Political Economy

The term “political economy” was first used in the 18th century to define the study of the relationship between production, buying, and selling as related to foreign law, customs, and government.  It originated from the economic philosophies of Adam Smith at the University of Glasgow where it developed into the more widespread “economies of states polities” and was finally shortened to the term “political economy.” 

The modern day study of political economy looks at the interaction of political and economic behaviors and tends to challenge traditional economic models and the scenarios of economists who don’t take real-time politics into consideration when they make economic forecasts.  Having taken a back seat to traditional economics when leading nations were more powerful, the study of political economy has resurfaced with the advent of a newly emerging and unpredictable global economy.  This is because many traditional economic models falsely rely on the fact that everyone in the modern world will follow the rules of what is traditionally considered to be fair trade.

Fair trade is now becoming impossible to define as countries with different philosophies become stronger players in a global market.  Historically, more dominate countries have been able to dictate the rules of production, distribution and prices by way of bilateral trade agreements with weaker countries, thus being able to control the flow of goods and services in a predictable pattern.  Weaker countries could either accept the agreement or not, but really had little bargaining power.

The nineties began to change all of that.  World economic leaders started to encourage free trade to give weaker countries more leverage when exporting goods and services.  This was partly because natural resources obtained from established world powers were becoming depleted.  Countries that previously weren’t relied on for trade because they were considered politically unstable were suddenly becoming the trading partners of strong countries with deep roots in their political and social beliefs.

This situation has brought a new set of challenges for economists and financial advisors; because they now had to take these different economic behaviors into account as part of the economic equation in order to predict an accurate economic outlook.  This includes looking at a country’s political institutions, laws, and economic systems that can be capitalist, socialist, communist, or mixed.  These are important factors to look at, because with free trade, countries that would have originally been at a disadvantage with bilateral trade agreements no longer compromise their political beliefs when they trade in a free market economy.

Long-established forecast methods rely on political powers to stay constant in their trading practices and foreign currencies to remain unmanipulated.  Because many economic scenarios are also conditional to fuel prices remaining constant, this tends to make highly traded commodities like oil also much less easy to understand. A recent case in point where traditional economic theories failed to foresee a problem with trade was between the United States and China.  The US generated a huge trade deficit with China partly because they did not take into account that the Chinese Government would monetarily subsidize its manufacturing plants and flood the American market with products that could not be made in the US for the same low price.  Because the US is part of the free market, it could not refuse or place tariffs on the goods and services delivered from China.  This is the type of situation where the study of political economy can prevent this type of unbalanced trade from happening.  Understanding the different economic philosophies of foreign countries is the best way to maintain healthy and balanced trading in the global market place.

Posted in Economic Growth & Development