.|alt=A vegetable vendor in a marketplace.]]
Economics is the
social science that studies the
production,
distribution, and
consumption of
goods and
services. The term
economics comes from the
Ancient Greek (
, "management of a household, administration") from
(
, "house") +
(
, "custom" or "law"), hence "rules of the house(hold)". Current economic models developed out of the broader field of
political economy in the late 19th century, owing to a desire to use an
empirical approach more akin to the physical sciences. Clark, B. (1998).
Political-economy: A comparative approach. Westport, CT: Preager.
A definition that captures much of modern economics is that of
Lionel Robbins in a
1932 essay:
"... the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." , p. 16
Scarcity means that available
resources are insufficient to satisfy all wants and needs. Absent of scarcity and alternative uses of available resources there is no
economic problem. The subject thus defined involves the study of
choices as they are affected by incentives and resources.
Economics aims to explain how
economies work and how economic
agents interact. Economic analysis is applied throughout society, in
business,
finance and
government, but also in
crime,
Friedman, David D. (2002).
"Crime," The Concise Encyclopedia of Economics. Accessed October 21, 2007.
education,
The World Bank (2007).
"Economics of Education." Accessed October 21, 2007. the
family,
health,
law,
politics,
religion,Iannaccone, Laurence R. (1998). "Introduction to the Economics of Religion,"
Journal of Economic Literature, 36(3),
pp. 1465–1495..
social institutions, war,
Nordhaus, William D. (2002). "The Economic Consequences of a War with Iraq", in
War with Iraq: Costs, Consequences, and Alternatives,
pp. 51–85. American Academy of Arts and Sciences. Cambridge, MA. Accessed October 21, 2007. and
science.Arthur M. Diamond, Jr. (2008). "science, economics of,"
The New Palgrave Dictionary of Economics, 2nd Edition, Basingstoke and New York:
Palgrave Macmillan. Pre-publication
cached ccpy. The expanding domain of economics in the
social sciences has been described as
economic imperialism.
Lazear, Edward P. (2000|. "Economic Imperialism,"
Quarterly Journal Economics, 115(1)|, p
p. 99–146.
Cached copy. Pre-publication copy(larger print.)
Becker, Gary S. (1976).
The Economic Approach to Human Behavior.
Links to arrow-page viewable chapter. University of Chicago Press.
Common distinctions are drawn between various dimensions of economics: between
positive economics (describing "what is") and
normative economics (advocating "what ought to be"); between economic theory and
applied economics; and between
mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and
heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"Davis, John B. (2006). "Heterodox Economics, the Fragmentation of the Mainstream, and Embedded Individual Analysis,” in
Future Directions in Heterodox Economics. Ann Arbor: University of Michigan Press.). However the primary textbook distinction is between
microeconomics, which examines the economic behavior of agents (including individuals and firms, consumers and producers), and
macroeconomics, addressing issues of unemployment, inflation, economic growth, and monetary and fiscal policy for an entire economy.
History of economic thought
|alt=A stele depicting a man sitting down]]
The
city states of
Sumer developed a trade and market
economy based originally on the
commodity money of the
Shekel which was a certain weight measure of
barley, while the
Babylonians and their city state neighbors later developed the earliest system of economics using a
metric of various
commodities, that was fixed in a legal code.Kramer,
History Begins at Sumer, pp. 52–55. The early law codes from Sumer could be considered the first (written) economic formula, and had many attributes still in use in the current
price system today... such as codified amounts of
money for business deals (interest rates), fines in money for 'wrong doing', inheritance rules, laws concerning how private property is to be taxed or divided, etc.http://history-world.org/reforms_of_urukagina.htm For a summary of the laws, see
Babylonian law and
Ancient economic thought.
Economic thought dates from earlier
Mesopotamian,
Greek,
Roman,
Indian,
Chinese,
Persian and
Arab civilizations. Notable writers include
Aristotle,
Chanakya (also known as Kautilya),
Qin Shi Huang,
Thomas Aquinas and
Ibn Khaldun through to the 14th century.
Joseph Schumpeter initially considered the
late scholastics of the 14th to 17th centuries as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary, interest, and value theory within a
natural-law perspective.Schumpeter, Joseph A. (1954).
History of Economic Analysis, pp. 97–115. Oxford. After discovering Ibn Khaldun's
Muqaddimah, however, Schumpeter later viewed Ibn Khaldun as being the closest forerunner of modern economics,I. M. Oweiss (1988), "Ibn Khaldun, the Father of Economics",
Arab Civilization: Challenges and Responses,
New York University Press, ISBN 0-88706-698-4. as many of his economic theories were not known in Europe until relatively modern times.
Nonetheless, recent research indicates that the Indian scholar-philosopher
Chanakya (c. 340-293 BCE) predates
Ibn Khaldun by a millennium and a half as the forerunner of modern economics,L. K. Jha, K. N. Jha (1998). "Chanakya: the pioneer economist of the world",
International Journal of Social Economics 25(2–4): 267–282.Waldauer, C., Zahka, W.J. and Pal, S. (1996)
Kautilya's Arthashastra: A neglected precursor to classical economics.
Indian Economic Review Vol. 31(1): 101–108.Tisdell, C. (2003)
A Western perspective of Kautilya's Arthasastra: does it provide a basis for economic science? Economic Theory, Applications and Issues Working Paper No. 18. Brisbane: School of Economics, The University of Queensland.Sihag, B.S. (2007) Kautilya on institutions, governance, knowledge, ethics and prosperity.
