I disagree with RobinRohan's description of the history of PC as a concept originating as a joke amongst liberals. My view is that it arose as a way of attacking liberal concerns with the political uses of language.
In the last two decades of the twentieth century, liberal scholars and journalists who had read a little postmodernist philosphy came to appreciate the importance of language in defining social categories and in defining arbitrary social groups.
For example, science told us that races did not exist, so pscyhologists were forced to ask why people were racist. The answer was that competing groups formed bad opinions of their oponents that were conceptualized in linguistic terms such as "Paki", "Nigger", "Towelhead", etc. Although these ways of describing social groups were without any social of biological meaning (all "pakis" are not the same, all "towelheads" are not the same, and these groups cannot be considered in any way homogenous) they called upon pre-existing prejudices (i.e. all jews are greedy, all blacks are criminals, etc).
Mainstream liberals made a conscious effort to avoid using linguistic categorizations that called upon negative prejudices in a hope that a transformation of language would result in a transformation of perception. That if we don't call people "Pakis" or "Niggers" we won't think of them being a homogenous group, and won't think of them as being homogenously stupid, criminal, lazy, or whatever. By removing or changing the labels to more accurately represent social and biological reality, we would remove some of the political stigma associated with preceived membership of such groups.
The idea of "political correctness" was conceived by right wing leaders in response to this program of progressive (albeit perhaps misguided) linguistic reflection. It had the benefit of harking back to Orwellian views of the official manipulation of language, and gave their right wing constituents the opportunity to continue the non-reflective categorization of ethnic and sexual minorities as homogenous masses to be shunned, while maintaining a sense of moral superiority in "telling things how they are".
The sad thing is that progressive elements of society bought into the right wing view of "political correctness" and made a show of being strictly self-righteous in their application of the concept. For example, at a local primary school, a teacher banned the song "baah baah black sheep" because she thought that the use of the word "black" was racist. If the black sheep had gone on to rob a 7-11 that might have been valid, but otherwise it just goes to show that well-meaning liberals are just as stupid as conservatives.
Nevertheless, the basic idea of examining our use of linguistic categories, especially when these categories are associated with pre-existing prejudices against the labelled group, is sound.
Mick