Ernest Mandel has provided the most recent interpretation of developments in political economy. Petty commodity production was the first stage that lasted upto the Middle Ages. The transformation of Europe from feudalism to a profit-oriented economy of buyers and sellers led to the school of political economy. They assumed that regulation and control were necessary in order to constrain the selfish individualism. They argued that wealth was produced, not by trade and industry, but by agriculture.
Liberals believed that private property should be protected and that the production of wealth based on the incentive to work, and the right to property instilled in the individual. They suggested that individual initiative must be free from mercantilist constraints. Adam Smith consolidated these ideas into classical political economy. In his Inquiry into the Nature and Causes of the Wealth of nations, he discussed the major themes of commodity, capital and values, simple and complex labour. He was the first to formulate a labour theory of value, "which reduces the value of commodities to the amounts of labour contained in them."
Adam Smith also identified laws of the market that explain the drive of individual self-interest in a competitive milieu and how this results in goods desired by society according to the demand and the price it is willing to pay. Smith envisaged competitive market equilibrium because individualism promoted order, not chaos, in the market economy. Ricardo in the Principle of Political Economy and Taxation was both a pupil and critic of Adam Smith. Ricardo advocated the accumulation of capital as the basis for economic expansion. He thought that restrictions on private investments should be abolished and that governments should not intervene in the economy. Ricardo also noted the conflict between the interest of landlords and capitalists.
The Utopian socialists like Robert Owen, Saint-Simon and Charles Fourier criticized the liberals for defending the system of capitalism by giving a twist to Ricardo's theory of labour. Engels said: In so far as modern socialism, no matter of what tendency, starts out from bourgeois political economy, it almost exclusively links itself to the Ricardian theory of value. The two proportions which 'Ricardo proclaimed (1) that the value of any commodity is purely and solely determined by the quantity of labour required for its production, and (2) that the product of the entire social labour is divided among the three classes: landowners (rent), capitalists (profit) and workers (wages), had ever since 1821 been utilized in England for socialist conclusions."
Marx transcended the theory of the Utopian socialists as well as the classical economists. He worked out a theory of surplus value and class struggle. He set both basic laws of development and theory of economic crises. He thus achieved a practical synthesis of micro-economic and macro economic ideas. He also said that the production relations of every society form a whole; the parts cannot be separated from the whole so that one can explain society in terms of all relations simultaneously coexisting and supporting one another.
The challenge of socialism led to the marginalist theory of value and neo-classical political economy. The labour theory of value was attacked along with a bourgeois onslaught on Marxism. The neo-classical theory was rigorous, detailed and abstract. Marxism was attacked by the historical school in Germany and also by the Austrian and Swiss economists. The neo-classicists emphasize equilibrium and are criticized for being unable to account for the disturbances that affect equilibrium. Their framework is static, not dynamic. It does not deal with economic crises and does not relate imperialism to capitalism.
These problems led some economists like Schumpeter to study structural crises. After the great depression of 1929-1933, Keynes wrote General Theory of Employment Interest and Money and changed an apologetic view of capitalism to a pragmatic one. Instead of justifying capitalism in theory, he suggested a way to preserve it in practice by mitigations, the extent of its frequent fluctuations.
Marxist and Neo-Marxist writers like Kautsky, Hilferding, and Rosa Luxemburg and others continued the radical tradition of political economy. Lenin's Imperialism: The Last Phase of Capitalism was a good example of the application of the political economy approach to the analysis of imperialism as a world system. Paul Baran, Leo Huberman and Paul Sweezy made a great contribution to the development of political economy since about 1960. Mandel continued their tradition and predicted an end to what he called the bourgeois, ideological approach to political economy.