The discipline of political economy views economics and politics as fundamentally inseparable, and today it is more relevant than ever.
In 2013, the world was rocked by the release of Thomas Piketty’s Capital in the Twenty-First Century, a book that made arresting claims about rising levels of global income inequality and the tendency toward an ever-greater concentration of wealth. Perhaps lost in all the excitement was one of Piketty’s fundamental assumptions: that classical economics does not provide sufficient tools for uncovering and addressing these important problems. The principal shortcoming of economic analysis, as the argument goes, is that it presumes a separation of economy and politics that does not meaningfully represent reality. This is in contrast to political economy, Piketty’s preferred tool kit, which assumes that politics and economics are fundamentally inseparable and that the relationship between states and markets is key to a rounded comprehension of the world.
Piketty’s is not a new argument but in fact a very old one. Adam Smith and many other founding fathers of economics believed themselves to be studying questions of political economy. From the late 1700s, when Wealth of Nations was written, until the early 1900s, scholars were more likely to study political economy than pure economics (see figure 1). The assumed separation of politics and economics is very much a 20th-century phenomenon; by the 1930s economics had achieved the clear predominance over political economy that we recognize as normal today. But political economy never went away as a discipline. In fact, the University of Toronto continued to house the disciplines together in its Department of Political Economy until as late as the 1980s, and Carleton University continues to have an Institute of Political Economy to the present day.
While he may be marching at the head of the parade, Piketty is certainly not alone in arguing in support of a reinvigorated discipline of political economy. In the late 20th and early 21st centuries, political economy has seen gradual increases in its popularity as a topic of research, while economics has comparatively sputtered. There are a number of explanations for the relative decline of economics, including intellectual insularity and a lack of predictive ability. Yet what is perhaps the discipline’s most significant shortcoming is how the assumption of free markets — the idea that a system of decentralized and unfettered economic relationships achieves its own stability— continues to take centre stage in its analysis.
The unencumbered free market as envisioned by the likes of Friedrich Hayek and Milton Friedman is elegant in its simplicity, but as a premise for real-world policy research, it relies too much on aspiration and ideology and not enough on empirical observation. Some political economists, like Karl Polanyi, have gone as far as to raise doubts about the very existence of a free market, suggesting that it is impossible to observe and probably exists only as a theoretical construct. Regardless of whether free markets do really exist, the assumption of free markets may not be an appropriate starting point for problem-oriented policy research, especially as the important policy issues of today are far from operating in free market conditions.
In 2014, for instance, the Canadian court of public opinion was asked to pass judgment on the political decisions surrounding the F-35 aircraft procurement program. More significant than any political jostling on this issue was the fundamental uncertainty about estimates of costs, capabilities and timelines for the planes; cost estimates alone ranged from $45.8 billion to $126 billion, a margin of error of $81 billion. This is because the markets for military equipment are so heavily intertwined with, and inseparable from, political affairs. There are often a dozen different government departments that set parameters for contractors providing military equipment, and these parameters touch on nearly every element of the end product’s supply chain. Suppliers are chosen through opaque processes that often have more to do to with secondary political considerations than with strategy, economics or good business practice. This problem cannot be untangled by economics alone.
This condition is hardly limited to matters of military spending; politics and economics are in collision across a spectrum of issues covered by public policy. As issues of housing affordability gain increasing prominence in the public consciousness, it’s almost impossible to imagine what a free market system for municipal land use could look like, even in theory. Indeed, there are few contemporary policy areas more determined by dirigisme than municipal zoning, building and housing policy. Sadly, the affordability of cities is too often overlooked by policy scholars because it falls between disciplinary boundaries, not neatly fitting into the traditions of political science or economics. If political economy really is resurging, we should see evidence of the discipline engaging with municipal policy issues and seeking to tackle problems of housing affordability.
Like housing affordability, many issues of political economy are bread-and-butter issues that are important to scholars as well as the public at large. With the rise of populism, political economy issues are coming to the fore of public policy once again. Donald Trump, for one, made international trade, or perhaps more accurately the localized impacts of international trade, a key issue of the American presidential election. Despite the insistence of classical economics that a rising tide raises all boats and that free trade brings a net benefit to society, many Americans simply do not feel that the previous 30 years of globalization has improved their lot in life. If we accept Harold Lasswell’s definition of politics as “who gets what, when and how,” it seems clear that the absence of partnership between economics and political science is much to blame.
None of this is to suggest that political economy is an appropriate approach for all issues of public policy; the discipline must resist the temptation to be all things to all people. But as cracks start to emerge in the consensus of laissez faire economic management, the public policy community must be prepared to pick up the pieces and use all the tools at its disposal to move forward. This means taking on emerging public issues in spite of the artificial boundaries that have been erected between politics and economics. Political economy may very well be able to reassert a leadership position in the world of public policy, or at least a position of much greater significance than in recent memory. Indeed, if political economy teaches one thing, it would be that history is long and filled with surprises.
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