Political Economy. The Greek word oihonomia means the art of managing a household and its means of subsistence (Aristotle, Polities). Political economy was originally conceived of as the same sort of art applied to the resources of a state. Even Adam Smith says that "it proposes to enrich both the people and the sovereign;" but the scientific treatment of the causes of wealth, on which such an art must be based, was so developed by him and by subsequent writers that the name has come to be used for the science dealing with the general laws of the production, distribution, accumulation, and exchange of wealth, which is most conveniently defined as "material things having an exchange value."
History. The society conceived of by Aristotle as the best possible was a uniform, stable society of well-to-do households, in which agriculture would be the chief source of wealth; slaves would do most of the work, and manufacture and exchange would be comparatively limited. There would be no lending at interest, and, of course, no finance. Values and prices would vary very little, and the few free labourers that existed would receive a regular wage. Moreover, all wealth-getting would be limited by the needs of a "good life." In such a society there would be little scope for the study of economic phenomena, though some of the simplest were dealt with by Aristotle; and the society conceived of by mediaeval philosophers is much of the same kind, only that slavery has disappeared, and the morally good life has become the Christian life. With the rise of great warlike monarchies towards the end of the Middle Ages we get the notion of such an art as that defined by Adam Smith (see above). The form it then took was the Mercantile System (q.v.). Gold and silver being the handiest form of wealth, a state, which must always be prepared for war, should try to secure as much of them as possible. The most effectual way to do so was to sell manufactured goods to foreigners for specie; and hence under Louis XIV. in France elaborate efforts were made to improve manufacture. [Colbert.] In reaction against the restrictions this involved, the Physiocrats argued (wrongly) that manufacturing was only transforming, not creating, wealth, which had its true source in agriculture; and that the true policy was "Laissez faire, laissez passer." [Laissez Faire.] Following them, Adam Smith attacked the Mercantile System much more elaborately, and used both economic history and abstract reasoning, and from him dates the science proper.
Adam Smith's successors - coming at a time when deductive reasoning was in fashion and society was commonly regarded simply as a collection of individuals naturally free and united under contract - created a science dealing with wealth and man as a wealth-producer in the abstract, so that its conclusions frequently do not correspond to actual fact. Schools have, therefore, arisen (especially in Germany) which insist that the science can only be studied by observing the facts of history and society. It may, however, be answered (as it was substantially by J. S. Mill) that, without some such provisional conclusions as the "abstract" science gives us, we should Ipe lost in the maze of economic phenomena. It would be hopeless to study the Irish land question or the fluctuations of silver without some preliminary notion of the general causes affecting rent and value. Partly in reaction against the "historical" schools, the abstract side has even been treated as a branch of the higher mathematics (especially in Austria) in a manner far too abstruse for description here. But it is well to remember that the definitions as ordinarily accepted are only provisional, and in part arbitrary, and that the deductions express rather tendencies than actual facts.
Thus the abstract schools assume a society composed of free men knowing their own interest, and each competing with his fellows to get as much wealth as possible, by producing wealth or rendering services, and selling that wealth or those services to the best possible advantage to himself. The assumption, though true in great part of modern commercial society, is comparatively remote from uncivilised or backward societies, but the deductions can easily be corrected by a study of the actual facts. Unfortunately, this correction has often been neglected; hence, in part, the outcry against economics as hardhearted and selfish. Moreover, as the science deals only with one set of the phenomena of society, other sets have to be taken into account in suggesting remedies for social ills. It is because abstract political economy alone is insufficient for this purpose that it has been called "the dismal science."
Divisions. Political economy deals with the production, distribution, and exchange of wealth. Exchange, however, and value (q.v.) are its cardinal facts. Under production and distribution (inasmuch as in England wealth may roughly be said to be divided between three conspicuous classes - landlords, labourers, and capitalists), it deals respectively with land, labour, and capital as requisites of production, and with rent, wages, and profits as the share accruing to each. These divisions are admittedly unscientific, but have not yet been quite displaced. Under exchange, it deals with the causes and nature of value and with the mechanism of trade, as money, credit, and banking; and some text-books deal also with taxation, since the goodness or the badness of the system adopted has great effect on the national wealth, or with the influence of government in general on that wealth. It must be remembered, however, that pure theory and descriptions of facts are often not clearly separated in the text-books; that the assumption of free individual competition is not true at all of many stages of society, and is still greatly modified by custom, and at present especially by the growth of joint stock companies, by "trusts" and "rings" to control markets, and by trades' unions; and that most of the conclusions are of necessity limited in their application; but this latter objection might be made to most branches of applied science, such as engineering or pathology. [For details see Rent, Banking, Bimetallism, Free Trade, etc.]