Before we talk about the impact of politics on economy, we have to understand the phrase “Political Economy”. Political Economy is neither a replacement of Politics nor Economy. It refers to the economic policy to be adopted by government from the perspective of politics but not only on economic angle.
Interconnection between Politics and Economy
Free market economy is well adopted in the last 30 years in the developed countries. The traditional capitalism encourages the free mechanism of the market operation and allows the market to achieve a balance based on personal decision but not national decision. However, a complete capitalist economy would cause the problem of poverty, create unfair advantage of market competition or forming a political power hierarchy in a country. Thus, government intervention is needed in order to provide a fair and stable society. Nobel Prize awardee Milton Friedman had argued capitalism greatly reduced the extent of poverty. Even in wealthy countries, there are clearly many people living under conditions that we label as poverty. Milton Friedman also said in the 20th century that if you want to see capitalism in action, you should go to Hong Kong. Nowadays, it is a hybrid economy combining Capitalism and Socialism.
Two samples of government intervention over economy from political view are anti-monopoly policy and restriction of certain business activities. Some countries have a clear anti-monopoly policy to oppose monopolies and intend to regulate a single company from occupying substantial market share so that it could control the supply and pricing of a single industry. Telecommunication, Energy and Banking (both Retail Banking and Corporate Banking) industry are typical industries under government intervention by competition law to avoid social turbulence. Some industries are restricted by certain business activities in order to defend the social stability such as military industry and aviation industry. All the nations require government pre-approval to sell military products to other countries in order to avoid the leakage of military technology to rival. Same in aviation industry, all the airlines require government approval for their business airline route in order to control the national sky security. Industries with similar situation have to strictly follow the government requirement, otherwise, the company would be dead overnight.
Equilibrium between Economy and Politics
Does it mean all the economies are under controlled by government? Not really, history tells us free market economy is an efficient market mechanism to support continuous economic growth. An economic growth with stable society is an ideal environment that government would like to have. That would cause the less expense from government and reserve could focus on the social welfare. That is the reason that socialism also applies to existing economy and hybrid of socialism and capitalism prevails among most of the nations. However, most of the time, it is like a pendulum, the phenomena swinging from one side to another side, from stable to unstable. At the end, the quality of citizens would help to solve the chaos.