Political Economy is variously defined. According to the definition most generally accepted in England, it is the science which is concerned with the production, distribution, and exchange of wealth. In Professor Marshall's Principles of Economics it is defined as 'a study of man's actions in the ordinary business of life; it inquires how he gets his income, and how he spends it.' The name 'Political Economy' dates only from 1615, having been first used (in this special sense, as distinguished from domestic economy and moral economy and from political theory) by Montchretien de Vatteville in his Traité de l'Économie Politique.
The science of political economy is a branch of the study of man. Man is a creature with many needs, which he seeks to satisfy by applying his labour to the nature by which he is surrounded. These needs are not a fixed quantity, but grow and change with the development of society; and man's devices for their satisfaction receive a corresponding development. In the growth of these needs and of the devices to satisfy them we can trace the economic development of the human race. Political economy may be regarded as the systematic and comprehensive study of the phenomena connected therewith. There have been economic facts therefore ever since the origin of man; but there was no real science of political economy till it was constructed by Adam Smith and his forerunners in France in the 18th century. Science generally is the systematic study of facts which existed before the study began. Yet, while political economy did not exist as an independent and comprehensive branch of human knowledge before the 18th century, much attention had been given to particular economic facts. Various economic problems had received great and serious attention.
The history of political economy naturally falls into three divisions, the ancient, the mediæval, and the modern. We shall treat them briefly in their order.
(1) The Ancient Period.—As in other sciences, the first notable efforts in economic reflection were made by the ancient Greeks. The leading Greek thinkers who handled economic questions were Plato, who in the economic as in other spheres represented the idealism of the ancient world; Aristotle, the exponent of scientific realism; and Xenophon, who expounded the plain common sense of his time and country. Of the problems which they treated with the insight peculiar to their race we may mention the following: the economic aspects of the origin of society; the division of labour; the function of money; economics of slavery, which they considered a natural thing; property and the related question of communism; the dependence of political change and of revolution on economic causes; the population question. On these and other subjects the teaching of the great Greek writers is most valuable; nor is its value lessened by the fact that their discussion of economic facts forms only a part of the science of politics. And, while the conditions of the modern world differ so vastly from the Greek world, the economic views of thinkers like Plato and Aristotle will always have an interest for us, inasmuch as the solid groundwork of human nature continues substantially the same through the changing conditions of history.
Roman economics had no special interest or originality. The main contribution of the Romans in connection with political economy was to give legal form to the prevalent ideas of property.
(2) The Mediæval Period.—During this period there was little discussion on economic problems that could now be called scientific. The most interesting feature of the economic views that then existed was the influence exerted on them by Christian teaching. This influence was most profound and greatly affected also the economic thinking of subsequent times. The influence of Christianity was especially manifest in relation to the weak and oppressed classes. It tended to soften and then to abolish slavery and serfdom; it raised the position of women and gave a new refinement to family life; the care of the poor became a first duty of men and of human institutions. The ideas and institutions of property prevalent in the Roman world, which were often harsh, severe, and cruel, were corrected by the spiritual ethics of Christianity. To the struggling and half barbarous feudal world it taught a nobler life and a higher conception of duty in the economic as in other spheres. It inculcated righteousness and charity, forbade usury and luxury, exalted poverty and resignation. In their opposition to the rigorous ideas of property some of the Fathers even advocated communism. The mediæval period was a time of confused struggle, in which Christian ethics were often opposed not only to the rough and warlike egoism of the feudal races, but to the harsh economic ideas that were incorporated in the Roman law.
(3) The Modern Period.—The feudal communities were superseded by centralised monarchies; and this great political change was an organic one, being attended by important changes in other spheres. The church lost much of its power. The feudal nobles were transformed into courtiers. The feudal militia gave place to professional armies in the pay and in the immediate service of the monarch. For the maintenance of the army and of the court and other dependents of the centralising ruler it was necessary first of all to have a sufficient revenue. And, as the old revenue in kind was neither convenient nor effective, it was found particularly desirable to have a revenue in money. Accordingly it was one of the greatest and most pressing functions of the statesmanship of that time to foster and to secure an ample revenue in money. The rise of the Colonial System (q.v.) consequent on the discovery of America and of the sea-route to India, the great expansion of commerce thence resulting, the growth of manufactures, the development of the banking system, all these were regarded as elements in the strength of the centralised state, and were made subservient to its policy. Under these circumstances it was natural that special attention should be paid to the balance of trade; that trade should be so regulated by statesmen as to secure for their own country a good balance of the precious metals. Thus it became a special note of economic theory to place an exaggerated value on the precious metals. The Mercantile System (q.v.) was an expression of this exaggeration in the sphere of political economy. Economists differ as to the precise meaning and application of the phrase, and indeed it had no very precise meaning or application. The meaning of the phrase will naturally vary according as we confine the application of it to the exaggeration to which it specifically relates or extend it to the whole system of which the exaggeration was a conspicuous feature. But there can be no doubt that the system grew out of the needs and circumstances of the time. Its chief expounders were Bodin and Montchrétien de Vatteville in France, Antonio Serra in Italy, and Thomas Mun in England. In practical statesmanship it is associated chiefly with the great names of Cromwell and Colbert.
