Political economy

Political economy studies the activity carried out by men in order to use in the most efficient way the available resources in order to satisfy their needs. Since resources are limited and needs are unlimited, each individual or each group of individuals must make choices: political economy studies the forms that human behavior (individual or society) takes in making these choices, setting as a fundamental assumption that they are made in order to maximize the useful effect and to minimize the sacrifice or the cost (principle of economy or the benefit).

The task of political economy is therefore to analyze the phenomena of production, exchange, consumption of goods as well as to seek the laws that govern them or the uniformity that are manifested in them and to highlight the relationships that exist between them. The application of mathematical methods to the analysis of these phenomena is called mathematical economics.

Political economy is divided into microeconomics and macroeconomics according to whether it studies the behavior of individual economic units or quantities related to the entire economic system. International economics is that branch of political economy that studies economic transactions between countries, transactions involving goods, services, capital. It also studies the activity of international economic organizations as it relates to such transactions.

The expression political economy was first used in 1615 by A. de Montchrétien in his work Traité de l’économie politique with the meaning of “administration of the city’s assets”. The adjective “political”, deprived of its original meaning, remained to qualify the discipline despite numerous attempts to change it (Genovesi suggested “civil economy”, Scialoia and Messedaglia “social economy”, Marshall “economic”).

History of economic thought

The origins of economic science or at least the first attempts to understand economic phenomena go back to the ancient Greek thinkers. In Plato and Aristotle, albeit expressed in a fragmentary and schematic form, there are already concepts that have become fundamental in the history of economic thought. Plato had clear, for example, the concept of professional division of labor and sensed its effects on the organization of economic and social life.

Aristotle’s contribution to the history of economic doctrines was more important than that of his master: to him we owe, in fact, the first distinction between exchange value and use value, the first definition of the nature and functions of money, the distinction between economics and chrematistics, the first being understood as the science of obtaining goods to satisfy necessary needs (through agriculture, hunting, fishing) and the second as the science of accumulating wealth for its own sake (through trade).

No contribution to the interpretation of economic phenomena has been given instead by the Roman world: the Romans, in economic matters, were more technicians than theorists and of some importance was only their contribution to agricultural economics. The economic thought of the medieval age was inspired by the principles of Christianity. Its maximum representative was Thomas Aquinas and the most important problems analyzed were those of the right price and usury.

With the rise of modern nation-states, aimed at a policy of power and dominance, and with the expansion and affirmation of trade relations, a complex of theories spread in Europe, particularly in England and France, to which has been given the name of mercantilism. Elaborated more by economic operators than by professional scholars from the end of the 15th century to the first half of the 18th century, these theories were substantially resolved in economic policy measures of a protectionist and interventionist kind. They focused mainly on the enrichment of States through the export of goods and the corresponding income of precious metals.

Although it did not constitute an organic and coherent current of thought, mercantilism was nevertheless the first example of an economic doctrine divorced from moralistic and religious considerations, aimed solely at the attainment of wealth. It is necessary, however, to reach the physiocracy, in the middle of the 18th century, to find the first system of economic analysis with scientific ambitions, the first “school”. Called “the economists” par excellence, the physiocrats were mainly French, followers of Quesnay. Their ideas were in opposition to the mercantilist ones: they opposed laissez-faire to protectionism, liberalism to state interventionism, wealth as money and wealth as production.

Adam Smith, Ricardo, Malthus and other members of the classical school are credited with having founded, between the end of the 18th century and the first half of the 19th century, the science of economics. Whether fully accepted or criticized, refined or rejected, many of their essential theories still animate modern economic issues. Marx himself, founder of the most important system of opposition to classical thought, scientific socialism, borrowed from the classics the same theoretical schemes and fundamental concepts such as that of labor-value. From the criticism of the capitalist system, from the need to defend national economies from competition from more industrialized countries, from a rejection of the deductive method of investigation, from the denial of necessary laws in economics, were born the most important currents of reaction to the classical school. They were socialism (associationism, sansimonism, Marxism), economic nationalism, the historical school.

In the years around 1870 there was another fundamental turning point in the development of economic thought: marginalism, also known as the neoclassical school. The scientific investigation passed from the “objective” level of the classics and their followers and opponents to the “subjective” one, the concept of utility became important, a new tool for analysis was introduced: the marginal principle. In the early years of the twentieth century, economists devoted their energies to perfecting and developing the achievements of theorists who had preceded them. The problem of economic equilibrium was, in particular, at the center of attention.

