The study of the allocation of scarce resources among competing ends, the creation and distribution of wealth, and national income. The first major economist was Adam Smith, and the economic theory of the classical school (equilibrium) dominated thinking until the 1930s. The main change in thinking at that time was the result of work by J M Keynes, whose economic theories attempted to solve the problems of depression and economic stagnation. After 1945, the main aim of economic policy was to maintain high employment levels. Inflationary pressures were a test of Keynesian economics: monetarist theories were popular in the 1970s as an attempt to reduce inflation, but these are now believed to have contributed to the high levels of unemployment seen in the early 1980s. Two main aspects are often recognized. Microeconomics is the study of the economic problems of firms and individuals, and the way individual elements in an economy behave (such as specific products, commodities, or consumers). Macroeconomics is the study of the country as a whole, including such matters as trade, monetary policy, prices, national income, output, exchange rates, growth, and forecasting (econometrics). Particular concerns are how to manage an economy to achieve high growth, low inflation, and high employment; and, for individual firms, to predict those economic factors which will affect them in the future, thus enabling them to improve their own planning.
The word "economics" is from the Greek words οἶκος [oikos], meaning "family, household, estate," and νόμος [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. 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 fields as diverse as criminal behavior, scientific research, death, politics, health, education, family, dating, etc. This is allowed because economics is fundamentally about human decision making.
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 (see political economy, which has a variety of meanings) and sociology (see socioeconomics).
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.
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.
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.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. A few authors (for example, Kurt Dopfer and Stuart Holland) 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; Computational economics relies on mathematical methods, including econometrics. Another trend which is more recent, and closer to microeconomics, is to use social psychology concepts (behavioural economics) and methods (experimental economics) 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.
Economic language and reasoning
Economics relies on rigorous styles of argument. Economic methodology has several interacting parts:
Collection of economic data. Formulation of models of economic relationships, for example, the relationship between the general level of prices and the general level of employment. In economics there are typically three types of equations in use.1) Identity Equations are used to explain how certain economic values are calculated.
2) Behavioral equations are used to describe how an economic agent behaves. Much of the power of economics as a science comes from the ability to express mathematically the way people pursue incentives within constraints. Examples are such as those that show consumption, using consumption function, however this is often applied to many different fields of economics which is increasingly expanded as economics moves out of field traditionally associated with it.
3) The final type of equations are those of Equilbrum equations, which are used to show the point where variables reach a natural level directed by economic forces using systems of simultaneous equations. It is important to note that equilbrum models do not exist in dynamic economic models where variables often either orbit an equilbrum but never reach it, or simply are not equilbrum based. 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. An example of the confirmative value of economic theory would be confirmation (or dismissal) 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; Some reject mathematical economics: The Austrian School of economics believes that anything beyond simple logic is often unnecessary and inappropriate for economic analysis. However, the framework sketched here accurately represents the current predominant view of economics.
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.
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". Concepts from the Utilitarian school of philosophy are used as analytical concepts within economics, though economists appreciate that society may not adopt utilitarian objectives.
On a microeconomic level, some economists extend economic analysis to all personal decisions.
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. Many important insights on collective behaviour (for example, emergence of organizations) 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. Other schools of thought are called heterodox economics, including institutional economics, Marxist economics, socialism, and green economics. (see Post-Keynesian economics) New-Keynesian economics: The other school associated with developments in the Keynesian fashion. (see New-Keynesian economics) 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. 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 schoolEconomics and ecology
Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources. Traditional economics explicitly does not deal with free or abundant natural 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, adding environmental considerations such as biodiversity to traditional list of human wants and needs, and proposing policy tools to address the negative impacts of economic growth on the environment.
Green economics is a closely related field which views the human economy as a subset of the larger ecosystem.
Alternative definitions of economics
This section 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. Adam Smith, author of the seminal work The Wealth of Nations and regarded by some as the "father of modern economics," defines economics simply as "The science of wealth." Hume argued that gold without increased activity simply serves to raise prices
John Stuart Mill defined economics as "The practical science of production and distribution of wealth"; 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 example, retired people, beggars, peasants). This interpretation gave economics a narrow focus that was rejected by many as placing wealth in the forefront and man in the background;
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;
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. It is most amenable to those who consider economics a pure science, but others object that it reduces economics merely to a valuation theory.
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.
Adam Smith defined "labor" as the underlying source of value, and "the labor theory of value" underlies the work of Karl Marx, David Ricardo and many other classical economists.
"Market theory" argues that there is no "value" separate from price, that the market incorporates all available information into price, and that so long as markets are open, that price and the value are one and the same.
Another set of theories rests on the idea that there is a basic external scarcity, and that "value" represents the relationship to that basic scarcity (or lack thereof). These theories include those based on economics being limited by energy or based on a "gold standard".
All of these value theories are used in current economic work with varying degrees of acceptance.
Supply and demand
In microeconomic theory supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in perfectly competitive markets. It is one of the most fundamental economic models, ubiquitously used as a basic building block in a wide range of more detailed economic models and theories.
The theory of supply and demand is crucial to explaining the market economy in that it explains the mechanisms by which prices and levels of production are set.
Price
In order to measure the ebb and flow of supply and demand, a measurable value is needed. A great deal of economic theory is based around prices and the theory of supply and demand. In economic theory, the most efficient form of communication comes about when changes to an economy occur through price, such as when an increase in supply leads to a lower price, or an increase in demand leads to a higher price.
In many practical economic models, some form of "price stickiness" is incorporated to model the fact that prices do not move fluidly in many markets. Economic policy often revolves around arguments about the cause of "economic friction", or price stickiness, and which is, therefore, preventing the supply and demand from reaching equilibrium.
