Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. It developed in the 18th century as the study of the economies of states (also known as polities, hence the word "political" in "political economy").

In contradistinction to the theory of the Physiocrats, in which land was seen as the source of all wealth, some political economists proposed the labour theory of value (first introduced by John Locke, developed by Adam Smith and later Karl Marx), according to which labour is the real source of value. Many political economists also attracted attention to the accelerating development of technology, whose role in economic and social relationships grew ever more important.

In the late 19th century, the term "political economy" was generally superseded by the term economics, which was used by those seeking to place the study of economy on a mathematical and axiomatic basis, rather than studying the structural relationships within production and consumption. (See marginalism, Alfred Marshall)

In the present, political economy refers to a variety of different, but related, approaches to studying economic and political behavior, which range from combining economics with other fields, to using different fundamental assumptions which challenge those of orthodox economics:

• Political economy is most commonly used to refer to interdisciplinary studies that draw on economics, law and political science in order to understand how political institutions, the political environment and capitalism influence each other.
• Within political science, the term refers to modern liberal, realist, Marxian, and constructivist theories concerning the relationship between economic and political power among states. This is also of concern to students of economic history and institutional economics.
• Historians have employed the term to explore the various ways in the past that individuals or groups with common economic interests have utilized the political process to effect change over time that is beneficial to their interest.
• "International political economy" (IPE) is an interdisciplinary field comprising a variety of approaches that are concerned with international trade and finance, and state policies that affect international trade, such as monetary and fiscal policy. In the U.S. these approaches are associated with the journal International Organization, which became the leading journal of international political economy in the 1970s under the editorship of Robert Keohane; subsequent editors Peter J. Katzenstein and Stephen Krasner. They are also associated with the journal The Review of International Political Economy (RIPE), which is edited by both British and U.S. scholars.
• Economists often associate the term with approaches using game theory.
• Others, especially anthropologists, sociologists and geographers, use the term "political economy" to refer to neo-Marxian approaches to development and underdevelopment set forth by Andre Gunder Frank and Immanuel Wallerstein.