Our century, in which the greatest figure is J. M. Keynes, inspirer of the new macroeconomic analysis (the theories of the nineteenth century were essentially microeconomic) and of the new macroeconomic analysis, was a time of great interest. Our century, in which the greatest figure is J.M. Keynes, who inspired the new macroeconomic analysis (the theories of the 19th century were essentially microeconomic) and the new liberalism, has seen the elaboration of new methods of investigation such as econometrics and dynamic analysis, and has seen the interest of scholars ignite around new problems, not only related to the functioning of the mechanisms of production and the market, but especially related to the functioning of economic systems as such, whether they are capitalist or socialist: they are the problems of welfare, development, cyclical fluctuations, stagnation, full employment, planning.

From the origins to the welfare state

No less important than the history of thought for understanding the development of economic science is the history of economic facts. As Schumpeter notes, “one cannot hope to understand the economic phenomena of any age, including the present one, without an adequate command of historical facts.” It is therefore appropriate to briefly list the main stages of the economic development of human societies.

In the ancient economy the characteristic unit is the family; goods and services are produced within its sphere and only for the purpose of pure sustenance. Agriculture is the main form of activity and only later is practiced to a certain degree the craft to manufacture tools to transform the products of the earth, furnishings, luxury items. The exchanges are null or extremely reduced and mainly in nature. Money plays a secondary role. This is the phase of the “domestic economy”, a typical form of closed economy that, according to Bücher and Rodbertus, characterized the Greco-Roman and feudal worlds.

Beginning in the 11th-12th centuries, the development of urban centers changed economic life and gave it new impetus. The city became center of artisan production, founded mainly on the corporative system, and center of exchanges both with the campaigns, which had to offer means of subsistence to its inhabitants, both with other neighboring cities. With the sec. XVI the economic life was transformed radically conquering that dynamism that was not to abandon it more. The geographical discoveries enlarged the outlets and changed the habits of consumers, the influx of precious metals from the New World increased the availability of money pushing the most enterprising men to business, new intellectual and religious movements developed individualism and pushed to the care of material interests.

The protagonists of this development were the countries of Western Europe, where the first forms of commercial capitalism were born and where the monetary economy established itself. The bank, the stock exchange, the commercial companies are the representative institutions of the period. The expansion of trade relations and the increase in population gave a new rhythm to production. From commercial capitalism came industrial capitalism.

The 18th century saw another fundamental stage in economic history: the industrial revolution which, in turn, accentuated the interdependence of the various national economies. The 19th century was, for the most part, the century of economic liberalism, of laissez-faire as theorized by classical economists. Born in England, the industrial revolution spread during the 19th century to the rest of Europe, confirming it as the center of the world economy. The hegemony of the Old Continent lasted until the last decades of the century, when the economic development of non-European countries, such as the United States, on the one hand, and disastrous economic crises and wars on the other, caused it to collapse.

In the twentieth century, after the emergence of new economic systems, the collectivist ones, two world wars and the resulting economic crises, including the very serious one of 1929-32, deeply undermined the foundations of capitalist systems, as they had been built in previous centuries, imposing new economic and social policies. Already Roosevelt, with his New Deal, implemented, after the crisis of 1929, a series of social measures in order to mitigate the effects of the Great Crisis; and it is especially after the Second World War that a system of social protection known as the Welfare State was established in most countries. Used as an instrument of economic policy, it has helped to resolve important social problems, particularly with regard to the education and training system, labor policies, prevention and health protection, social security, assistance for the weaker sectors of society and support for families.

Towards the end of the 20th century, however, the crisis of the collectivist model and the changed geopolitical scenarios, the progressive integration of national economies and their greater interdependence with the consequent need to find new forms of collaboration on a global level, the need for greater flexibility and the ability to transform production systems, and the aging of the population, have put the welfare state, as it was structured, into crisis.

The crisis and the reform of the welfare state

Welfare reform began in the world at the same time as the serious economic crises of the 1970s and 1980s, crises which put a strain on the public accounts of many countries and contributed to a growing accumulation of debt. The demographic changes of the planet, characterized by the progressive increase in the average life span of the population, favored by the development of medicine and the economic and cultural changes that have occurred in recent decades, have caused a substantial aging of the population, a continuous decline in the birth rate and a consequent profound change in social needs.