Humanomics 23 (1): 5–28. and has written more expansively on this subject, particularly on political economy. His magnum opus, the
Arthashastra (
The Science of Wealth and Welfare),Sihag, B.S. (2005) Kautilya on public goods and taxation.
History of Political Economy 37 (4): 723–753. is the genesis of economic concepts that include the opportunity cost, the demand-supply framework, diminishing returns, marginal analysis, public goods, the distinction between the short run and the long run, asymmetric information and the producer surplus.Sihag, B.S. (2009) An introduction to Kautilya and his Arthashastra.
Humanomics 25(1). In his capacity as an advisor to the throne of the
Maurya Empire of ancient
India, he has also advised on the sources and prerequisites of economic growth, obstacles to it and on tax incentives to encourage economic growth.Sihag, B.S. (2007) Kautilya on institutions, governance, knowledge, ethics and prosperity.
Humanomics 23(1): 5–28.
|alt=A seaport with a ship arriving]]
Two other groups, later called 'mercantilists' and 'physiocrats', more directly influenced the subsequent development of the subject. Both groups were associated with the rise of
economic nationalism and
modern capitalism in Europe.
Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.NA (2007). "mercantilism," Blaug, Mark (2007). "The Social Sciences: Economics".
The New Encyclopædia Britannica, v. 27, p. 343.
Physiocrats, a group of 18th century French thinkers and writers, developed the idea of the economy as a
circular flow of income and output.
Adam Smith described their system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth.
Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. Variations on such a
land tax were taken up by subsequent economists (including
Henry George a century later) as a relatively non-
distortionary source of tax revenue. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of
laissez-faire, which called for minimal government intervention in the economy.NA (2007). "physiocrat," Blaug, Mark (1997, 5th ed.)
Economic Theory in Retrospect, pp, 24–29, 82–84. Cambridge.
Classical political economy
Publication of
Adam Smith's
The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline."
Blaug, Mark (2007). "The Social Sciences: Economics".
The New Encyclopædia Britannica, v. 27, p. 343. The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.
wrote
The Wealth of Nations|alt=A man facing the right]]
In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace. He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.
In his famous
invisible-hand analogy, Smith argued for the seemingly
paradoxical notion that competitive markets tended to advance broader
social interests, although driven by narrower
self-interest. The general approach that Smith helped initiate was called
political economy and later
classical economics. It included such notables as
Thomas Malthus,
David Ricardo, and
John Stuart Mill writing from about 1770 to 1870.Blaug, Mark (1987). "Classical Economics", , v. 1, pp. 434–35. Blaug notes less widely used datings and uses of 'classical economics', including those of
Marx and
Keynes.
While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labor and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.
cautioned law makers on the effects of poverty reduction policies|alt=A man facing the viewer]]
Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Malthus also questioned the automatic tendency of a
market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until
John Maynard Keynes revived it in the 1930s.
Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.Smith, Adam (1776).
The Wealth of Nations, Bk. 1, Ch. 5, 6. Other classical economists presented variations on Smith, termed the '
labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium.
Marxism
.|alt=A man facing the viewer]]
Marxist (later, Marxian) economics descends from classical economics. It derives from the work of
Karl Marx. The first volume of Marx's major work,
Das Kapital, was published in German in 1867. In it, Marx focused on the
labour theory of value and what he considered to be the exploitation of labour by capital.
Roemer, J.E. (1987). "Marxian Value Analysis".
, v. 3, 383.
Mandel, Ernest (1987). "Marx, Karl Heinrich", ''The New Palgrave: A Dictionary of Economicsv. 3, pp. 372, 376. The labour theory of value held that the value of a thing was determined by the labor that went into its production.
Neoclassical economics
A body of theory later termed 'neoclassical economics' or '
marginalism' formed from about 1870 to 1910. The term 'economics' was popularized by such neoclassical economists as
Alfred Marshall as a concise synonym for 'economic science' and a substitute for the earlier, broader term '
political economy'.
Marshall, Alfred, and Mary Paley Marshall (1879).
The Economics of Industry
, p. 2. W. Stanley Jevons (1879, 2nd ed.) The Theory of Political Economy
, p. xiv. This corresponded to the influence on the subject of mathematical methods used in the natural sciences.Clark, B. (1998). Political-economy: A comparative approach'', 2nd ed., Westport, CT: Preagerp. p. 32..
Neoclassical economics systematized
supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the
labour theory of value inherited from classical economics in favor of a
marginal utility theory of value on the demand side and a more general theory of costs on the supply side.Campos, Antonietta (1987). "Marginalist Economics",
The New Palgrave: A Dictionary of Economics, v. 3, p. 320
In
microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping
decision making. An immediate example of this is the
consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In
macroeconomics it is reflected in an early and lasting
neoclassical synthesis with Keynesian macroeconomics.
Hicks, J.R. (1937). "Mr. Keynes and the 'Classics': A Suggested Interpretation,"
Econometrica, 5(2), p
2.0.CO;2-E&size=LARGE&origin=JSTOR-enlargePage">p. 147–159.Blanchard, Olivier Jean (1987). "Neoclassical Synthesis",
The New Palgrave: A Dictionary of Economics, v. 3, pp. 634–36.
Neoclassical economics is occasionally referred as
orthodox economics whether by its critics or sympathizers. Modern
mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as
econometrics,
game theory, analysis of
market failure and
imperfect competition, and the
neoclassical model of
economic growth for analyzing long-run variables affecting
national income.
