In the 18th and early 19th Centuries, people studied what they called “political economy” when they studied what we now call “economics”. I've occasionally heard Left activists bemoan this change in terminology as if some sense of the interconnectivity of politics and economics was lost along the way. Regarding the terms, themselves, I believe they are historically incorrect. The term "political economy" was used in the sense that we might say "public economy", that is the economy of the Commonwealth, or "polis", with the intention to distinguish it from the more domestic sense that the bare word "economy" would have carried in the 18th century, that is, the economics of households, or what we might nowadays refer to as "home economics", or, with more dignity "household management". This was the sense that "oikonomia" had to the Greeks. The use of the two-word term did not imply any insight that the power relations of “politics” were somehow inseparable from the market and production relations of “economics”.
Still, something is lost in trying to analyze “the market” as if it could be divorced from the other power relationships in society. Marxists, of course, have never believed in making this division, but the liberal economic tradition makes it central. One who broke from the mold was John Kenneth Galbraith, whose central trilogy of The Affluent Society, The New Industrial State, and Economics and the Public Purpose, as well as the excellent biography by Parker, I have worked my way through over the past few years. One of Galbraith's central ideas is that economics and politics are inseparable "in the wild", and the academic separation of these two disciplines is therefore artificial, and causes analysis to deviate from reality.
Many of the details of Galbraith’s economic analyses were seriously flawed. These flaws have been analyzed in detail by many who are more learned than I, and I won’t try to reproduce the critique, except to say that my sense is that he was too in love with his own ideas, too inclined to spin them out as logical exercises to see where they would lead, and not inclined enough to the more demanding task of empirically testing them against facts. Still, despite flaws in detail, many of his key insights, including that on economics and politics, were and are profound.
There are many reasons why economics should not be separated from politics. One is that wealth is readily translatable into other kinds of power, and not only by means which most people would consider illegitimate or “corrupt” (such as bribing officials). Money buys access to politicians, it buys media coverage (either directly, or just because what the rich and powerful do and say is interesting and “newsworthy”), it buys research to “prove” your point of view (and it pays to bury the research results when they aren’t “right”). Money buys respect. Galbraith often commented ironically that nothing produces a semblance of intelligence and perspicacity so much as the possession of wealth. Even Adam Smith commented on the “natural” deference which we offer to the “opulent”.
Differential wealth also influences outcomes in the market place. Worker and owner don’t meet as equals in the labor markets when waiting a few more weeks to strike a bargain means the owner puts off buying a new yacht, but the worker can’t put food on her family’s table. And you don’t need to accept Galbraith’s entire theory of “the planning system” in all its detail to agree that an economy where major areas of production are controlled by a few large corporations, which spend huge amounts on advertising to manipulate consumer opinion regarding products that are, otherwise, functionally nearly indistinguishable, and which arguably add almost nothing to the quality of human life, is very different from an economy in which a large number of small firms compete to provide easily understood products in response to autonomous customer demand.
Nor is the answer as simple as breaking up big economic groupings in favor of the small. Markets may, as we’ve been told, create wealth – they also create unequal wealth. Even from a perfectly fair “starting position”, in which all participants had equal initial wealth and talent, pure chance would result from time to time in some participants temporarily having more wealth than others, and since differential wealth brings the power to manipulate, the unbalance would tend to be accentuated. And, of course, a perfectly fair starting position could never be achieved, in life. (Just see Marx’s chapters on Primitive Accumulation, in Capital, Vol. 1.)
Also, Galbraith was certainly correct that the complexities of producing the goods and services demanded by our modern technologies requires a certain amount of large scale coordination, even if he missed the “right sizing” and “outsourcing” trends that radically altered his “technostructure”-dominated mega firms.
The bottom line is that an economy is not a place where impersonal forces work themselves out in a way that automatically tends to justice. It is a complex arena where people strive for advantage, where advantage translates into power, and, power leads to more power. The only intellectual stance that makes sense is to accept that the economy is inherently linked to the political, and not strive for an artificial separation.
Fortunately, it now seems more common in academia to decry, at least by lip service, the artificiality of boundaries between disciplines, than it was when Galbraith was doing most of his writing, and at least some of today’s classically trained economists recognize the importance of linking power relations to economic outcomes. One of them, in fact, is John Kenneth’s son, James K. Galbraith. I haven’t read as much of his work yet, but he seems just as bright as his father (if not quite the wordsmith – and certainly not possessed of the same level of ego), and he is much more amenable to subjecting his ideas to the discipline of empirical testing.
So there is hope that even the liberal tradition may someday join with the Marxist in recognizing that the economic is political, after all.