Political economy is loosely defined as the interrelationship between economic conditions and the people and government in a specific country or throughout the world. The term gained favor prior to the 20th century with the rise of economists like Adam Smith and philosophers like Karl Marx who attempted to explain the way human behavior shapes economic conditions. In the 20th century, political economy more often referred to the study of economic markets and the actions or stimuli that cause them to react. Although the term is fluid, political economy in all cases attempts to explain economic conditions so that they may be predicted in the future.
In its earliest incarnation, the study of political economy was limited to the relative role of money and physical goods in an economy. The term cropped in the 17th century and has been twisted and bent ever since then to be relevant to the economic situations prevalent at the time. As economic systems evolved in complexity, it became more common for people to attempt to understand how these systems affected the people within the society and vice versa.
This study was led by economists like Adam Smith, one of the first men to study the market system in terms of theories like supply and demand. Smith's studies led him to believe that capitalism was humanity's most advanced achievement and that the market system would self-correct to represent the needs of the society. Others who followed him argued that in some cases the market needs stimulation from the government, whether by means of taxes or business incentives, to fulfill the needs of the people.
Karl Marx revolutionized the theory of political economy by offering a critique on the class system. Studying the burgeoning Industrial Revolution in Europe in the 19th century, he theorized that although the common worker controlled the means of production, it was actually the owners of the business who profited the most, while the workers stayed in relative poverty. Based on Marx's work, many workers rose up to protest these conditions.
Such theories, while still studied and applied widely today, generally take a back seat in terms of the modern discussion of political economy. The term now more specifically applies to the role played by government in determining the economic conditions of a specific country. It also refers to how economic conditions play a role in the political arena in terms of elections or regime changes. As such, the concept is usually studied as an offshoot of modern political science.