The labor market has also changed over time, adding demands for a profound revision of the welfare system. In particular, the spread of female employment has called into question the pact based on the division of social roles on the basis of gender, the rigidity of the work model and social organization and, in general, has led to a review of the rules of the labor market. The objective of equal opportunities between the sexes in professional life has in fact entailed an adjustment of social action, at times even inducing greater costs for the community (in order to guarantee the possibility of better reconciling professional and family life, the care of children or other family dependents).

Other important changes in the labor market have concerned the start of a general process of deregulation of work activity, with the aim of increasing the level of discretion of companies in their choices of staff size, limiting the unconditional protection of employees, promoting the expansion of the area of precarious work, temporary jobs and new forms of subordinate work. The still high level of illiteracy, the obsolescence of the educational system and the failure to adapt training throughout working life have further contributed to the need for a revision of welfare.

In the last years of the 20th century, therefore, the first measures were taken to improve public finances in the main industrialized countries. This process of restructuring and liberalization has led to a review of the role of the welfare state, which must now be able to respond efficiently to the greater flexibility of the labor market, the increase in insecurity and inequality, the emergence of new forms of exclusion and poverty, the emergence of new needs and the need to offer everyone opportunities to integrate into work and society. Public authorities are therefore committed to finding a way to ensure that social actions are aimed at favoring the most exposed sectors of the population without their subsidy weighing too heavily on the level of employment.

More and more, in fact, the social protection system must manage to adapt to the new nature of the labor market, seeking a difficult balance between the need for flexibility and the guarantee of greater social security. The complexity of social issues is thus increasing and it is increasingly necessary to affirm the value of democratic participation in order to develop the fight against exclusion from society and to strengthen the procedures for evaluating public policies. The change in the welfare system has been partly induced, therefore, by the profound transformation recently undergone by the labor market, which is faced with the serious problems of unemployment.

Globalization and technological progress impose, in fact, continuous reorganization interventions on companies in conflict with the rigidity of traditional employment regulation schemes. The evolution of the labor market, which follows the welfare crisis, still generally finds an obsolete and fragmented legislative framework to which renewed and different demands are placed: Place greater emphasis on vocational training in order to ensure easier access to the market; revive socially useful jobs that risk being set aside due to their limited profitability; reorganize working hours (there have been widespread initiatives in industrialized countries to promote the reduction of working hours) in order to ensure flexibility to meet the needs of production and workers; to promote interventions aimed at the continuity of work relationships, the safeguarding of professional skills, training and retraining, and re-employment; to decentralize some competencies in the labor market in order to take into account the different territorial needs in a national context of protection of the principles and fundamental rights valid for all.

On the basis of these unanimously shared principles, the desire to create an authentic world social policy has become increasingly concrete within international bodies – including the European Union, especially during the 1990s. In fact, in view of the fact that, while it is true that competence for employment policy must remain essentially at the level of the individual member state, it is also important that the problem of employment be tackled at the community level, the European Union signed the Treaty of Amsterdam in June 1997, as a European employment policy support to actions already undertaken at the national level.

The Treaty establishes a model of coordination for employment policies at the Community level that involves the adoption of common employment guidelines and annual assessments of how far the measures that individual nation states take are consistent with that common line. All of this is aimed at improving the functioning of the labor market, creating new forms of organization, encouraging worker mobility, and modernizing and adapting social protection systems. Discrimination, inequality, poverty and exclusion still threaten the social system. It is necessary to adapt social protection systems to new needs while avoiding excessive financial burdens.

In Europe, once economic and monetary union has been achieved, there is a need to strengthen community ties in order to push towards a well-functioning single market, sustainable growth and a policy of cohesion also in the social and employment spheres. In other words, it is necessary to integrate macroeconomic stability with support for social progress, also addressing the problem of the progressive ageing of the population and the growing imbalance between the active and the retired population. This integration will be virtuous when it succeeds in making growth and macroeconomic stability means to strengthen structural reforms and increase the employment rate.

In accordance with the employment strategy and the affirmation of best practices, interventions are carried out to promote innovative forms of job creation through local development measures (territorial pacts and social economy), to develop an entrepreneurial culture, to incentivize investment in the development of human resources, to urge social partners to promptly conclude agreements for the training of workers, and to guarantee equal opportunities.

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