Encyclopedia
In the
social sciences,
economics is the study of the production, distribution, and consumption of
goods and
services.. Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources.
Alfred Marshall in the late 19th century informally described economics as "the study of man in the ordinary business of life".
The word "economics" is from the Greek words [
oikos], meaning "family, household, estate," and ??µ?? [
nomos], or "custom, law," and hence literally means "household management" or "management of the state." An
economist is a person using economic concepts and data in the course of employment, or someone who has earned a university degree in the subject.
The field may be divided in several different ways, most popularly
microeconomics vs macroeconomics , but also descriptive vs. normative, mainstream vs. heterodox, and by subfield. Economics has many direct applications in business, personal finance, and government. Theories developed as a part of economic theory have also been applied to non-monetary choices in field as diverse as criminal behavior, scientific research, death, poltics, health, education, family, dating, etc. This is allowed because economics is fundementaly about human decision making.
Areas of study in economics
One of the main purposes is to understand how economies work, and what are the relations between the main economic players and institutions.
Economics is usually divided into two main branches:
- Microeconomics examines the economic behaviour of individual units such as businesses and households in face of scarcity and government interactions, as well as the economic consequences of these decisions on other actors.
- Macroeconomics examines an economy as a whole with a view to understanding the interaction between economic aggregates such as national income, employment and inflation. Note that general equilibrium theory combines concepts of a macro-economic view of the economy, but does so from the microeconomic viewpoint.
Attempts to join these two branches or to refute the distinction between them have been important motivators in much of recent economic thought, especially in the late 1970s and early 1980s. Today, the consensus view is arguably that good macroeconomics has solid microeconomic foundations. In other words, its premises ought to have theoretical and evidential support in microeconomics. A few authors also argue that 'mesoeconomics', which considers the intermediate level of economic organization such as markets and other institutional arrangements, should be considered a third branch of economic study.
Economics can also be divided into numerous subdisciplines that do not always fit neatly into the macro-micro categorization. These subdisciplines include: international economics, development economics, industrial organization, public finance,
economic psychology, economic sociology, institutional economics and economic geography.
Another division of the subject distinguishes positive economics, which seeks to predict and explain economic phenomena, from normative economics, which orders choices and actions by some criterion; such orderings necessarily involve subjective value judgments.
There are also methodologies used by economists whose underlying theories are important.
- The most significant example may be econometrics, which applies statistical techniques to the study of economic data. Computational economics relies on mathematical methods, including econometrics.
- Another trend which is more recent, and closer to microeconomics, is to use social psychology concepts and methods to understand deviations from the predictions of neoclassical economics.
- Evolutionary economics often deals with the otherwise difficult questions related to the role of 'routines' and 'capabilities' in explaining heterogeneity in firm outcomes.
- Economic history is the study of economic change, and of economic phenomena in the past.
Finance has traditionally been considered a part of economics – as its body of results emerges naturally from microeconomics – but has today effectively established itself as a separate, though closely related, discipline.
Interdisciplinary studies and cross-application
There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Economic analysis focuses on decision making, and has been applied, with varying degrees of success, to various fields where people are faced with alternatives –
education, marriage,
health,
law, crime,
war, and
religion.
Public choice theory can apply to political science and
sociology .
Econophysics is an interdisciplinary research field, applying theories and methods originally developed within
Physics in order to solve problems in Economics, usually those including uncertainties or stochastic elements and
nonlinear dynamics.
Information theory has been applied to economics since the work of Ronald Coase in the 1930s. However, with
Herbert Simon and
John von Neumann in the 1950s, it gathered a more specific formalism as part of
game theory. This emphasizes that the decision-making process itself is costly.
Economic language and reasoning
Economics relies on rigorous styles of argument. Economic methodology has several interacting parts:
- Collection of economic data. These data consist of measurable values of price and changes in price, for measurable commodities. For example: the cost to hire a worker for a week, or the cost of a particular commodity, and how much is typically used.
