The return of the political economy

POLITICS is back, and markets do not know what to do about it.

Political risk faded from financial markets in the 1990s. Central bank independence seemed to remove economic policy from political influence. Markets did not care which Bush or Clinton was in the White House, so long as Alan Greenspan was at the Federal Reserve. The result was a reverence for central bank policy, an emphasis on mathematical economics, and a disregard for political concerns.

The years since the global financial crisis have seen the rise of political economics. Political economics is not concerned with predicting election outcomes or speculating on political events (that dark art is psephology). Political economics is concerned with understanding the way policy acts upon an economy, and how political issues like wealth distribution can shape economic outcomes. Political economics is also about how people start to anticipate policy, and change their behaviour as a result.