Keynesian economics
(above, right), widely considered a key theorist in economics.|alt=Two men in suits converse with each other]]
Keynesian economics derives from
John Maynard Keynes, in particular his book
The General Theory of Employment, Interest and Money (1936), which ushered in contemporary
macroeconomics as a distinct field.Blaug, Mark (2007). "The Social Sciences: Economics,"
The New Encyclopædia Britannica, v. 27, p. 347. Chicago. The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "
effective demand" and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis.Tarshis, L. (1987). "Keynesian Revolution",
The New Palgrave: A Dictionary of Economics, v. 3, pp. 47–50.Samuelson, Paul A., and William D. Nordhaus (2004).
Economics, p. 5.Blaug, Mark (2007). "The Social Sciences: Economics,"
The New Encyclopædia Britannica, v. 27, p. 346. Chicago.
Keynesian economics has two successors.
Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the
University of Cambridge and the work of
Joan Robinson.Harcourt, G.C.(1987). "Post-Keynesian Economics",
The New Palgrave: A Dictionary of Economics, v. 3, pp. 47–50.
New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behavior but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.
Chicago School of economics
The Chicago School of economics is best known for its free market advocacy and
monetarist ideas. According to
Milton Friedman and monetarists, market economies are inherently stable
if left to themselves and depressions result only from government intervention. Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the
Federal Reserve, and not by the lack of investment as Keynes had argued.
Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.
Milton Friedman effectively took many of the basic principles set forth by
Adam Smith and the classical economists and modernized them. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business should be “to use its resources and engage in activities designed to increase its profits...(through) open and free competition without deception or fraud.” Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times Magazine 13 Sep. 1970.
Other schools and approaches
Other well-known 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, include the
Austrian School, the
Freiburg School, the
School of Lausanne,
post-Keynesian economics and the
Stockholm school. Contemporary
mainstream economics is sometimes separated into the Saltwater approach of those universities along the
Eastern and
Western coasts of the US, and the Freshwater, or Chicago-school approach.
Within macroeconomics there is, in general order of their appearance in the literature;
classical economics,
Keynesian economics, the neoclassical synthesis,
post-Keynesian economics,
monetarism,
new classical economics, and
supply-side economics. Alternative developments include
ecological economics,
institutional economics,
evolutionary economics,
dependency theory,
structuralist economics,
world systems theory,
econophysics, and
biophysical economics.
New School of Thought Brings Energy to 'the Dismal Science' New York Times Retrieved Oct-26-09
Microeconomics
Microeconomics looks at interactions through individual markets, given scarcity and
government regulation. A given market might be for a
product, say fresh corn, or the
services of a factor of production, say bricklaying. The theory considers
aggregates of
quantity demanded by buyers and
quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time.
This is broadly termed
supply and demand analysis. Market structures, such as
perfect competition and
monopoly, are examined as to implications for behavior and
economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that behavioral relations in other markets remain unchanged, that is,
partial-equilibrium analysis.
General-equilibrium theory allows for changes in different markets and aggregates across
all markets, including their movements and interactions toward equilibrium.
Blaug, Mark (2007). "The Social Sciences: Economics," Microeconomics,
The New Encyclopædia Britannica, v. 27, pp. 347–49. Chicago. ISBN 0-85229-423-9
Varian, Hal R. (1987). "Microeconomics",
, v. 3, pp. 461–63. London and New York: Macmillan and Stockton. ISBN 0-333-37235-2
Markets
In
microeconomics, production is the conversion of
inputs into
outputs. It is an economic process that uses
resources to create a
commodity that is suitable for
exchange. This can include
manufacturing,
warehousing,
shipping, and
packaging. Some economists define production broadly as all economic activity other than
consumption. They see every commercial activity other than the final purchase as some form of production. Production is a process, and as such it occurs through time and space. Because it is a
flow concept, production is measured as a "rate of output per period of time".
There are three aspects to production processes, including the quantity of the commodity produced, the form of the good created and the temporal and spatial distribution of the commodity produced.
Opportunity cost expresses the idea that for every choice, the true
economic cost is the next best opportunity. Choices must be made between desirable yet
mutually exclusive actions. It has been described as expressing "the basic relationship between
scarcity and
choice.".
James M. Buchanan (1987). "Opportunity Cost",
, v. 3, pp. 718–21. The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.
The Economist's definition of Opportunity Cost Thus, opportunity costs are not restricted to monetary or financial costs: the
real cost of
output forgone, lost time, pleasure or any other benefit that provides
utility should also be considered.
The inputs or resources used in the production process are called
factors of production. Possible inputs are typically grouped into six categories. These factors are
raw materials,
machinery,
labour services,
capital goods,
land, and
enterprise. In the
short-run, as opposed to the
long-run, at least one of these factors of production is fixed. Examples include major pieces of equipment, suitable factory space, and key personnel.
A variable factor of production is one whose usage rate can be changed easily. Examples include electrical power consumption, transportation services, and most raw material inputs. In the "
long-run", all of these factors of production can be adjusted by
management. In the short run, a firm's "scale of operations" determines the maximum number of outputs that can be produced, but in the long run, there are no scale limitations. Long-run and short-run changes play an important part in
economic models.
Economic efficiency describes how well a system generates the maximum desired output a with a given set of inputs and available
technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "friction" or "waste" is reduced. Economists look for
Pareto efficiency, which is reached when a change cannot make someone better off without making someone else worse off.
Economic efficiency is used to refer to a number of related concepts. A system can be called economically efficient if: No one can be made better off without making someone else worse off, more output cannot be obtained without increasing the amount of inputs, and production ensures the lowest possible per unit cost. These definitions of efficiency are not exactly equivalent. However, they are all encompassed by the idea that nothing more can be achieved given the resources available.