- Formulation of models of economic relationships, for example, the relationship between the general level of prices and the general level of employment. This includes observable forms of economic activity, such as money, consumption, preferences, buying, selling, and prices. Some of the models are simple accounting models, while others postulate specific kinds of economic behaviour, such as utility or profit maximization. An example of a model that illustrates both of these aspects is the classical mathematical formulation of the Keynesian system involving the consumption function and the national income identity. This article will refer to such models as formal models, although they are not formal in the sense of formal logic. Economists often formulate very simple models in order to define the impact of just one variant changing. This is called the "ceteris paribus"-assumption , meaning that all other things are assumed not to change during the period of observation. Example: "If the price of movie tickets rises, ceteris paribus the demand for popcorn falls."
- Production of economic statistics. Taking the data collected, and applying the model being used to produce a representation of economic activity. For example, the "general price level" is a theoretical idea common to macroeconomic models. The specific inflation rate involves taking measurable prices, and a model of how people consume, and calculating what the "general price level" is from the data within the model. For example, suppose that diesel fuel costs 1 euro a litre: To calculate the price level would require a model of how much diesel an average person uses, and what fraction of their income is devoted to this —but it also requires having a model of how people use diesel, and what other goods they might substitute for it.
- Reasoning within economic models. This process of reasoning sometimes involves advanced mathematics. For instance, an established tradition among economists is to reason about economic variables in two-dimensional graphs in which curves representing relations between the axis variables are parameterized by various indices. A good example of this type of reasoning is exhibited by Paul Krugman's online essay, There's something about macro. See also the article IS/LM model. One critical analysis of economic reasoning is studied in Paul Samuelson's treatise, Foundations of Economic Analysis: he identifies a class of assertions called operationally meaningful theorems which are those that can be conceivably refuted by empirical data. As usual in science, the conclusions obtained by reasoning have a predictive as well as confirmative value. An example of the predictive value of economic theory is a prediction as to the effect of current deficits on interest rates 10 years into the future. An example of the confirmative value of economic theory would be confirmation of theories concerning the relation between marginal tax rates and the deficit.
Formal modelling, which has been adapted to some extent by all branches of economics, is motivated by general principles of consistency and completeness. It is not identical to what is often referred to as mathematical economics; this includes, but is not limited to, an attempt to set
microeconomics, in particular general equilibrium, on solid
mathematical foundations. Some reject mathematical economics: The Austrian School of economics believes that anything beyond simple logic is often unnecessary and inappropriate for economic analysis. In fact, the entire empirical-deductive framework sketched in this section may be rejected outright by that school. However, the framework sketched here accurately represents the current predominant view of economics.
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Schools of economic thought
Modern mainstream economics
Mainstream economics begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternative—the opportunity cost. The opportunity cost creates an implicit price relationship between competing alternatives. In addition, in both market oriented and planned economies, scarcity is often explicitly quantified by price relationships.
Understanding choices by individuals and groups is central. Economists believe that incentives and desires play an important role in shaping
decision making. Concepts from the Utilitarian school of
philosophy are used as analytical concepts within economics, though economists appreciate that society may not adopt utilitarian objectives. One example of this is the idea of a utility function, which is assumed to represent how economic agents rank the choices given to them. Then the utility function ranks available choices from best to worst, and the agent gradually learns to choose the best-ranked choice in the feasible set of his alternatives.
On a microeconomic level, some economists extend economic analysis to all personal decisions. An alternative can be thought of as a vector where the entries are answers not only to questions like "How many eggs should I buy?", but also "How many hours should I spend with my kids?", and "How long should I spend brushing my teeth?".
Modern mainstream economics builds primarily on neoclassical economics, which began to develop in the late 1800s and models choices made in the allocation of scarce resources. Mainstream economics also acknowledges the existence of market failure and some insights from
Keynesian economics. It looks to
game theory and asymmetric information to solve problems on a microeconomic level. Many important insights on collective behaviour have been incorporated from institutional economics via new institutionalism.
Alternative approaches
The approach to economics that is dominant today is usually referred to as mainstream economics, and has developed primarily from neoclassical economics. The more specific definition this approach implies was captured by Lionel Robbins in 1932: "the science which studies human behaviour as a relation between scarce means having alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs; absent scarcity and alternative uses of available resources, there is no economic problem. Other schools of thought are called heterodox economics, including institutional economics, Marxist economics,
socialism, and green economics.
