The origins of classical economics can be traced to Adam Smith’s work THE WEALTH OF NATIONS (1776) where he applied principles of John Locke’s Liberal political philosophy to the study of economics. The work reflects both the influence of England’s first industrial revolution in which the industrial capitalists became the preeminent class, and the Age of Reason when it was assumed that laws of nature can be applied to institutions in society presumably for the welfare of all people. David Ricardo’s work ON THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION (1817) made the term “political economy” part of the dialogue regarding the inexorable relationship between the political regime and the economy, something well known not just in England where classical economics has its origin but on the continent as well.
Some scholars argue that Marx and Engels were the last of the classical political economists, although they were fierce critics of classical economics identified with Smith, Ricardo, Thomas Malthus as apologists of capitalism. Adam Smith’s “invisible hand” as the sole driving force in the economy did not take into account that the state conducting fiscal, trade and investment policy as well as measures to protect public welfare from the abuses of the private sector in everything from pollution to safety measures for workers and consumers alike. Moreover, classical liberal political economy well suited for industrial capitalists did not take into account the uneven economic development across the globe and the unfair advantage of the industrialized nations over those that had not industrialized and were subject to unfair terms of trade.
While many argue that classical political economy comes to an end with the European social revolutions of 1848, others maintain that it continued through the later part of the 19th century. There are also scholars who argue that Joseph Schumpeter and John M. Keynes, both candidly open to the severe shortcomings of capitalism, belong in the category of classical or modern political economy. Closely identified with the New Deal in the US, Keynes had a global influence in recognizing that left to its own devices and without the state to buttress the political economy, capitalism will collapse because of inherent contradictions in the system exactly as Marx and Engels had argued.
The Industrial Revolution gave rise to classical political economy first by apologists of industrial capitalism and then by critics ranging from economic nationalists to socialists. Ultimately, industrial capitalism shaped the value system of industrialized nations that accepted liberal political economy as “natural”, organic rather than a result of the evolutionary process of historical dynamics subject to change as was the case with the Feudal/Manorial mode of production that existed from the fall of the Roman Empire until the nascent stage of the Commercial Revolution in the 15th century.
Contemporary Political Economy of Neoliberalism
Contemporary political economy is invariably identified with neo-liberalism that actually has its theoretical origins in Germany during the Great Depression. In reaction to Keynesian economics that prevailed in the US and many countries around the world in the 1930s and 1940s, capitalists and economists pushed back against state involvement in the economy, except when it pertained to fiscal, trade, investment and monetary policies all favoring capital. Contemporary political economists that helped to set the foundations of neo-liberalism against the welfare state identified with Keynesians were Friedrich von Hayek, Milton Friedman, Gary Becker, James Buchanan and Ronald Coase, all endeavoring to revive Adam Smith’s philosophy of economic and political freedom in the global marketplace.
Although the International Monetary Fund in making stabilization loans to member nations was promoting neoliberal policies long before the 1980s, the Reagan-Thatcher decade, neoliberalism became closely identified with a major US-UK effort to downsize the welfare state and promote the corporate welfare state. This trend spread globally, especially after the collapse of the Soviet bloc and China’s integration into the world economy. Deregulation and the idea of privatizing public services or providing the private sector with government contracts to carry out tasks previously carried out by the public sector became a global trend and promoted as the panacea for economic growth and development.
Although it costs much more to have private contractors carry out public sector services, in some case two or three times more, the assumption is that the private sector is sacrosanct and the state’s role is to privatize as many of its services as possible. Just as with classical liberal economists and their apologists, neoliberalism became gospel truth adopted by international financial organizations such as the IMF and World Bank using stabilization and development loans respectively as leverage to force governments into the neoliberal policy mold.
Every public service from utilities to intelligence gathering has been part of the neoliberal agenda. The triumph of neoliberal thought represents the hegemony of markets of state whose role neoliberal advocates want limited and primarily focused on defense and intelligence gathering, although aspects of those are also subcontracted to corporations. Public services from health to education remain to a large extent in the public sector domain. However, the goal is to privatize as much of what remains in these sectors as possible, even if it means the cost, quality and safety of services provided is unfavorable when compared with the same services under public control.
Naturally, the contemporary political economy of neoliberalism since the Reagan-Thatcher decade has resulted in the immense concentration of capital in the hands of a few thousand corporations and a few thousand people around the world. Meanwhile, living standards for workers and the middle class have been declining across the entire Western World; the middle class has been steadily shrinking and it is expected to follow that trend, contradicting the promise of neoliberal advocates that the political economy will deliver prosperity for all across the world. Even more significant, neoliberalism has led to authoritarian policies not just in the US, but in all countries trying to impose policies that result in greater capital concentration and create socioeconomic polarization.
The contradictions in contemporary political economy of neo-liberalism, including the reality that while promising non-interference the state intervenes to redistribute income from the middle and lower classes to the wealthy through corporate subsidies, fiscal, and monetary policies have resulted in a segment of society turning to extreme right wing politics promising salvation through economic nationalism against globalization under which neo-liberalism operates. Just as classical political economic theory ran into the realities of the economy as it impacted segments of society that the industrial revolution marginalized and could not integrate into the mainstream, similarly contemporary political economy is running into all sorts of problems as it creates monumental socioeconomic inequality. The more wealth that the capitalist economy creates, the more marginalized people become, thus failing to deliver on the promise of upward socioeconomic mobility and failing to fulfill what many believe is basic rights as part of the social contract.