Introduction

Political economy relates to application of economic concepts and assumptions in understanding aspects of politics, political behaviour of citizens, decision-makers, interest groups and the states in their interaction with other states.

Political economy approach offers economic explanation for public policy; that decision and policy-makers would choose or formulate such policies that would present an optimal solution, i.e., it would meet or satisfy various objectives and be acceptable in each case.¹

For example, a public policy designed to provide food security for the people below the poverty line (BPL) in India may be required to balance or relate to various other policies and provisions. These may include provisions for food grains at subsidized rates to the BPL people through the Public Distribution System (PDS), Minimum Support Price (MSP) for procurement of food grains and other agricultural produce for PDS, subsidized inputs such as fertilizers, electricity, etc., to the farmers so that cost of agricultural production can be minimized for the farmers producing for self-consumption and livelihood, transparent and accountable delivery system so that the gap between the price of PDS and open market does not result in leakage and benefit to the unintended persons.

Alternatively, however, a public policy may be analysed in terms of influence of interest groups and their pressure to benefit from state-distributed benefits. For example, it may be argued that various types of subsidies given by the governments, for example on fertilizers, benefits rich farmers and commercial crop producers (tea, rubber, tobacco, cotton, fruits) more than the poor farmers. Similarly, subsidized petrol/diesel benefits the urban middle and upper classes more than it reduces the cost of public transportation or cost of transportation of essential commodities.

Political economy approach tells us how allocation of public resource and making of public policies are influenced by economic factors and economic behaviour of the actors. Concepts and assumptions, such as individuals as rational actors, aware of his/her best interests and to be left alone to pursue one’s own conception of good and betterment, efficient and optimum outcome and maximization of profit are taken as an explanatory tool for political behaviour and public policy. Assumptions and formal rules of economic analysis are applied to understand the interplay of economics and politics, on the one hand, and behaviour of the political actors, on the other. In brief, a political actor is viewed as economic actor. The political economy approach gives a new dimension to the understanding of politics. Understanding of politics in terms of the ‘state’ or ‘political system’ may present analysis of effect of economics on politics only as a peripheral issue.

Whether conflicting interests in society are reconciled justly or whether settled in favour of a particular section or class through publicly legitimized policies; whether optimal resource allocation is being achieved or whether it is being done in favour of some at the cost of others; or whether resource allocation and public policy are result of pressure of certain groups only. All these aspects require analysis and explanation from the perspectives of political economy; it requires studying politics and economics together. Engaging in economic exchanges, resource allocation, economic development, public policy and welfare redistribution also involves engaging in politics and negotiation.

Another feature of the political economy approach is to understand the concept of power as combining economic and political power. Susan Strange says, ‘it is impossible to make any clear distinction between political power and economic power since there is always an element of each in the other.’² For example, before liberalization and divestment, planned economy in India conferred, and even today confers, power of regulating and directing the economy of not only the public sector but also the general direction of the private sector. Reforms in the land and agrarian relations, planned economy, policy on food security, PDS, resource allocation policies relating to subsidies, priority sector finance and policies on planned development relate to interplay of economics and politics. The political economy approach makes us understand how the interplay between the economic and the political produces economic and resource-based outcomes or results and who benefits from them and how. This interplay between economics and politics can be studied and explained at three levels:

1. At the level of individual actor: Market condition is considered the basis for individuals pursuing their self-chosen conception of good life, un-interfered by external authority, the state. Laissez-faire doctrine and theories of the classical economists, such as Adam Smith, Robert Malthus, David Ricardo and others are considered part of classical political economy. In the classical political economy approach, the individual actor is considered as a rational actor and if s/he is un-interfered, one would achieve what is her/his best interest. The State is not allowed any role for regulation and resource allocation. Instead, the market forces, what Adam Smith says, the ‘invisible hand’ is considered the sole regulator and distributor. Resource allocation and outcomes are considered a result of market forces and not of political authority.
2. At the level of civil society: Friedrich Wilhelm H. Hegel, the idealist philosopher, analysed the civil society, as the realm of the market relations and competition. Karl Marx, influenced by the classical political economy, felt that the latter ‘incorporated the presumptions of bourgeois society’.³ In classical political economy as well as in Marxian analysis, political behaviour, or for that matter, human activity is treated as reflection of the economic activity. In this, economic activity and economic relations are assigned a fundamental place than any other activity. However, though starting on the same platform of political economy (economic activity as the primary realm of human activity), classical political economists and Marx reached different conclusions. While the former set up arguments for a market society and individual actor, Marx did exactly the opposite and treated it as a class phenomenon. We can discuss theory of political economy in terms of classical economists and the Marxian framework.
3. At the level of interest groups: Rational-choice or public-choice theory or political economy approach deals with the analysis of strategic choice by decision-makers in a situation of competition or conflict in order to maximize gains and minimize losses. Primarily, it is an analytical tool for accounting for the behaviour of rational actors or players. As such, it is the rational actor who always seeks maximization of his/her interest. The political economy approach seeks to find out the correlation between the interest groups and state and governmental policies. Do policy and programme formulations of governments reflect preferences of interest groups within the economy? This explains why and how interest groups emerge and express their objectives and preference, so far as resource allocation and preferential distribution of benefits in society is concerned. It also focuses on how interest groups enter into coalitions, tacitly or openly, with similar groups and how they interact with other institutions in society, primarily the institutions of the state and resource distribution. A mathematical model of this approach is called the Game theoretic model or game theory, which explains actions of individuals as rational actors by applying the mathematical model of calculation of maximum, minimum and optimum benefits and payoffs.

Application of the political economy approach in studying and explaining the Indian political situation is present in studies by Francine R. Frankel’s India’s Political Economy, 1947–1977: The Gradual Revolution, Pranab Bardhan’s The Political Economy of Development in India and Lloyd Rudolph and Susanne Rudolph’s In Pursuit of Lakshmi: The Political Economy of the Indian State, amongst others. We have the following approaches that broadly constitute political economy approach:

1. Classical political economy approach: This includes the lasses-faire thesis of individual actors being left un-interfered as economic actors and the utilitarian thesis of utility maximization as the basis of political action by individual actors. These are integrated with the assumptions of the classical liberalism. When applied to international politics, classical political economy or the laissez–faire approach becomes a liberal theory of International Political Economy (IPE). This approach supports free market world economy and includes support for free trade and free movement of capital and investments. Another approach in IPE relates to ‘mercantilist tradition’ that treats world economy as an ‘arena of competition among states’ where states seek maximization of their strength, self-reliance and power through economic means including ‘trade protectionism’.⁴
2. Marxian approach to political economy: This treats economic activity as the primary activity and political activities as result of economic relations. In bourgeois society, i.e., society dominated by the interest of the capitalists, the Marxian approach deals with class relations defined in terms of ownership of means of production. Application of Marxian class perspective and political economy in the international arena has been in terms of ‘World System’, ‘Dependency Theory’ and ‘Theory of Underdevelopment’. Immanuel Wallerstein, Samir Amin and André Gunder Frank, amongst others, have discussed and analysed the phenomenon of world capitalist system and relationship between the core-periphery (industrialized countries versus developing countries) and unequal economic exchange between the two sets of countries.
3. Political economy/public-choice/rational-choice approach: This approach seeks to explain political behaviour of human actors by drawing economic concepts such as incentive, rational choice, maximum outcome and payoff in decision-making. This approach can be applied to explain behaviour of individual decision-makers, interest groups, sectors of economy, bureaucracy, and states in their interaction with other states. It is also called ‘neo-utilitarianism’.⁵