Even during the prevalence of the mercantile system a new way of thinking on economics had arisen in England and France. Its keynote was freedom, and it too was an organic part of the social and political evolution of the time. The expounder of the new system was Adam Smith, but he was only the chief representative and culminating point of a movement which had been growing for more than a century. In England men like Locke, Joshua Child, William Petty, and Dudley North had been struggling more or less successfully towards a similar point of view. In France the school of Physiocrats, headed by Quesnay, had taught many of the new ideas; in particular they had been set forth with perfect lucidity and conciseness by Turgot in his Réflexions sur la Formation et la Distribution des Richesses (1766). In fact, Turgot's little book might be regarded as the first scientific exposition of political economy. Adam Smith's achievement was to give the fittest form to ideas which were becoming current among the most progressive minds of his time. If Turgot's work may be regarded as the first brief statement of political economy, Smith's Wealth of Nations was the first thorough and comprehensive exposition of the subject by a man who had ample leisure and capacity, a remarkable knowledge of history, and an adequate philosophic training.
The teaching of Adam Smith was by himself well defined as a system of natural liberty. In view of the ill-judged or antiquated regulations of the past he advocated liberty; and to all that was artificial in such regulation he opposed a natural order, thus following the school of Rousseau in the return to nature from a perverted civilisation. Indeed, both in his assertion of freedom and in the appeal to nature, Smith was only applying to political economy principles that were dominant in other spheres of thought. Smith also followed the example of his predecessors, and showed himself in harmony with the new era, in regarding labour as the source of wealth. With regard to other economic questions relating to capital, rent, interest, &c. Smith has said much which, though it has not always gained the assent of subsequent economists, has at least had the merit of starting important discussion. Smith's pre-eminence as an economist lies in the fact that he summed up and presented in lucid perspective the best economic thought of the times preceding, while his writings were the starting-point of all further development.
The greatness of Smith becomes all the more apparent when we contrast him with his successors, for in none of them do we see the same combination of humanity, moderation, and open-mindedness, fullness of knowledge, width of view, and philosophic culture. Malthus had many of the same qualities, but he fully applied them only to the elucidation of a single aspect of the subject, the population question. In Ricardo the historic factor almost disappears in the abstract; his theory of rent, for which he has been most celebrated, is particularly abstract and artificial, and has been much overrated. The main body of J. S. Mill's economic work was simply a re-statement of the traditional doctrine, and as an achievement for his time cannot be compared with what Smith did for the 18th century. His later writings as well as the later editions of his Political Economy show a perception of the fresh problems which are opening up to the economist, but he never brought his economic system as a whole into harmony with his new views. His economic writings represent a process of transition, in which the old was not fused or transformed by the new.
The political economy of Adam Smith had great influence on the continent of Europe. J. B. Say in France, and Rau and Hermann in Germany, followed Smith more or less faithfully. But Smith's teaching, or what is alleged to have been his teaching, has also met with strong opposition. His doctrines have been variously criticised as being too abstract and individualistic, as inculcating selfishness, as based on doubtful theological assumptions. It is a special objection that his tendency to individualism and cosmopolitanism prevents him from seeing the importance of the nation as an element in economic development. Here we find the most fundamental point of difference between the economics of Germany and of England, plainly arising out of the different circumstances of the two countries. The national element found conspicuous expression in the system of List, who has been followed by the American economist Carey, the gist of this doctrine being that the political economy of each country is and must be adapted to the particular conditions of its national development; in other words, that circumstances render protection necessary to the national life and growth of Germany and the United States.