- Post-Keynesian economics: An alternative school - one of the successors to the Keynesian tradition with a focus on macroeconomics. They concentrate on macroeconomic rigidities and adjustment processes, and research microfoundations for their models based on real-life practices rather than simple optimizing models. Generally associated with Cambridge, England and the work of Joan Robinson.
- New-Keynesian economics: The other school associated with developments in the Keynesian fashion. These researchers tend to share with other Neoclassical economists the emphasis on models based on microfoundations and optimizing behaviour but focus more narrowly on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of these models, rather than simply assumed as in older style Keynesian ones.
- Other alternatives: There are many types of economist, and many of them are considerably outside the mainstream. Marxian economics, Socialist economics, green economics, Austrian economics, and Old Keynesian economics have many voices in academia.
- Eclectic Economists: The term 'eclectic' means selecting and using what seems best from various sources, systems or schools of thought. Eclectic economists tend to economize to get an optimal result for the problem at hand. The assumption of utility can for example be used, not to imply that people really have such a utility, but as an efficient approximation. Such economists might be 'main stream' or neoclassical in one publication and do political economy in another publication.
- Biophysical economics
- Thermoeconomics
Famous schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, may be generally summarized as follows:
- Austrian School
- Chicago School
- Freiburg School
- Keynesian economics
- Post-Keynesian economics
- School of Lausanne
- Stockholm school
Economics and ecology
Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources. For instance, when fuelling a fire, people are usually concerned with finding the wood, and not with finding the air to burn it with. Traditional economics explicitly does not deal with free abundant inputs – one criticism is that it often conflicts with ecology's view of what affects what.
Ecological economics attempts to address this criticism by calculating the financial contribution of nature's services and by adding environmental considerations such as
biodiversity to traditional list of human wants and needs.
Green economics is a closely related field which views the human economy as a subset of the larger ecosystem.
Alternative definitions of economics
This sections extends the discussion of the definition of Economics at the beginning of the article.
Economics is the study of human choice behaviour. All of economics whether represented through articulation or empirically through mathematical means is essentially an analysis of the behaviour choices of human beings.
Wealth definition
The earliest definitions of political economy were simple, elegant statements defining it as the study of wealth. The first scientific approach to the subject was inaugurated by
Aristotle, whose influence is still recognised today by the Austrian School, among others.
Adam Smith, author of the seminal work
The Wealth of Nations is the
magnum opus [i] of the Scottish [i]...
and regarded by some as the "father of modern economics," defines economics simply as "The science of wealth." Smith offered another definition, "The Science relating to the laws of production, distribution and exchange."
John Stuart Mill defined economics as "The practical science of production and distribution of wealth"; this definition was adopted by the
Concise Oxford English Dictionary even though it does not include the vital role of consumption. For Mill, wealth is defined as the stock of useful things.
Definitions in terms of wealth emphasize production and consumption. The accounting measures usually used measure the pay received for work and the price paid for goods, and do not deal with the economic activities of those not significantly involved in buying and selling . For economists of this period, they are considered non-productive, and non-productive activity is considered a kind of cost on society. This interpretation gave economics a narrow focus that was rejected by many as placing wealth in the forefront and man in the background;
John Ruskin referred to political economy as a "Bastard science, the science of getting riches."
Welfare definition
Later definitions evolved to include human activity, advocating a shift toward the modern view of economics as primarily a study of man and of human welfare, not of money.
Alfred Marshall in his 1890 book
Principles of Economics wrote, "Political Economy or Economics is a study of mankind in the ordinary business of Life; it examines the part of the individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being."
The welfare definition was still criticized as too narrowly materialistic. It ignores, for example, the non-material aspects of the services of a doctor or a dancer. A theory of wages which ignored all those sums paid for immaterial services was incomplete. Welfare could not be quantitatively measured, because the marginal significance of money differs from rich to the poor . Moreover, the activities of production and distribution of goods such as alcohol and tobacco may not be conducive to human welfare, but these scarce
goods do satisfy innate human wants and desires.
Marxist economics still focuses on a welfare definition. In addition, several critiques of mainstream economics begin from the argument that current economic practice does not adequately measure welfare, but only monetized activity, which is an inadequate approximation of welfare.
