The study of political economy originated in the 18th century with the attempt to connect prosperity not to the mere accumulation of wealth, as theories of mercantilism had it, but to a nation’s productive capacities. Initially a branch of moral philosophy, political economy took as its purview state policy, law, geography, production, class, and human sentiments—all to develop a systematic account of the creation and distribution of wealth. The narrower discipline of economics has since supplanted political economy in the popular and academic imaginations, but the issues to which political economy addresses itself remain very much real and deeply, overwhelmingly, consequential. To help us suss out the meaning of political economy and the insights it uniquely provides, as well as give an account of the disciplines’ chief debates (on what points, exactly, do Karl Marx and Adam Smith disagree?) and intellectual future, we sat down with BISR political economist Raphaële Chappe, whose course The Making of the Market: an Introduction to Political Economy starts Wednesday, February 28th.
What is political economy, and how are we to distinguish it from the disciplines of political science and economics? Is political economy the forebear, and political science and economics its children? Is political economy therefore outmoded?
Economics comes from the Greek oikos (meaning “home”) and nomos (meaning “law” or “order”), so literally the ordering of the home. This is something Aristotle wrote about. Yet as a discipline political economy originated much later (in the 18th Century) with the publication of Adam Smith’s The Wealth of Nations in 1776, even arguably a bit earlier with a group of French enlightenment thinkers such as Quesnay and Turgot, the so-called Physiocrats. They are the first to meaningfully explore the topic of what makes a nation wealthy—Smith’s masterful treatise begins with this very question. We could say that political economy looks at wealth at the state level, and not just the home.
Smith’s answer that the source of national wealth lies in human labor and productivity (responding to the Physiocrats’ narrow focus on agricultural labor), not the accumulation of precious metals or trade surpluses, is a key insight that influenced the work of Ricardo through Marx with their subsequent development and refinement of the labor theory of value. Though The Wealth of Nations begins with issues of production and labor productivity, namely how society produces a surplus, it quickly shifts the focus to distributive considerations—that of the surplus allocation between workers (wages), owners of capital (profit rate), and land (rent). What are the laws that govern the return on labor and capital? What is the role played by institutions and the state in this regard? Political economy is deeply concerned with issues of production, consumption and distribution—issues that of course far from being outmoded are today more relevant than ever.
In the late 19th Century, proponents of a more scientific approach (Marshall, Jevons) started to study these issues through mathematical formalism. The term of “economics” began to replace that of “political economy” as the field saw its transformation from a branch of moral philosophy to a scientific discipline (how economics came to emulate physics is well analyzed in Philip Mirowski’s More Heat Than Light, but the extent to which modern-day economics is truly scientific, and in what sense, is a topic that can be debated). I’ll quote the noted French economist Thomas Piketty: “This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.” Well, the tradition found in political economy does not shy away from asking these more complex questions.
Political economy as a practice appeared with the advent of capitalism. Is political economy essentially the study of capitalism?
Political economy has capitalism as its main object of study because it has been the dominant mode of production and surplus allocation since the beginning of the Industrial Revolution. By capitalism, we typically mean a production sector that relies on the workers’ own ability to sell their labor (as opposed to prior systems with a different organization of labor, such as hunter-gatherer societies, slavery, feudalism, etc.), and the allocation of resources through a decentralized market-based price system based on supply and demand and the private ownership of the means of production. But it is not a monolithic system and is continually evolving, with different flavors (some less appealing than others!) and stages. So political economy has a lot to offer in terms of thinking about whether economic and political domination is exercised by industrial or financial institutions; the national or global nature of the capitalist class; the different ways in which capital can accumulate; the existence of crises and contradictions, etc. This said there is no reason that political economy should be limited to the study of capitalism, and in fact it does concern itself with alternative production models and distributive mechanisms. BISR recently ran a course on market socialism, an interesting combination of market-based production with a radically different redistribution and ownership mechanisms.