The school of political economy which has long been most prevalent on the continent of Europe is usually described as historical. It holds that economic factors must be studied in the light of the historic conditions of each time and country—conditions legal, political, social, and ethical. The historical school is a protest against abstractness and absoluteness in economic science. No reasonable adherent of the school would deny that there are permanent factors in economics, but all would assert that even the most stable elements are subject to continual variation. That being so, much will depend on whether the economist is disposed to dwell on the stable or the variable elements in economic development. Roscher was the founder of the school. He and Adolf Wagner are its greatest recent representatives. Their works are true to the leading principle of the school; they are studies of economic principles conducted with all the lights which a vast historical learning can supply. Schäffle is more than historical, as he has given ample recognition to the evolution principle in his Bau und Leben des Sozialen Körpers.
At present it will be generally admitted by students of political economy that the subject is in an unsettled and unsatisfactory condition. Various explanations of this may be given, but the real and substantial grounds must be found in the following great facts which have emerged since the time of Adam Smith, and which seem to necessitate a reconstruction, or at least a large modification, of the science.
(1) The greatly improved study of history, and the application of the historical method to all departments of inquiry. The charge of neglecting the teachings of history can be urged justly enough against many of Smith's school; against Smith himself it is most unfair. It would be absurd to say that an age which produced Smith and Gibbon was entirely lacking in the historical spirit; both men are amongst the finest examples of it that have appeared. Yet they were only isolated instances of a method which has now become universal among competent inquirers. The comparative study of history, and especially of historical institutions, has practically come into existence since their time, and has thrown entirely new light on the growth and working of economic forces.
(2) The general acceptance of the theory of evolution, especially as taught by Darwin. We can now see that Smith's theory of natural liberty really meant that individual struggle for existence carried on within the limits prescribed by law which we call the competitive system; and that the protective system favoured on the European continent is only a moment in the struggle for existence carried on between vast organised communities like France, Germany, and Russia. In the United States it may be considered as a moment in the struggle for a better national existence against the industrial power of England.
(3) The industrial revolution, whereby hand labour has been superseded by machinery, and individual effort has given place to labour organised in vast industrial and commercial undertakings, such as factories, railway and shipping companies. This revolution was just beginning when Adam Smith wrote his Wealth of Nations, which was published in the very year when Watt produced the first effective steam-engine (1776). The change in industrial technique and organisation have been vastly greater since Adam Smith's time than they were in the whole period between Aristotle and Smith.
(4) The growth of democracy, which took a fresh start with the American revolution also in the same year that saw the publication of the Wealth of Nations, in 1776, to be followed thirteen years later by the great French Revolution of 1789.
(5) The increasing prominence of the social question, of which we need not further speak here.
It cannot be said that the current English economics have given due recognition to any of the above facts. Professor Marshall's important Principles of Economics (1890), while it is learned, thorough, and progressive in tone, and does considerably show the influence of new movements, is in the main merely a reproduction of the traditional doctrine. The only prominent thinkers who give due recognition to the evolution principle in economics are Herbert Spencer and Schäffle.
It will be clear that the old abstract economics, of which Ricardo was the signal example, is now being abandoned by all competent economists. Most students of the subject will admit that we can best comprehend the present if we consider it as having grown out of the past; and if we can throw any light on the future, we can do so only by studying both the past and the present. In other words, the great function of the economist is to collect and analyse facts and to inquire into the action of the forces, whatever they may be, that determine the economic well-being of mankind. His aim must be on the one hand to avoid a servile adherence to the historical method, through which the discussion of economic theories is overburdened by a too elaborate apparatus of historical learning, and on the other hand to avoid the assumption that the economic conditions of our own time and country are and must be normal for all other times and countries. While the main body of economic inquiry must be the collection and analysis of facts, the best and most fruitful achievements in political economy accomplished by men like Quesnay, Turgot, Adam Smith, and J. S. Mill have been in forwarding human progress. Thus the ethical or ideal element has not been excluded from political economy at its best. On the contrary, it has informed and inspired the science in its noblest efforts. While political economy must start from an adequate basis of facts supplied by the cognate or subsidiary sciences, geology, geography, statistics, history, it must own allegiance to the supreme science of ethics. Progress in economic science will move in harmony with and promote the social and moral progress of the human race.
Political economy may be regarded as concerned with a vast process which is incessantly going on. This process begins and ends with human beings. The starting-point is found in the needs which stimulate men to those efforts for their satisfaction which are termed labour. But labour can create nothing; it operates by utilising natural objects, or as economists briefly express it, the land, which includes mines and the sea as well as agricultural land. In the history of civilisation a vast system of appliances have, under the name of capital, been developed and accumulated by the labour, ingenuity, and foresight of men for more effective operation on nature; thus we have the three factors of production, land, labour, and capital.
