Political economy is the branch of social science which studies the inter-relationships between political and economic processes. This academic discipline aims to explain the economic phenomena through governments' decisions both at domestic and international level. Originally, political economy theory emerged in order to explain the organization of production in emerging capitalist states. In 1987, Peter Groenewegen wrote that the term ?political economy,? first appeared in 17th century France, where Antoine de Montchretien (1575 to 1621) wrote Treatise on Political Economy. The first English economist to use the term was James Steuart (1712 to 1780) in his book An Inquiry into the Principles of Political Economy.
The meaning of the term ?political economy,? has evolved over time. In the 18th and 19th century, it was used to designate what is now known as economics. At that time scholars held the view that economics and politics were inseparable. Political economy was discussed in detail in the works of philosopher John Locke (1632 to 1704), the economist Adam Smith (1723 to 1790) and social scientist Karl Marx (1818 to 1883). In his book An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith postulated that when individuals pursue their own ends, they can work for the general welfare of the community. In Principles of Political Economy with Some of their Applications to Social Philosophy(1848), John Stuart Mill (1806 to 1873) highlighted the close relationship between political economy and social philosophy.
The study and understanding of political economy was marked by the use of the term laissez faire,, where state intervention is reduced to the minimum and private players are left to act with minimal, if any, interference. The laissez faire doctrine calls for regulatory restrictions, taxes and tariffs to be minimized. Adam Smith did not use the term laissez faire, but used the metaphor the "invisible hand," to describe the involvement of government and the role of economic self-organization. The theory of political economy has been significantly influenced by the founders of modern socialism and communism, Karl Marx and Friedrich Engels (1820 to 1895), and in particular their ideas of class struggle, which was developed as a response to laissez faire capitalism. In Outlines of Political Economy, Engels said that, "Political economy came into being as a natural result of the expansion of trade, and with its appearance elementary, unscientific huckstering was replaced by a developed system of licensed fraud, an entire science of enrichment."
In the late 19th century, the term economics replaced political economy in its broader use and economists drew a dividing line between economics and political science. Political economy therefore began to encompass the effects of globalization, and issues such as immigration of labor, energy security and global warming. Therefore, political economy draws heavily on environmental studies, anthropology, history, psychology and international relations.
By the 21st century, political economy analysis became used for improving state aid effectiveness. As it bridges the traditional scopes of politics and economics, it can reveal the underlying interests or incentives for phenomena. Political economy tools can play a key role in risk mitigation and ensuring that donors avoid harmful practices. The contemporary theory of political economy develops through different approaches to the study of economy and political reality. For example, international political economy (IPE), also known as global political economy, is a discipline which focuses on international relations and their link with political economy. The evolution of the international politic environment has attached further weight to IPE. Furthermore, the role of the World Trade Organization, the World Bank and the International Monetary Fund is becoming more important. The IPE also examines the economic repercussions of political conflicts.
Another movement in political economy is the new political economy, an interdisciplinary theory which transgresses the traditional boundaries in social science. While trying to combine the classical approach of Smith and Marx, this discipline relies on novel analytical methods. Another theory, positive political economy, investigates how political constraints determine economic outcome. This theory is based on the methodology of microeconomics. It studies rational decisions within political and economic institutions. Positive political economy is more analytical than conventional approaches in the field, and it relies heavily on empirical data.