Economics

From Wikipedia, the free encyclopedia.

Economics is a social science that studies society's allocation of scarce resources to meet desires and wants.

Economics begins with the premise that resources are in limited supply and that it is necessary to choose between competing alternatives. The subject is said to be positive when it attempts to explain the consequences of different choices given a set of assumptions and normative when it prescribes a certain route of action.

Aspects receiving particular attention in economics are resource allocation, trade and competition. The subject is broadly divided into two main branches: microeconomics, which deals with individual agents and macroeconomics which considers the economy as a whole. Economics may in principle be applied to any problem that involves choice under scarcity; this includes such diverse topics as the governance of production, distribution of wealth as well as the various related problems of finance, taxation, labour, law, poverty, pollution etc.

Economic assumptions

Understanding choice by individuals and groups is central in economics. With scarcity, choosing one alternative implies foregoing another alternative; economists refer to this as opportunity cost. For instance, learning one skill implies time not spent learning another. At an applied level this approach often requires an explicit modelling of the spectrum of choices available and thus implicitly those that are unavailable.

Economists belive that incentives and preferences (tastes) together play an important role in shaping decision making. Sometimes a preference relation can be represented by a utility function (utilitarianism may be viewed as a philosophical basis of much of economics; see goodness and value theory for other approaches to value).

Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. To the contrary, much analysis is devoted to cases where market failures lead to resource allocation that is suboptimal by some standard. In such cases, economists may attempt to find policies that will avoid waste, either directly by government control or indirectly by regulation that forces market participants to act in a manner consistent with optimal welfare.

Despite the extreme controversy surrounding larger economic issues, there is significant agreement among mainstream economists on the fundamentals of the subject, especially as reflected in microeconomics as opposed to macroeconomics.

Much contemporary theory assumes that economic agents act rationally to optimize well-being given available information. This may sometimes be an acceptable approximation (for instance, if individual irrationality cancel each other out in the aggregate) and tends to produce tractable results. However, this framework ("homo economicus") is not accepted by all. More recently, irrational behavior and imperfect information have increasingly been the subject of formal modelling (often referred to as behavioral economics), resulting in some Nobel Prizes in economics. An example is the growing field of behavioral finance which combines traditional theory with cognitive psychology.

Economic language

Economics relies on formal styles of argument more than other social sciences. Formal modelling implies that conclusions follow rigorously by the laws of logic from the stated assumptions. It may involve advanced mathematical methods, but need not. Formal modelling is motivated by the belief that it encourages researchers to focus on essentials and makes exposition less prone to ambiguity. Modelling is also increasingly used in other social sciences, such as political science and philosophy.

Formal modelling has been adopted by all branches of economics. It is not the same as mathematical economics, which implies the application of advanced mathematical methods to study any given problem. Some reject mathematical economics: The Austrian School of economics believes that anything beyond simple logic is not only unnecessary but inappropriate for economic analysis.

Academic work sometimes requires years of training to be fully understandable. However, the basic ideas of economics can be taught with no more than simple arithmetic and graphs.

Areas of study in economics

Economics is usually divided into two main branches:

• Microeconomics, which deals with the behaviour and interaction of individual agents and firms.
• Macroeconomics, which examines an economy as a whole with a view to understanding the interaction between economic aggregates such as 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. Today, the consensus view is arguably that good macroeconomics has solid microeconomic foundations i.e. its premises have support in microeconomics.

Within these major divisions there are specialized areas of study that try to answer questions on a broad spectrum of human economic activity (see below). 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.

There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Since economics analysis focuses on decision making, it can be applied (with varying degrees of success) to any field where people are faced with alternatives - education, marriage, health, public policy, voting theory etc. Public Choice Theory studies how economic analysis can apply to those fields traditionally considered outside of economics. The areas of investigation in Economics therefore overlap with other social sciences, including political science and sociology.

