Money, innovation, and growth: a historical perspective on political economy

This paper provides a comprehensive, albeit non-exhaustive, critical reflection on the evolution of political economy, tracing its intellectual lineage from foundational theories to modern growth dynamics. By examining shifting paradigms of wealth production, resource distribution, and power, the study navigates the transition from Mercantilist protectionism and Classical liberalism to the systemic critiques of Marxian economics. It further analyzes the discipline’s formalization during the Neoclassical Revolution and subsequent 20th-century shifts—specifically the Keynesian macroeconomic surge, the neoclassical synthesis, Hayek’s liberal stance, the Monetarist counter-revolution, and the rational expectations frameworks that redefined state-market relations. Beyond these foundational paradigms, the study evaluates critical modern expansions that transformed economics into a mathematically rigorous and structurally nuanced science. Specifically, it reviews the mathematical-axiomatic breakthrough of the Arrow-Debreu general equilibrium model and the strategic frameworks of Game Theory pioneered by von Neumann, Morgenstern, and Nash. Furthermore, the analysis incorporates Coase’s foundational work on transaction costs and organizational boundaries, alongside the revolutionary impacts of asymmetric information models and modern financial portfolio theory. Moving into contemporary discourse, the analysis bridges Solow’s foundational growth models with the endogenous growth theory championed by Romer, emphasizing the pivotal roles of technological change and knowledge. By integrating the Schumpeterian tradition of "creative destruction" with these frameworks, the paper highlights the institutional drivers of modern economic expansion. The study also underscores the innovative contributions of behavioral economics, which integrate psychological insights to explain the factors determining individual economic choices. Utilizing a conceptual-analytic approach, this study synthesizes abstract theory with practical policy to offer a cohesive overview of political economy for scholars and policymakers alike.