In the system of economics that prevails in the most advanced countries these three factors of production are supplied by as many different classes of individuals, whose relations to each other are determined by free competition. Hence it is that the problems connected with distribution attain to primary importance in political economy. The share of the results of production obtained by the owner of land is rent; the share of the capitalist is called profits, consisting of interest, wages of management, &c.; the share of the labourer is simply termed wages.
One of the most marked features in the recent economic history of the world is the enormous development of the means of communication and transport both by sea and land. In former times the bulk of the produce of labour was locally consumed by the producers themselves. The growing utilisation of steam and electricity has given rise to the great markets of the world, or we should rather say, to a great world-market, in which the exchange of the most varied commodities is carried on. Exchange had long been an important department of economics; it is now a dominant one. Out of exchange arise the problems connected with value. The medium of exchange is money, also involving a wide complex of questions—banking, credit, &c.
The final aim of the whole economic process is the satisfaction of the needs from which it started. This satisfaction is gained in the consumption of the commodities which are produced, distributed, and exchanged; but they are used up not only for enjoyment, but for the production and maintenance of human energies. All human activity, whether it be viewed as the activity of individuals or of the great organised communities, such as states and nations, must rest on an economic basis, and must be more or less limited by the economic resources which it can command. As wealth consists of commodities which are derived from external nature and transformed in the process of production, so in the process of consumption they are returned to nature in a greatly altered form. The subject of consumption has been much neglected by political economists. The utilisation of the materials returned to nature, which are often considered as mere waste, but which could be scientifically applied to the recuperation of the often exhausted powers of nature, has also been greatly neglected in economic technique.
The vast process which we have thus briefly sketched is for the most part a private matter. It rests with each individual to determine how he shall relate himself to it. But there is also a large public sphere connected with the state, the municipality, and other local bodies. It has almost universally been admitted that the state must provide for defence, justice, education, the larger means of communication, &c.; and the necessary revenue is mostly drawn from the wealth of the citizens under the name of taxation. An enlarging set of functions, connected with lighting, water-supply, police, and to some extent education, are generally performed by municipalities and other local bodies, the funds for these being styled rates.
Many of the older forms of society were marked by stability or stagnation, and the economic conditions under which they existed underwent little change. Yet economic history has also been a record of development. Labour in particular has gone through a distinct succession of changes, through slavery, serfdom, and the guild system, into the present system of free labour. Discontent has always been the mother of progress, and it is obvious that the economic changes of the present and the future must largely proceed from the discontent of the labouring class, especially from their discontent with the prevailing system of distribution. Hence a group of most important questions connected with trades-unions, co-operation, socialism.
It should also be said that the economic process is an organic one, that each part of it is vitally connected with every other, and that the whole process is intimately related to the entire social, political, artistic, moral, and religious development of mankind. One of the greatest dangers to political economy (as to other sciences) is the excessive specialisation by which certain departments of it are studied in isolation from the other branches of the science, and from the cognate provinces of human knowledge.
Larger works on political economy: Adam Smith, Wealth of Nations; J. S. Mill, Principles of Political Economy; Cairnes, Some Leading Principles of Political
Economy newly expounded; Jevons, Theory of Political Economy; Sidgwick, Principles of Political Economy; Marshall, Principles of Economics; Roscher, Grundlagen der Nationalökonomie (Eng. trans.); Adolf Wagner, Grundlegung; Schäffle, Bau und Leben des Sozialen Körpers; Schönberg's Handbuch der Nationalökonomie, which is really an encyclopædia of the subject. Manuals and smaller works: Fawcett, Manual of Political Economy; Mrs Fawcett, Political Economy for Beginners; Marshall, Economics of Industry; F. A. Walker, Political Economy; Joseph Garnier, Traité d'Économie Politique; Laveleye, Elements d'Économie Politique (Eng. trans.). Histories of political economy: Roscher, Geschichte der Nationalökonomik in Deutschland; Kautz, Die geschichtliche Entwicklung der Nationalökonomik; L. Cossa, Guide to the Study of Political Economy; J. K. Ingram, History of Political Economy; Dictionary of Political Economy, edited by R. H. Inglis Palgrave. See also the articles BANKING, BOUNTY, CAPITAL, COMMUNISM, CONSUMPTION, COOPERATION, CORN LAWS, DIVISION OF LABOUR, EXCHANGE, FREE TRADE, LABOUR, LAND LAWS, MONEY, MONOPOLY, PROTECTION, RENT, SOCIALISM, TAX, TRADE-UNIONS, and WAGES; and the articles on the more important economic thinkers—Smith, Malthus, Ricardo, Mill, Carey, Lassalle, Marx, &c.