Both Adam Smith and Karl Marx are considered political economists. In the popular conception, Smith is the evangelist of capitalism, Marx its great critic. How, as political economists, did the two arrive at divergent conclusions? Or, do Marx and Smith have more in common intellectually than is typically imagined?
It is true that the Wealth of Nations is often thought to stand as the theoretical basis for capitalism, and Marx its greatest critic. This is broadly accurate, but let’s begin with some caveats. The portrayal of Smith as an uncritical advocate of free-markets is oversimplified. Smith did expect that capitalism would produce some unpleasant side effects, and saw a role for government intervention to manage them. For example, long anticipating Taylorism, Smith did note capitalism’s long-term deskilling potential for the working class, wherein the worker might become “as stupid and ignorant as it is possible for a human creature to become.” This is worth pointing out.
Marx saw himself as providing a critique of political economy, leveraging the work of Smith and David Ricardo but reaching radically different conclusions. Marx’s analysis starts with a commitment to (and refinement of) Smith’s (and Ricardo’s) labor theory of value. The major theoretical disagreement has to do with its implications for wealth distribution, ownership, and the stability of the system writ large. For Smith, the labor theory of value does not preclude the legitimacy of capital to attract a share of surplus. If capital plays a role in the production process, its owner is entitled to a return. But for Marx, capital is nothing but “congealed labor” and cannot exist as a distributional category separate from labor. The labor embedded in capital must be remunerated solely in the period in which the labor was performed. The extraction of surplus value to provide a return on capital is fundamentally necessary to capitalism. Marx’s entire economic analysis flows from this initial position. Another major difference is the trajectory of capitalism in the long-run. Marx saw capitalism as inherently unstable, with capital earning an ever growing share of national income, leading to the concentration of wealth in ever fewer hands and a falling rate of profit. Smith on the other hand saw the process of capital accumulation as a virtuous cycle feeding economic growth and prosperity.
Interestingly, some of the long-term implications of Marx’s ideas are not terribly different than the conclusions of, say, Ricardo (who unlike Smith does directly address the long-term trends of the process of capital accumulation). Both believed that the dynamics of capital accumulation would lead to a growing share of national income and concentration of wealth in ever fewer hands (capitalists for Marx, landowners for Ricardo). There would be more to say about Marx’s big hypothesis of the falling tendency of the rate of profit, itself a topic of controversy, and whether Marx’s analysis is so different from Smith’s.
The course title—“The Making of the Market”—implies that markets, so often taken to be a kind of “natural” phenomena, are human, historical creations. What follows from a conception of markets as social artifacts?
In microeconomics market are modeled as ethereal self-regulated systems governed by the detached and immutable laws of physics. The understanding of markets as human historical creations leads to the realization that markets are inherently embedded in a social and political reality. If so they are structured by specific actors, in ways that serve certain interests. If so market outcomes are not inevitable, they are simply engineered social realities that can be changed or reversed.
Among the works we’ll be reading is Thomas Piketty’s Capital in the 21st Century, which caused a stir on its publication in 2013. In what direction, do you think, is contemporary political economy as a discipline going? What’s the exciting work being done, and what are the issues with which its grappling?
The distribution of wealth is one of today’s most pressing concerns, as evidenced by the level of public debate that followed the publication of Piketty’s Capital in the 21st Century. Piketty invited us to cast doubt on the seemingly established view that capitalism, on the whole, put us on the long-term trajectory of reducing inequality. World capitalism is arguably experiencing its worst ever crisis: in addition to massive concentration of wealth and capital, we are facing the specter of ecological collapse, the rise of ethno-nationalism, the potential displacement of labor markets through artificial intelligence, and the Uberization of the economy. In the age of neoliberalism, capitalism seems to have entered a new qualitative transformation, where the logic of human capital and commoditization has invaded every aspect of our lives. The challenge for contemporary political economy is to analyze this transformation.
To investigate further the subject discussed above, join us for Raphaële’s upcoming course The Making of the Market: an Introduction to Political Economy, which starts Wednesday, February 26th at Rosa Luxemburg Stiftung.