Scarcity definition
This definition allowed a potentially broader field of study, but it, too, has its critics. It is most amenable to those who consider economics a pure science, but others object that it reduces economics merely to a valuation theory. It ignores how values are fixed, prices are determined and national income is generated. It also ignores unemployment and other problems arising due to abundance. This definition cannot apply to such Keynesian concerns as cyclical instability, full employment, and
economic growth.
The focus on scarcity continues to dominate neoclassical economics, which, in turn, predominates in most academic economics departments. It has been criticized in recent years from a variety of quarters, including institutional economics and evolutionary economics and surplus economics.
Economic assumptions
Value
It could be argued that beneath an economic theory is a theory of value. Value can be defined as the underlying activity which economics describes and measures. It is what is "really" happening.
Adam Smith defined "labour" as the underlying source of value,
Economics is a field of study with
various schools and currents of thought. As a result, as in many other fields, there exists a considerable distribution of opinions, approaches and theories. Some of these reach opposite conclusions or, due to the differences in underlying assumptions, contradict each other. , .
Criticism on several topics in economics can be found elsewhere, in both general and specialized literature .
McCloskey critique
Although the conventional way of connecting the economic model with the world is through econometric analysis, Professor Deirdre McCloskey cites many examples in which professors of econometrics were able to use the same data to both prove and disprove the applicability of a model's conclusions. She argues that the vast efforts expended by economists on analytical equations is essentially wasted effort.
Ethics and economics
The relationship between economics and ethics is complex.
Many economists consider normative choices and value judgements, like what what needs or wants, or what is good for society, to be political or personal questions outside the scope of economics. Once a person or government has established a set of goals, however, economics can provide insight as to how they might best be achieved.
Others see the influence of economic ideas, such as those underlying modern
capitalism, to promote a certain system of values with which they may or may not agree. According to some thinkers such as John Syko, a theory of economics is also, or implies also, a theory of moral reasoning.
The premise of
ethical consumerism is that one should take into account ethical and environmental concerns, in addition to financial and traditional economic considerations, when making buying decisions.
See also
- Economy
- Ecological Economics
- Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel
- Dismal Science
- List of accounting topics
- List of business ethics, political economy, and philosophy of business topics
- List of business law topics
- List of economic geography topics
- List of economic systems
- List of economics consultancies and think tanks
- List of economics topics
- List of economists
- List of finance topics
- List of human resource management topics
- List of information technology management topics
- List of international trade topics
- List of management topics
- List of marketing topics
- List of production topics
- List of publications in economics
- List of scholarly journals in economics
- List of video lectures in economics
- Socioeconomics
Notes and references
Further reading
- - ed. K. F. Zimmermann, Springer-Science, 2002. - A summary of surveys on different areas in economics.
- - Yale Economic Review - How and why the dismal science embraces theory over reality.
- by Jean-Baptiste Say - an essay in which Say claims that economics is not an ethical system that one can simply refute on the basis that one does not accept its values: it is a collection of theories and models that explain inductively found principles.
External links
General information
Institutions and organizations
- –from the American Labor Department
- –Economics material from the organization that declares Recessions and Recoveries.
- [https://bea.gov/ US Department of Commerce Economics Statistics]
Study resources
-
- –Economics Books, Articles, Blog , Podcasts
- –Encyclopedia. Entries by renowned economists.
- - History of Economics
- –An index of all theories and theoreticians throughout the history of economic thought.
-
- –By Vladimir Boutiaga
- –By Walter E. Williams
- –Compare various economic schools of thought on particular issues
-
- –A UK-based portal site for Economics and Business Studies designed mainly for UK students.
- –A complete introductory economics textbook under Creative Commons license by Preston McAfee.
- section of EH.Net Economic History Services
- basic economic thinking tools skimmed: rational self-interest, opportunity cost, marginal analysis, specialization, comparative advantage, scarce resources and unlimited wants, as well as a sketch of the institutional structure of the U.S. economy.
Publications
Miscellaneous
- - LTKTBM/LTBTBM agent economics java applet and model description
-
- - Links to historical economic statistics for different countries and regions
-
- Gateway to the Federal Reserve Bank of St Louis, including working papers, links to lectures and other material.
- - UC Berkeley Experimental Social Science Laboratory: Human Subject Research in Economics
