of the monarch and the aristocracy. With these changes in place, the
market became a dynamic engine for the production of wealth, far overshadowing the power of
government to dispense privileges and grant protection. The future was clearly discernible; the
market would become the dominant institution for organizing society.
The subsequent evolution of political economy over the next two centuries is depicted in Figure
2.1. The remainder of this chapter and the next four chapters are organized around this diagram.
Figure 2.1
The History of Political Economy

Adam Smith (1723–1790), a Scottish professor of moral philosophy, was fascinated by the
market’s potential for promoting both individual freedom and material prosperity. Although he was
not the first person to advocate laissez-faire policies by government, his book The Wealth of Nations
(1776) presented the case for free markets with such wisdom that it formed the basis for a school of
thought known as classical political economy. In addition to Smith, its leading proponents included
Thomas Malthus (1766–1834), David Ricardo (1772–1823), Nassau Senior (1790–1864), and Jean
Baptiste Say (1767–1832).

Classical political economists were both optimistic and pessimistic about the future of capitalism.
They anticipated that the market economy would generate both increasing wealth and individual
freedom without the need for supervision by church or state. In this sense, classical political economy
is linked with the Enlightenment, demonstrating that when the shackles of religious and political
restrictions are removed, individuals will prosper and society will remain orderly.
Yet, lurking beneath this rosy vision was impending disaster. Adam Smith repeatedly suggested
that the market could not work its magic indefinitely. Malthus and Ricardo were even more
pessimistic. With population growing rapidly and the available supply of land relatively fixed, they
predicted an inevitable future of subsistence living for the vast majority of the population. Landlords
would prosper as they received ever-larger rents due to the increasing demand for land on which to

grow food, but capitalists’ profits would dwindle as they were forced to pay higher wages so that
workers could afford to buy increasingly expensive food. Eventually, profits would be insufficient to
provide capitalists with either the incentive or the means to expand production, and the entire
economy would settle into a gloomy “stationary state” with no further growth.
Despite these predictions of widespread poverty and an end to growth, classical political
economists remained largely committed to laissez-faire. The future would be grim, but attempts by
government to intervene would only worsen the situation because government could control neither
the scarcity of land nor the human tendency to overpopulate. The only relief would come from
depopulation caused by plagues, famines, and wars, or from trade with other countries possessing
plentiful land and cheap food. In the meantime, the stationary state could be delayed by keeping
production costs as low as possible, meaning that any efforts to raise wages or regulate businesses
would harm the economy.
As classical political economy veered toward pessimism, Radical theorists continued to defend
the Enlightenment vision of continual progress through the rational reconstruction of society. From the
Radical perspective, the classical political economists were failing to carry out the mission of the
Enlightenment. Although the power of the state and church had been successfully challenged, the
power of property owners had actually increased due to the elimination of most government
restraints. In the spirit of the Enlightenment, Radicals demanded that every aspect of society be
subjected to criticism to see whether it could withstand the test of reason. The rights of property
owners were viewed as no more sacrosanct than the authority of church or state.
Central to the Radical call for a reconstruction of society was a strong commitment to
egalitarianism. Until all persons directly participated in the formation of the institutions governing
their lives and shared in the benefits derived from those institutions, society’s institutions would
necessarily appear arbitrary and oppressive. Radicals condemned private property for breeding
selfish interests conflicting with the common good of society. In a private property system,
individuals have opposing interests and social cohesion disintegrates as the owners of property
oppress those with little or no property. Sharp inequalities in property holdings make the poor
vulnerable to exploitation as the threat of starvation coerces them to work for subsistence wages.
Radicals also condemned private property for alienating individuals from any sense of community

or control over their work. Relying on the optimism of the Enlightenment, they concluded that humans
could join together to collectively restructure the institutions governing their social interaction.

Radicals envisioned a classless society in which free individuals would live in harmony with each
other in their work, their communities, and their government. Such a society would be egalitarian and
communal, with citizens sharing a broad range of common interests, including a commitment to
maintain appropriate conditions for the development and security of every person. From the Radical
perspective, genuine freedom requires access to sufficient resources for well-rounded human
development and hence can be secured only when the community as a whole controls productive
Examples of early Radical thinkers include William Godwin (1756–1836) in England, Thomas
Paine (1737–1809) in the United States, and Marquis de Condorcet (1743–1794) in France. These
writers were opposed not so much to the principle of private property as to the excessive
concentration of ownership that restricted the opportunities and freedom of the majority of the
population. In the early 1800s, writers such as Robert Owen (1771–1858) in England and Charles
Fourier (1772–1837) and Henri de Saint-Simon (1760–1825) in France popularized the idea of
eliminating private property. These “utopian socialists” formulated detailed plans for small
communities based on shared ownership of property. Owen actually put his ideas into practice,
moving to the United States with a group of followers to establish a community in Indiana called New
Harmony. Hundreds of other small experiments with communal living occurred during the 19th
century in both Europe and North America. Growing apprehension over the effects of
industrialization and modernization undoubtedly spurred this interest in alternative forms of society.
The loss of tradition, the squalor of large cities, and conditions in the early factories persuaded many
people that fundamental change was required to improve the quality of human existence.
The influence of Radical thought was heightened immeasurably by Karl Marx (1818–1883), a
German philosopher and political economist who constructed an impressive theoretical analysis of
capitalism by weaving together classical political economy, the ideas of the German philosopher G.
W. F. Hegel (1770–1831), and the communal vision of the utopian socialists. Building on the
pessimistic theories of the classical political economists, Marx developed an elaborate theoretical

argument that capitalism would eventually crumble and be replaced by a society in which the means
of production were communally owned and operated. This new society, Marx claimed, was
incubating within capitalism and its birth would coincide with the death of the parent. Thus, unlike the
utopian socialists who sought to turn their backs on capitalist society, Marx portrayed capitalism as
the essential precondition for a new and better organization of society. In capitalist factories, workers
were acquiring the technical knowledge, cooperative skills, and sense of solidarity that would enable
them to revolt and establish a communal society.
After Marx’s death, his ideas inspired several distinct political traditions. Some Radical theorists,
including Georgi Plekhanov (1857–1918) in Russia and Karl Liebknecht (1871–1919) and Karl
Kautsky (1854–1938) in Germany, upheld Marx’s belief in the historical inevitability of communism.
However, when a proletarian revolution failed to appear by the early 20th century, Russian theorists
V. I. Lenin (1870–1924) and Leon Trotsky (1879–1940) introduced into Marxism the notion of a
“vanguard party” of intellectuals who would lead the workers in the struggle for socialism. This
strand of Marxism served as the theoretical basis for the Soviet Union.
In Western Europe and the United States, a different revision of Marx’s ideas was formulated by
theorists such as Edward Bernstein (1850–1932) in Germany, Sidney and Beatrice Webb (1859–
1947 and 1858–1943) in England, Jean Jaurès (1859–1914) in France, and Eugene Debs (1855–