This document provides an overview of the evolution of political economy from the pre-classical era to modern times. It discusses early schools of thought like mercantilism and physiocracy. It then covers Adam Smith and the classical economists of the 18th century. Rival schools emerged like neo-mercantilism, institutionalism, and Marxism. The document also discusses Keynesian political economy in the 20th century and monetarist criticisms of Keynesianism. The intellectual history of political economy has included many influential thinkers and ongoing debates around the appropriate roles of government and markets.

1. EvolutionofPolitical
Economy
CHAPTER 2

2. Pre-classical Political Economy
The intellectual development
of political economy was
closely associated with its
historical background.
Beginning with the
Renaissance, the cultural and
intellectual movement aimed
to promote humanism which
lasted from the 14th to the
17th century.
Protestant Reformation,
which witnessed the splits
from and rebellions against
the established Catholic
Church in Europe in the 16th
century.

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There was a gradual but irreversible
process of consolidating the power of the
state at the expense of the Church.
In political theories, the 16th century
French philosopher and jurist Jean Bodin
(1530-1596) postulated the theory of
absolute sovereignty, which justified the
maximum centralization of power in the
hands of the secular monarchs.

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Nicollo Machiavelli (1469-1527), the Italian political theorist
who wrote the brilliant tract on statesmanship, The Prince,
proposed the separation of public and private morality.
Ruthless methods should be employed by the ruler to achieve
nobler, public ends, he stated.
Such discourse has the effect of strengthening the secular power
of the states at the expense of the power of the Church.

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In this historical movement
towards the enhancement
of the power of the nation-
state, economic ideas
aimed for the increase of
national wealth.
The representative school
of thought in political
economy in the 16th and
17th centuries was
mercantilism.

6. Mercantilist
World View
The mercantilist world-view was based on increasing the
wealth of the political unit the territory controlled by the
secular monarchs, or what we call the nation-state today.
The method of increasing this wealth was principally through
the largest possible export surplus, from which the secular
rulers could generate hard currency.

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Mercantilism hence saw international trade, rather than
increased productivity, as the most important economic task of
the government. Therefore, it urged the government to play a
stronger role.

8. Mercantilist
tools
Mercantilist advocated:
◦ Political centralization
◦ Unification of the domestic market,
◦ Protectionist measures for domestic industrial production
◦ Provision of tax exemption and subsidies for manufactures and
exports

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◦ imposition of high tariffs to discourage import
◦ acquisition of colonies to extract resources and
raw materials.
Within the domestic sphere, the state should
also centralize and regulate economic activities
to enhance political loyalty to the rulers

10. Costs of the
Mercantilism
Mercantilism, neglects the productivity, ironically fails to
generate much of wealth and prosperity.
France, the country that pursued mercantilist policies the
most, was fast becoming one of Europe's poorest countries.

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IN THE 18TH CENTURY ECONOMIST
NOTED THE FAILURE OF THE
MERCANTILISM WHICH WAS THE
STARTING POINT OF THE
PHYSIOCRACY.
THE MEANING OF PHYSIOCRACY
WAS LITERALLY RULE OF THE
NATURE.
PHYSIOCRATS HENCE WERE
COMMITTED TO THE IDEA OF
NATURAL LAW, WHICH ULTIMATELY
GUIDED ECONOMIC AND SOCIAL
BEHAVIOR.

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Another attacking point raised by the physiocrats was that the
mercantilist focus on acquiring hard currency was plainly
wrong.
National wealth was based on productivity and the bases of
such productivity should be agriculture and land
development

13. Is Mercantilism Still
Applied

14. Classical Political Economy and its Rivals
The school of thought that Adam Smith started and built is generally referred to as classical
political economy.
In many ways, Adam Smith provided the economic echo to the theme of the era: protecting
individual liberty and restraining the power of the state.

15. Continue… Adam Smith book; Inquiry into the Nature and Causes of the
Wealth of Nation celebrated individual private pursuit of interest
and happiness, which is the source of the greatest public good.
Smith Said:

16. Classical Economist Theories
In Smith’s classical political
economy government should
not repress self-interested
people, for self-interest is a rich
natural resource.
Instead, government should let
the free exchange of private
interests take place. This idea
had profound consequence in
the history of political and
economic thought.