Branches of economics and related subjects

Economics may be broken down as follows:

Microeconomics

General equilibrium -- Industrial organization -- Financial economics -- Public finance -- International trade -- Labor economics -- Development economics -- Environmental economics -- Evolutionary economics -- Public choice theory -- Public goods -- Economic geography -- Network effect -- Transport economics -- Supply and Demand -- Consumer Theory -- Health economics

Macroeconomics

Stabilisation policy -- Economic growth -- Purchasing power parity -- supply side economics --Gold standard

Methodology

Econometrics -- Game Theory -- Mathematical economics

Development of economic thought

Modern economic thought is usually said to have begun with Adam Smith in the late 18th century. For an overview of precursors to Smith as well as an overview of schools that have developed later, see history of economic thought. Modern mainstream economics is primarily a further refinement of neoclassical economics.

Macroeconomics began with Keynes in the 1930s. For an overview of a number of competing schools, see macroeconomics.

Many economists use a combination of Neoclassical microeconomics and Keynesian macroeconomics. This combination, sometimes known as the Neoclassical synthesis, was dominant in Western teaching and public policy in the years following World War II and up to the late 1970s.

In principle, economics can be applied to any type of economic organization. However, it developed historically in market societies, and its most detailed and precise work has dealt with the institutions belonging to them. To what extent economics must be adjusted to be applied to earlier forms of social organization has been the source of discussion. Generally, mainstream economists mostly feel that the basic framework of economics is relevant and flexible enough to be applied to virtually any form of society. Marxist economists, who were more influential a few decades ago, often feel that each era of history obeys its very own set of laws, and that contemporary economics can only be applied to industrialized societies.

Economics and other disciplines

There is to some degree in tension between economics and ethics, another of the most basic social sciences, which tends to avoid quantification and emphasize balances of rights. Modern economics deals with this tension explicitly - according to some thinkers a theory of economics is also, or implies also, a theory of moral reasoning. One way economists deal with this is to qualify discussions of economic choice by noting that "all else being equal..." referring to moral or social factors that are supposedly held equivalent for all choices that one might make. For exploration of this issue, see the moral purchasing article.

Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources - for instance, when fueling a fire one is usually concerned with finding the wood, and not so much with finding the air to burn it with. Economics explicitly does not deal with free abundant inputs - one criticism is that it often conflicts with ecology's view of what affects what. Human beings are, according to ecologists, merely one species participating in a vast energy system on this planet - economy is a subset of ecology that deals with just one species' habits and wants. See nature's services for the economic view of ecology and green economics for the view wherein economics is a subset of ecology.

A third premise is that economics suggests market forms and other means of distribution of scarce goods that do not just affect "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is involuntary, certainly given the conditioning that people have to expect certain quality of life. Much of the welfare state that developed nations have built has no basis whatsoever in the study of economics in academia. This is viewed as a failure to respect economics by libertarians, and viewed as a failure of economics to respect society by socialists. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory.

The debates above are all quite old. The term economics was coined in around 1870, and popularised by influential "neoclassical" economists such as Alfred Marshall. Prior to this the subject had been known as "political economy" and referred to "the economy of polities" - competing states. The older term is still often used instead of economics, especially by radical economists such as Marxists who strongly question assumptions of "mainstream" technical and quantitative economics. Use of this term often signals an intent to challenge or reframe economic assumptions about scarcity.

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. Political economy explicitly brings political considerations into economic analysis and therefore tends to be more normative - for instance it would describe assumptions in common between green politics and green economics rather than assuming the latter objective.

See also

Related fields

History of economic thought -- Political economy -- Political science -- Accounting -- Finance -- Operations research -- Home economics

Selected topics

Economists -- The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel -- Communism -- Capitalism -- Coordinatorism -- Market economy -- Informal economy -- Freiwirtschaft -- Synthetic economies -- Participatory economics -- Natural capitalism -- Stock exchange -- economic indicator -- Regulation -- Deregulation -- Privatization

List of terms in urban economics

• List of things which are neither production nor consumption
• List of economics consultancies and think tanks
• Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel

External links

• A guide to several online economics textbooks
• The library of economics and liberty, a site with numerous articles and essays written by well-known economists
• LibertyForums - Classical Liberal, Libertarian & Objectivist Discussion Board