Specialization
Specialization is considered key to economic efficiency because different individuals or countries have different
comparative advantages. While one country may have an
absolute advantage in every area over other countries, it could nonetheless specialize in the area which it has a relative comparative advantage, and thereby gain from trading with countries which have no absolute advantages. For example, a country may specialize in the production of high-tech knowledge products, as developed countries do, and trade with developing nations for goods produced in factories, where labor is cheap and plentiful.
According to theory, in this way more total products and utility can be achieved than if countries produced their own high-tech and low-tech products. The theory of comparative advantage is largely the basis for the typical economist's belief in the benefits of
free trade. This concept applies to individuals, farms, manufacturers,
service providers, and
economies. Among each of these production systems, there may be a corresponding
division of labour with each worker having a distinct occupation or doing a specialized task as part of the production effort, or correspondingly different types of
capital equipment and differentiated
land uses.Groenewegen, Peter (1987). "Division of Labour",
The New Palgrave: A Dictionary of Economics, v. 1, pp. 901–05. Johnson, Paul M. (2005).
"Specialization," A Glossary of Political Economy Terms.Yang, Xiaokai, and Yew-Kwang Ng (1993).
and Economic Organization. Amsterdam: North-Holland.
Adam Smith's
Wealth of Nations (1776) discusses the benefits of the division of labour. Smith noted that an individual should invest a resource, for example, land or labour, so as to earn the highest possible return on it. Consequently, all uses of the resource should yield an equal rate of return (adjusted for the relative riskiness of each enterprise). Otherwise reallocation would result. This idea, wrote
George Stigler, is the central proposition of economic theory, and is today called the marginal productivity theory of income distribution. French economist
Turgot had made the same point in 1766.
Adam Smith, Biography: The Concise Encyclopedia of Economics: Library of Economics and Liberty
In more general terms, it is theorized that market incentives, including
prices of outputs and productive inputs, select the allocation of
factors of production by
comparative advantage, that is, so that (relatively) low-cost inputs are employed to keep down the
opportunity cost of a given type of output. In the process, aggregate output increases as a
by product or by
design.
Cameron, Rondo (1993, 2nd ed.).
A Concise Economic History of the World: From Paleolithic Times to the Present, Oxford, pp. 25, 32, 276–80. Such specialization of production creates opportunities for gains from trade whereby resource owners benefit from trade in the sale of one type of output for other, more highly-valued goods. A measure of gains from trade is the increased output
(formally, the sum of increased consumer surplus and producer profits) from specialization in production and resulting trade.Samuelson, Paul A., and William D. Nordhaus (2004). Economics
,ch. 2, "Trade, Specialization, and Division of Labor" section, ch. 12, 15, "Comparative Advantage among Nations" section," "Glossary of Terms," Gains from trade.Findlay, Ronald (1987). "Comparative Advantage", The New Palgrave: A Dictionary of Economics
, v. 1, pp. 514–17.Kemp, Murray C. (1987). "Gains from Trade", The New Palgrave: A Dictionary of Economics'', v. 2, pp. 453–54.
Supply and demand
model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).|alt=A graph depicting Quantity on the X-axis and Price on the Y-axis]]
The theory of demand and supply is an organizing principle to explain prices and quantities of goods sold and changes thereof in a
market economy. In
microeconomic theory, it refers to price and output determination in a
perfectly competitive market. This has served as a building block for modeling other market structures and for other theoretical approaches.
For a given market of a
commodity, demand shows the quantity that all prospective buyers would be prepared to purchase at each unit price of the good. Demand is often represented using a table or a graph relating price and quantity demanded (see boxed figure).
Demand theory describes individual consumers as
rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is 'constrained utility maximization' (with income as the
constraint on demand). Here,
utility refers to the (hypothesized) preference relation for individual consumers. Utility and income are then used to model hypothesized properties about the effect of a price change on the quantity demanded.
The
law of demand states that, in general, price and quantity demanded in a given market are inversely related. In other words, the higher the price of a product, the less of it people would be able and willing to buy of it (other things
unchanged). As the price of a commodity rises, overall
purchasing power decreases (the
income effect) and consumers move toward relatively less expensive goods (the
substitution effect). Other factors can also affect demand; for example an increase in income will shift the demand curve outward relative to the origin, as in the figure.
Supply is the relation between the price of a good and the quantity available for sale from suppliers (such as producers) at that price. Supply is often represented using a table or graph relating price and quantity supplied. Producers are hypothesized to be profit-maximizers, meaning that they attempt to produce the amount of goods that will bring them the highest profit. Supply is typically represented as a directly proportional relation between price and quantity supplied (other things unchanged).
In other words, the higher the price at which the good can be sold, the more of it producers will supply. The higher price makes it profitable to increase production. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This pulls the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. The
model of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. This is at the intersection of the two curves in the graph above,
market equilibrium.
For a given quantity of a good, the price point on the demand curve indicates the value, or
marginal utility Baumol, William J. (2007). "Economic Theory" (Measurement and ordinal utility).
The New Encyclopædia Britannica, v. 17, p. 719. to consumers for that unit of output. It measures what the consumer would be prepared to pay for the corresponding unit of the good. The price point on the supply curve measures
marginal cost, the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is determined by supply and demand. In a
perfectly competitive market, supply and demand equate cost and value at equilibrium.