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Classical Economist does not how ever deny the role of the
government but states three point:
◦ The duty of protecting society from violence and invasion of
other independent societies.
◦ the duty of establishing an exact administration of justice.
◦ The duty of erecting and maintaining certain public works and
certain public institutions.

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Smith was not the only scholar in the classical political economy tradition. Other eminent
scholars in the same school included Jean-Baptiste Say (1767-1832) in France, and David
Ricardo (1772-1823), Thomas Malthus (1766-1834) and John Stuart Mill (1806-1873) in Britain.

19. Rivals of
Classical
Political
Economy
mercantilism was severely attacked and almost obliterated by
Smith’s brilliant ideas, as a result, three schools emerged
those are:
◦ Neo mercantilism
◦ Institutionalism
◦ Radical political economy

20. Neo Mercantilism
Neo-mercantilism later emerged to contend with Smith’s ideas, from Friedrich
List.
List continued the earlier mercantilist worldview which prioritized the nation-
state.
Friedrich economic thought pictured economic life not as a static norm but as
a continuing process that goes through successive stages of development.

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According to List, the state had an indispensable role in facilitating
the movement from the earlier to the later stages and to the final
equilibrium between agriculture, industry and commerce.
Once Germany was unified, List was to defend high tariffs and other
protectionist measures for the purpose of developing the industrial
base of the national economy.

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Free trade, hence, was not particularly useful for an economy
in an early stage of development.
It was useful, however, for countries that were moving
towards higher stages of development.
In this way of economic thinking, List confronted Adam
Smith’s theory of free trade.

23. Institutionalism
Institutionalist criticisms were directed more towards the
neo-classical school of thought.
Institutionalism contended that ignoring society’s laws,
ethos and institutions within the neo-classical economic
inquiry restricted understanding of how political economy
actually worked.

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Institutionalism boldly predicted that
the rise of scientific engineers in the
twentieth century would bring the
downfall of the philosophical bases
of capitalism.
They also believed a technocracy:
the idea that technical experts should
be the rightful political leaders of
society.

25. Radical Political Economy
Radical political economy
encompasses to the
socialist thinkers like e
Saint-Simon and
revolutionary theorists
like Karl Marx and Lenin.
Marx himself shared a lot
of the same economic
views with Adam Smith
and David Ricardo, such as
the labor theory of value.

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Marx did not object to the immense
productive power of capitalism. In
fact, he considered the advent of
capitalism as a progressive step in
human society.
However, Marx saw in capitalism the
highly unequal distribution of power
and income, the susceptibility of the
economic system to depression and
the tendency of monopoly

27. Modern Political Economy
In the 1920s, when the Great Depression was wreaking havoc on all advanced economies,
Marx’s prediction seemed imminent.
One of the weakest capitalist powers, Russia, had succumbed to a revolution led by Lenin and
his communist followers.
In Germany and Italy, the democratic-capitalist system was brought down by the right-wing
fascist regimes of Hitler and Mussolini.

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The problems of the capitalist system
seemed unlikely to be solved by citing
laissez faire anymore. It was from this
moment that calls for political
economy to return to government.
Keynesian political economy hence
provided the basis for government
intervention in the economy in order
to save the capitalist system itself.

29. Critics of Keynesians
Keynesian political economy is
not without rivals. In modern
terms, the school of
monetarism, established by
Milton Friedman has been a
persistent critic of
Keynesianism.
Monetarists contend that fiscal
policy rarely works and the
best tool to fine-tune the
economy is a monetary policy.
In the 1970s, when many
advanced countries were
experiencing economic
downturns and high inflation,
Keynesian policy tools seemed
unable to work.

30. Con….
The intellectual history of the field of political economy
encompasses many distinguished scholars and thinkers in human
history.
Many of the ideas of these political economists are still
profoundly influential. In formulating socioeconomic policies,
many modern governments are indebted to the intellectual legacy
of these political economists.

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