Another area of economic controversy is about whether price measures the value of a good correctly. In mainstream market economics, where there are significant scarcities not factored into price, there is said to be an externalization, which is a cost or benefit to actors other than the buyer and seller, of which many examples exist, including pollution (a cost to others) and education (a benefit to others). Market economics predicts that scarce goods which are under-priced because of externalities are over-consumed (See social cost), and that scarce goods that are over-priced are under-consumed.
Scarcity
Neoclassical economics is characterised by maximization (leisure time, wealth, health, happiness - all commonly reduced to the concept of utility) subject to constraints.
All economies in the world face scarcity.
Scarcity is defined as: when the price is zero, the quantity demanded exceeds the quantity supplied.
Marginalism
In marginalist economic theory, the price level is determined by the marginal cost and marginal utility.
Marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react.
The marginalist theory of price level runs counter to the classical theory of price being determined by the amount of labour congealed in a commodity.
Development of economic thought
The term economics was coined around 1870 and popularized by influential "neoclassical" economists such as Alfred Marshall (Welfare definition), as a substitute for the earlier term political economy, which referred to "the economy of polities" – competing states. Both "economy" and "economics" are derived from the Greek oikos- for "house" or "settlement", and nomos for "laws" or "norms".
Actually, etymological sources indicate that the source of "economy" and "economics" is indeed oikos- for "house" or "settlement", but that the second bit is from -nomos meaning "managing," from nemein "manage".
Economic thought may be roughly divided into three phases: Premodern (Greek, Roman, Arab), Early modern (mercantilist, physiocrats) and Modern (since Adam Smith in the late 18th century). Joseph Schumpeter specifically credits the development of the scientific study of economics to the Late Scholastics, particularly those of 15th and 16th century Spain (see his History of Economic Analysis).
There have been different and competing schools of economic thought pertaining to capitalism from the late 18th century to the present day. Important schools of thought are Mercantilism, Kameralism, Physiocracy, Classical economics, Manchester school, Austrian School, Marxian economics, Chicago School. Classical economics, Keynesian economics, Neo Classical synthesis, Post-Keynesian economics, Monetarism, New classical economics Supply-side economics and New Keynesian Economics. New alternative developments include The political macroeconomy, Evolutionary economics, Dependency theory, World systems theory and Associative Economics.
Criticism and contrarian perspectives
Is economics a science? Unlike the natural sciences, economics yields no natural laws or universal constants, so this has led some critics to argue economics is not a science, or at best, is
just a soft science. Some have argued that difficulty in this estimation implies economics is not a soft science, the field simply lacks the controllability of other sciences, and thus has
greater difficulty in gathering and establishing evidence. The field of experimental economics has seen efforts to test at least some predictions of economic theories in a simulated laboratory
setting – an endeavour which earned Vernon Smith the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2002.
Criticisms of economic theory and practice
Economics has been persistently criticized for its heavy reliance on unrealistic, unobservable, or unverifiable assumptions. Some people reply to this criticism by saying that the unrealistic assumptions of economics result from abstraction from unimportant details, and abstraction is necessary for knowledge of a complex real world. So, far from unrealistic assumptions detracting from the epistemic worth of economics, such assumptions are essential for economic knowledge. Denominating this explanation the abstractionist defence, and after clarifying abstraction, unrealistic assumptions and kindred notions, at least one study has shown that this abstractionist defence does not successfully rebut the position of those who criticize economics for its unrealistic assumptions.
Economics is a field of study with various schools and currents of thought.
Criticism on several topics in economics can be found elsewhere, in both general and specialized literature (for example, General equilibrium, Pareto efficiency, Marginalism, Behavioral finance, Behavioral economics, Feminist economics, Keynesian economics, Monetarism, Endogenous growth theory, Comparative advantage, Kuznets curve, Laffer curve et al.).
McCloskey critique
Although the conventional way of connecting an 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.
Ethics and economics
The relationship between economics and ethics is complex. Many economists consider normative choices and value judgements, like 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. (See, for example consumerism and Buy Nothing Day.) 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.
Effect on society
Some would go so far as to say that market forms and other means of distribution of scarce goods suggested by economics affect what people consider to be not just their "desires and wants" but also "needs" and "habits". And socialists view it as a failure of economics to respect society. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory.
The older term for economics, political economy, is still often used instead of economics, especially by certain economists such as Marxists. Use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (such as the University of Toronto and many in the United Kingdom) have a "political economy" department rather than an "economics" department.
Marxist economics generally denies the trade-off of time for money. ^ Dick Richardson, Ph.D., Professor, Integrative Biology, University of Texas at Austin — Economics is NOT Natural Science! (It is technology of Social Science.), accessed May 2006 ^ Harvard University Department of Economics — Al Roth - Gund Professor of Economics and Business Administration, Harvard Economics Department and Harvard Business School, accessed May 2006 ^ International Network for Economic Method — Journal of Economic Methodology Volume 3, Number 2, December 1996, accessed May 2006 ^ JSTOR: American Economic Review — Consensus and Dissension among Economists: An Empirical Inquiry Bruno S. 5 (Dec., 1984), accessed May 2006 ^ University of Illinois at Chicago — Rhetorical Criticism in Economics, Deirdre McCloskey, Professor of the Liberal Arts and Sciences, University of Illinois at Chicago, Professor of Economics, History, English, accessed May 2006
Further reading
Frontiers in Economics - ed. - A summary of surveys on different areas in economics. The Autistic Economist - Yale Economic Review - How and why the dismal science embraces theory over reality. Nature of Things 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.General information
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