Demand and supply can also be used to model the
distribution of income to the
factors of production, including labour and capital, through factor markets. In a labour market for example, the quantity of labour employed and the price of labour (the wage rate) are modeled as set by the
demand for labour (from business firms etc. for production) and supply of labour (from workers).
Demand and supply are used to explain the behavior of perfectly competitive markets, but their usefulness as a standard of performance extends to any type of market. Demand and supply can also be generalized to explain variables applying to the whole
economy, for example,
quantity of total output and the general
price level, studied in
macroeconomics.
In supply-and-demand analysis, the price of a good coordinates production and consumption quantities.
Price and quantity have been described as the most directly observable characteristics of a good produced for the market.Brody, A. (1987). "Prices and Quantities",
The New Palgrave: A Dictionary of Economics, v. 3, p. 957. Supply, demand, and market equilibrium are theoretical constructs linking price and quantity. But tracing the effects of factors predicted to change supply and demand—and through them, price and quantity—is a standard exercise in applied
microeconomics and
macroeconomics. Economic theory can specify under what circumstances price serves as an efficient communication device to regulate quantity.Jordan, J.S. (1982). "The Competitive Allocation Process Is Informationally Efficient Uniquely."
Journal of Economic Theory, 28(1), p. 1–18. A real-world application might attempt to measure how much variables that increase supply or demand change price and quantity.
Marginalism is the use of
marginal concepts within economics. Marginal concepts are associated with a specific change in the quantity used of a
good or of a
service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity thereof. The central concept of marginalism proper is that of
marginal utility, but marginalists following the lead of
Alfred Marshall were further heavily dependent upon the concept of
marginal physical productivity in their explanation of
cost; and the
neoclassical tradition that emerged from
British marginalism generally abandoned the concept of
utility and gave
marginal rates of substitution a more fundamental rôle in analysis.
Market failure
are not borne by producers but are by the environment, accident victims or others, then prices are distorted.|alt=A smokestack releasing smoke]]
The term "
market failure" encompasses several problems which may undermine standard economic assumptions. Although economists categorise market failures differently,Cf. Barr (2004) pp. 72–79, whose list of market failures is melded with failures of economic assumptions, which are (1) producers as price takers (i.e. presence of oligopoly or monopoly; but why is this not a product of the following?) (2) equal power of consumers (what labour lawyers call an imbalance of bargaining power) (3) complete markets (4) public goods (5) external effects (i.e. externalities?) (6) increasing returns to scale (i.e. practical monopoly) (7) perfect information. the following categories emerge in the main texts.Stiglitz (2000) Ch.4, states the sources of market failure can be enumerated as
natural monopolies,
information asymmetries,
incomplete markets,
externalities,
public good situations and
macroeconomic disturbances.
Natural monopoly, or the overlapping concepts of "practical" and "technical" monopoly, involves a failure of competition as a restraint on producers. The problem is described as one where the more of a product is made, the greater the returns are. This means it only makes economic sense to have one producer.
Information asymmetries arise where one party has more or better information than the other. The existence of information asymmetry gives rise to problems such as
moral hazard, and
adverse selection, studied in
contract theory. The economics of information has relevance in many fields, including
finance,
insurance,
contract law, and decision-making under risk and uncertainty.Lippman, S. S., and J. J. McCall (2001). "Information, Economics of,"
International Encyclopedia of the Social & Behavioral Sciences, pp. 7480–7486.
Abstract.
Incomplete markets is a term used for a situation where buyers and sellers do not know enough about each other's positions to price goods and services properly. Based on
George Akerlof's
Market for Lemons article, the paradigm example is of a dodgy second hand car market. Customers without the possibility to know for certain whether they are buying a "lemon" will push the average price down below what a good quality second hand car would be. In this way, prices may not reflect true values.
Public goods are goods which are undersupplied in a typical market. The defining features are that people can consume public goods without having to pay for them and that more than one person can consume the good at the same time.
Externalities occur where there are significant social costs or benefits from production or consumption that are not reflected in market prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the price
distortions caused by these externalities.
Laffont, J.J. (1987). "Externalities",
The New Palgrave: A Dictionary of Economics, v. 2, p. 263–65. Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of equilibrium due to a shift in demand or supply.
Blaug, Mark (2007). "The Social Sciences: Economics".
The New Encyclopædia Britannicav. 27, p. 347. Chicago. ISBN 0-85229-423-9
In many areas, some form of
price stickiness is postulated to account for quantities, rather than prices, adjusting in the short run to changes on the demand side or the supply side. This includes standard analysis of the
business cycle in
macroeconomics. Analysis often revolves around causes of such price stickiness and their implications for reaching a hypothesized long-run equilibrium. Examples of such price stickiness in particular markets include wage rates in labour markets and posted prices in markets
deviating from
perfect competition.
Macroeconomic instability, addressed below, is a prime source of market failure, whereby a general loss of business confidence or external shock can grind production and distribution to a halt, undermining ordinary markets that are otherwise sound.
sampling water|alt=A woman takes samples of water from a river]]
Some specialised fields of economics deal in market failure more than others. The
economics of the public sector is one example, since where markets fail, some kind of regulatory or government programme is the remedy. Much
environmental economics concerns externalities or "
public bads".
Policy options include regulations that reflect
cost-benefit analysis or market solutions that change incentives, such as
emission fees or redefinition of property rights.Kneese, Allen K., and Clifford S. Russell (1987). "Environmental Economics",
The New Palgrave: A Dictionary of Economics, v. 2, pp. 159–64.Samuelson, Paul A., and
William D. Nordhaus (2004).
Economics, ch. 18, "Protecting the Environment." McGraw-Hill.
