Political economy originally was the term for studying production, buying and selling, and their relations with law, custom, and government. Political economy originated in moral philosophy (e.g. Adam Smith was Professor of Moral Philosophy at the University of Glasgow), it developed in the 18th century as the study of the economies of states — polities, hence political economy.

In contradiction to the theory of the Physiocrats, wherein land was the source of all wealth, some political economists proposed the labour theory of value (introduced by John Locke, developed by Adam Smith, and later by Karl Marx), according to which labour is the true source of value. Many political economists also noted the accelerating development of technology, whose role in economic and social relations was important (Joseph Schumpeter).

In late nineteenth century, the term "political economy" was generally replaced by the term economics, used by those seeking to place the study of economy upon mathematical and axiomatic bases, rather than the structural relationships of production and consumption (cf. marginalism, Alfred Marshall).

History of the term:

Originally, political economy meant the study of the conditions under which production was organized in the nation-states of the newly-born capitalist system. It first was used in England in the eighteenth century, in replacing the earlier approach of the (French) physiocrats; Adam Smith, David Ricardo and Karl Marx were the principal exponents of political economy. In 1805, Thomas Malthus became England's first professor of political economy, at the East India Company College, Hailey bury, Hertfordshire. The world's first professorship in political economy was established in 1763 at the University of Vienna, Austria; Joseph von Sonnenfels was the first tenured professor.

In the United States, political economy first was taught at the College of William and Mary, in 1784; Adam Smith's Wealth of Nations was a required textbook. Glasgow University, where Smith was chairman of Logic and Moral Philosophy, changed the name of its Department of Political Economy to the Department of Economics (ostensibly to avoid confusing prospective undergraduates) in academic year 1997-1998, leaving the Class of 1998 as the last to be graduated with a Scottish master of arts degree in Political Economy.

Current approaches to political economy:

Contemporarily, political economy refers to different, but related, approaches to studying economic and political behaviours, ranging from the combining of economics with other fields, to the using of different, fundamental assumptions that challenge orthodox economic assumptions:

• Political economy most commonly refers to interdisciplinary studies drawing upon economics, law, and political science in explaining how political institutions, the political environment, and the economic system — capitalist, socialist, mixed — influence each other. When narrowly construed, it refers to applied topics in economics implicating public policy, such as monopoly, market protection, government fiscal policy, and rent seeking.[3]

• Historians have employed political economy to explore the ways in the past that persons and groups with common economic interests have used politics to effect changes beneficial to their interests.

• "International political economy" (IPE) is an interdisciplinary field comprising approaches to international trade and finance, and state policies affecting international trade, i.e. monetary and fiscal policies. In the U.S., these approaches are associated with the journal International Organization, which, in the 1970s, became the leading journal of international political economy under the editorship of Robert Keohane, Peter J. Katzenstein, and Stephen Krasner. They are also associated with the journal The Review of International Political Economy. There also is a more critical school of IPE, inspired by Karl Polanyi's work; two major figures are Susan Strange and Robert W. Cox.

• Economists and political scientists often associate the term with approaches using rational choice assumptions, especially game theory, in explaining phenomena beyond economics' standard remit, in which context, the term "positive political economy" is common.
 
• Anthropologists, sociologists, and geographers, use political economy in referring to the neo-Marxian approaches to development and underdevelopment postulated by André Gunder Frank and Immanuel Wallerstein.

• Contemporary political economy students treat economic ideologies as the phenomenon to explain, per the traditions of Marxian political economy without its deterministic class war assumptions. Thus, Charles S. Maier suggests that a political economy approach: interrogates economic doctrines to disclose their sociological and political premises....in sum, [it] regards economic ideas and behavior not as frameworks for analysis, but as beliefs and actions that must themselves be explained. [6] This approach informs Andrew Gamble's The Free Economy and the Strong State (Palgrave Macmillan, 1988), and Colin Hay's The Political Economy of New Labour (Manchester University Press, 1999). It also informs much work published in New Political Economy an international journal founded by Sheffield University scholars in 1996.
 
Disciplines related to political economy:

Because political economy is not a unified discipline, there are studies using the term that overlap in subject matter, but have radically different perspectives:

Sociology: studies the effects of persons' involvement in society as members of groups, and how that changes their ability to function. Many sociologists start from a perspective of production-determining relation from Karl Marx.

Political Science: focuses on the interaction between institutions and human behavior, the way in which the former shapes choices and how the latter change institutional frameworks. Along with economics, it has made the best works in the field by authors like Shepsle, Ostrom, Ordeshook, among others.

Anthropology: studies political economy by studying the relationship between the world capitalist system and local cultures.

Psychology: is the fulcrum on which political economy exerts its force in studying decision-making (not only in prices), but as the field of study whose assumptions model political economy.

History: documents change, using it to argue political economy; historical works have political economy as the narrative's frame.

Economics: focuses on markets by leaving the political - governments, states, legal frameworks - as givens. Economics dropped the adjective political in the 19th century, but works backwards, by describing "The Ideal Market", urging governments to formulate policy and law to approach said ideal. Economists and political economists often disagree on what is preeminent in developing production, market, and political structure theories.

Law: concerns the creation of policy and its mediation via political actions that have specific results, it deals with political economy as political capital and as social infrastructure - and the sociological results of one society upon another.

Human Geography: is concerned with politico-economic processes, emphasizing space and environment.

Ecology: deals with political economy, because human activity has the greatest effect upon the environment, its central concern being the environment's suitability for human activity. The ecological effects of economic activity spur research upon changing market economy incentives.

International Relations: often uses political economy to study political and economic development.

Cultural Studies: studies social class, production, labor, race, gender, and sex.