Firms
, buyer and seller are not present and trade via intermediates and electronic information. Pictured:
São Paulo Stock Exchange.|alt=Two men sit at computer monitors with financial information]]
One of the assumptions of perfectly competitive markets is that there are many producers, none of whom can influence prices or act independently of market forces. In reality, however, people do not simply trade on markets, they work and produce through firms. The most obvious kinds of firms are
corporations,
partnerships and
trusts. According to
Ronald Coase people begin to organise their production in firms when the costs of doing business becomes lower than doing it on the market.Coase,
The Nature of the Firm (1937) Firms combine labour and capital, and can achieve far greater
economies of scale (when producing two or more things is cheaper than one thing) than individual market trading.
Labour economics seeks to understand the functioning of the
market and dynamics for
labour.
Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting patterns of wages and other labour income and of employment and unemployment, Practical uses include assisting the formulation of
full employment of policies.
Freeman, R.B. (1987). "Labour Economics",
The New Palgrave: A Dictionary of Economics, v. 3, pp. 72–76.
Industrial organization studies the strategic behavior of firms, the structure of markets and their interactions. The common market structures studied include
perfect competition,
monopolistic competition, various forms of
oligopoly, and
monopoly.Schmalensee, Richard (1987). "Industrial Organization",
The New Palgrave: A Dictionary of Economics, v. 2, pp. 803–808.
Financial economics, often simply referred to as
finance, is concerned with the allocation of financial resources in an uncertain (or
risky) environment. Thus, its focus is on the operation of
financial markets, the pricing of
financial instruments, and the
financial structure of companies.
Ross, Stephen A. (1987). "Finance",
The New Palgrave: A Dictionary of Economics, v. 2, pp. 322–26.
Managerial economics applies
microeconomic analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as
operations research and programming and from statistical methods such as
regression analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to
optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions.NA (2007). "managerial economics". Hughes, Alan (1987). "Managerial Capitalism", , v. 3, pp. 293–96.
Public sector
Public finance is the field of economics that deals with budgeting the revenues and expenditures of a
public sector entity, usually government. The subject addresses such matters as
tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, effects on
economic efficiency and
income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of
public choice theory, models public-sector behavior analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.
Musgrave, R.A. (1987). "Public Finance",
The New Palgrave: A Dictionary of Economics, v. 3, pp. 1055–60.
Much of economics is
positive, seeking to describe and predict economic phenomena.
Normative economics seeks to identify what is economically good and bad.
Welfare economics is a normative branch of economics that uses
microeconomic techniques to simultaneously determine the
allocative efficiency within an economy and the income
distribution associated with it. It attempts to measure
social welfare by examining the economic activities of the individuals that comprise society.Feldman, Allan M. (1987). "Welfare Economics",
The New Palgrave: A Dictionary of Economics, v. 4, pp. 889–95.
Macroeconomics
|alt=A graph depicting "Circulation in Microeconomics"]]
Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down," that is, using a simplified form of
general-equilibrium theory.Blaug, Mark (2007). "The Social Sciences: Economics,"
The New Encyclopædia Britannica, v. 27, p. 345. Such aggregates include
national income and output, the
unemployment rate, and price
inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of
monetary policy and
fiscal policy.
Since at least the 1960s, macroeconomics has been characterized by further integration as to
micro-based modeling of sectors, including
rationality of players,
efficient use of market information, and
imperfect competition.
Ng, Yew-Kwang (1992). "Business Confidence and Depression Prevention: A Mesoeconomic Perspective,"
American Economic Review 82(2), pp. 365–371.
link This has addressed a long-standing concern about inconsistent developments of the same subject.Howitt, Peter M. (1987). "Macroeconomics: Relations with Microeconomics".
Macroeconomic analysis also considers factors affecting the long-term level and
growth of national income. Such factors include capital accumulation,
technological change and
labor force growth.Blaug, Mark (2007). "The Social Sciences: Economics," Macroeconomics,
The New Encyclopædia Britannica, v. 27, p. 349.Blanchard, Olivier Jean (1987). "Neoclassical Synthesis",
, v. 3, pp. 634–36.
Growth
for 2008|alt=A world map with countries colored in different shades of orange]]
Growth economics studies factors that explain
economic growth – the increase in output
per capita of a country over a long period of time. The same factors are used to explain differences in the
level of output per capita
between countries, in particular why some countries grow faster than others, and whether countries
converge at the same rates of growth.
Much-studied factors include the rate of
investment,
population growth, and
technological change. These are represented in theoretical and
empirical forms (as in the
neoclassical and
endogenous growth models) and in
growth accounting.Samuelson, Paul A., and William D. Nordhaus (2004).
Economics, ch. 27, "The Process of Economic Growth" McGraw-Hill. ISBN 0-07-287205-5.
Uzawa, H. (1987). "Models of Growth", , v. 3, pp. 483–89.
The Business Cycle
The economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline field of study. During the
Great Depression of the 1930s,
John Maynard Keynes authored a book entitled
The General Theory of Employment, Interest and Money outlining the key theories of
Keynesian economics. Keynes contended that
aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.
He therefore advocated active policy responses by the
public sector, including
monetary policy actions by the
central bank and
fiscal policy actions by the government to stabilize output over the
business cycle{{cite book
| last = Sullivan
| first = arthur
| authorlink = Arthur O' Sullivan
| coauthors = Steven M. Sheffrin
| title = Economics: Principles in action
| publisher = Pearson Prentice Hall
| date = 2003
| location = Upper Saddle River, New Jersey 07458
| pages = 396
| url = http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4
| doi =
| id =
| isbn = 0-13-063085-3}}
Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards
full employment levels.
John Hicks'
IS/LM model has been the most influential interpretation of
The General Theory.
Over the years, the understanding of the
business cycle has branched into various schools, related to or opposed to Keynesianism. The
neoclassical synthesis refers to the reconciliation of Keynesian economics with
neoclassical economics, stating that Keynesianism is correct in the short run, with the economy following neoclassical theory in the long run.
The
New classical school critiques the Keynesian view of the business cycle. It includes Friedman's
permanent income hypothesis view on consumption, the "
rational expectations revolution"
The Macroeconomist as Scientist and Engineer, Gregory Mankiw, Harvard University, May 2006 spearheaded by
Robert Lucas, and
real business cycle theory.
In contrast, the
New Keynesian school retains the rational expectations assumption, however it assumes a variety of
market failures. In particular, New Keynesians assume prices and wages are "
sticky", which means they do not adjust instantaneously to changes in economic conditions.
Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the "long run" may be very long.
Inflation and monetary policy
electrum coin from
Lydia, shown larger. One of the first standardized
coins.|alt=The front and back of a coin. A creature's head is on the front.]]
Money is a
means of final payment for goods in most
price system economies and the
unit of account in which prices are typically stated. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention, like language, useful to one largely because it is useful to others.
As a
medium of exchange, money facilitates trade. Its economic function can be contrasted with
barter (non-monetary exchange). Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate
double coincidence of wants as to what is exchanged, say apples and a book. Money can reduce the
transaction cost of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces.
Tobin, James (1992). "Money" (Money as a Social Institution and Public Good),
The New Palgrave Dictionary of Finance and Money, v. 2, pp. 770–71.
At the level of an
economy,
theory and evidence are consistent with a
positive relationship running from the total
money supply to the
nominal value of total output and to the general
price level. For this reason, management of the
money supply is a key aspect of
monetary policy.
Milton Friedman (1987). "Quantity Theory of Money",
The New Palgrave: A Dictionary of Economics, v. 4, pp. 15–19.Samuelson, Paul A., and William D. Nordhaus (2004).
Economics, ch. 2, "Money: The Lubroicant of Exchange" section, ch. 33, Fig. 33–3.
Fiscal policy and regulation
is a
central bank]]
National accounting is a method for summarizing aggregate economic activity of a nation. The national accounts are
double-entry accounting systems that provide detailed underlying measures of such information. These include the
national income and product accounts (NIPA), which provide estimates for the money value of output and income per year or quarter.
NIPA allows for tracking the performance of an economy and its components through
business cycles or over longer periods. Price data may permit distinguishing
nominal from real amounts, that is, correcting money totals for price changes over time.Usher, D. (1987), "Real Income",
The New Palgrave: A Dictionary of Economics, v. 4, p. 104.
Sen, Amartya (1979), "The Welfare Basis of Real Income Comparisons: A Survey,"
Journal of Economic Literature, 17(1), p
p. 1–45. The national accounts also include measurement of the
capital stock,
wealth of a nation, and
international capital flows. Ruggles, Nancy D. (1987), "Social Accounting".
International economics
International trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of
gains from trade. Policy applications include estimating the effects of changing
tariff rates and trade quotas.
International finance is a macroeconomic field which examines the flow of
capital across international borders, and the effects of these movements on
exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary
globalization.Anderson, James E. (2008). "International Trade Theory",
The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.Venables, A. (2001), "International Trade: Economic Integration," International Encyclopedia of the Social & Behavioral Sciences, pp. 7843–7848. Abstract.Obstfeld, Maurice (2008). "International Finance", The New Palgrave Dictionary of Economics, 2nd Edition''.
Abstract.
.|alt=A world map with countries colored in different colors.]]
The distinct field of
development economics examines economic aspects of the development process in relatively
low-income countries focussing on
structural change,
poverty, and
economic growth. Approaches in development economics frequently incorporate social and political factors.Bell, Clive (1987). "Development Economics",
, v. 1, pp. 818–26.Blaug, Mark (2007). "The Social Sciences: Economics," Growth and development,
The New Encyclopædia Britannica, v. 27, p. 351. Chicago.
Economic systems is the of economics that studies the methods and
institutions by which societies determine the ownership, direction, and allocaton of economic resources. An
economic system of a society is the unit of analysis.
Among contemporary systems at different ends of the organizational spectrum are
socialist systems and
capitalist systems, in which most production occurs in respectively state-run and private enterprises. In between are
mixed economies. A common element is the interaction of economic and political influences, broadly described as
political economy.
Comparative economic systems studies the relative performance and behavior of different economies or systems.
Heilbroner, Robert L. and Peter J. Boettke (2007). "Economic Systems",
The New Encyclopædia Britannica, v. 17, pp. 908–15.NA (2007). "economic system,"
Encyclopædia Britannica online Concise Encyclopedia
entry.
Economics in practice
Contemporary
mainstream economics, as a formal
mathematical modeling field, could also be called
mathematical economics. It draws on the tools of
calculus,
linear algebra,
statistics,
game theory, and
computer science.
Debreu, Gerard (1987). "Mathematical Economics",
The , v. 3, pp. 401–03. Professional economists are expected to be familiar with these tools, although all economists specialize, and some specialize in econometrics and mathematical methods while others specialize in less quantitative areas.
Heterodox economists place less emphasis upon mathematics, and several important historical economists, including Adam Smith and
Joseph Schumpeter, have not been mathematicians. Economic reasoning involves intuition regarding economic concepts, and economists attempt to analyze to the point of discovering
unintended consequences.
Theory
Mainstream economic theory relies upon quantitative
economic models, which employ a variety of concepts. Theory typically proceeds with an assumption of
ceteris paribus, which means holding constant explanatory variables other than the one under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research than prior theories.
Friedman Milton (1953). "
The Methodology of Positive Economics,"
Essays in Positive Economics, University of Chicago Press, p. 10.
In
microeconomics, principal concepts include
supply and demand,
marginalism,
rational choice theory,
opportunity cost,
budget constraints,
utility, and the
theory of the firm.Boland, Lawrence A. (1987). "Methodology",
, v. 3, pp. 455–58. Accessed on 2007-03-17. Early
macroeconomic models focused on modeling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists were pressured to base their models in
microfoundations.
The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in
monetary theory, the
quantity theory of money predicts that increases in the
money supply increase
inflation, and inflation is assumed to be influenced by
rational expectations. In
development economics, slower growth in developed nations has been sometimes predicted because of the declining marginal returns of investment and capital, and this has been observed in the
Four Asian Tigers. Sometimes an economic hypothesis is only
qualitative, not
quantitative.Quirk, James (1987). "Qualitative Economics",
The New Palgrave: A Dictionary of Economics, v. 4, pp. 1–3.
Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality,
Paul Samuelson's treatise
Foundations of Economic Analysis (1947) used mathematical methods to represent the theory, particularly as to maximizing behavioral relations of agents reaching equilibrium. The book focused on examining the class of statements called
operationally meaningful theorems in economics, which are
theorems that can conceivably be refuted by empirical data.
Empirical investigation
Economic theories are frequently tested
empirically, largely through the use of
econometrics using
economic data. Hashem, M. Pesaren (1987). "Econometrics", , v. 2, p. 8. The controlled experiments common to the
physical sciences are difficult and uncommon in economicsProbability, econometrics and truth: the methodology of econometrics
By Hugo A. Keuzenkamp
Published by Cambridge University Press, 2000
ISBN 0-521-55359-8, 9780521553599
312 pages, page 13: "...in economics, controlled experiments are rare and reproducible controlled experiments even more so..." , and instead broad data is
observationally studied; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more tentative. The number of laws discovered by the discipline of economics is relatively very low compared to the physical sciences.
Statistical methods such as
regression analysis are common. Practitioners use such methods to estimate the size, economic significance, and
statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is dependent upon the
falsifiable hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests,
data sets, and prior beliefs.
Criticism based on professional standards and non-
replicability of results serve as further checks against bias, errors, and over-generalization,Blaug, Mark (2007). "The Social Sciences: Economics" ( Methods of inference and Testing theories),
The New Encyclopædia Britannica, v. 27, p. 347. although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data. Like theories, uses of test statistics are themselves open to critical analysis,Kennedy, Peter (2003).
A Guide to Econometrics, 5th ed., "21.2 The Ten Commandments of Applied Econometrics," pp. 390–96
(excerpts).McCloskey, Deirdre N. and Stephen T. Ziliak (1996). "The Standard Error of Regressions,"
Journal of Economic Literature, 34(1), pp.
97–114.
Hoover, Kevin D., and Mark V. Siegler (2008). "Sound and Fury: McCloskey and Significance Testing in Economics,"
Journal of Economic Methodology, 15(1), pp. 1–37
(2005 prepubication version). Reply of McCloskey and Ziliak and rejoinder, pp. 39–68. although critical commentary on papers in economics in prestigious journals such as the
American Economic Review has declined precipitously in the past 40 years.{{cite journal | author = Coelho, P.R.P. | coauthors = De Worken-eley Iii, F.; McClure, J.E. | year = 2005 | title = Decline in Critical Commentary, 1963–2004 | journal = Econ Journal Watch | volume = 2 | issue = 2 | pages = 355–361
| url = http://www.econjournalwatch.org/pdf/CoelhoetalAbstractAugust2005.pdf | accessdate = 2008-06-10|format=PDF}} This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).{{cite journal | author = Whaples, R. | year = 2006
| title = The Costs of Critical Commentary in Economics Journals | journal = Econ Journal Watch | volume = 3 | issue = 2 | pages = 275–282 | url = http://ideas.repec.org/a/ejw/volone/2006275-282.html | accessdate = 2008-06-10
}}
In applied economics,
input-output models employing
linear programming methods are quite common. Large amounts of data are run through computer programs to analyze the impact of certain policies;
IMPLAN is one well-known example.
Experimental economics has promoted the use of
scientifically controlled experiments. This has reduced long-noted distinction of economics from
natural sciences allowed direct tests of what were previously taken as axioms.
C.F. (1925). "Experimental Methods in Economics,"
Palgrave's Dictionary of Economics, reprinted in
The New Palgrave: A Dictionary of Economics (1987, v. 2, p. 241.
Smith, Vernon L. (1987), "Experimental Methods in Economics", ii.
The New Palgrave: A Dictionary of Economics, v. 2, pp. 241–42. In some cases these have found that the axioms are not entirely correct; for example, the
ultimatum game has revealed that people reject unequal offers.
In
behavioral economics, psychologists
Daniel Kahneman and
Amos Tversky have won Nobel Prizes in economics for their empirical discovery of several
cognitive biases and
heuristics. Similar empirical testing occurs in
neuroeconomics. Another example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences.Fehr, Ernst, and Urs Fischbacher (2003). "The Nature of Human Altruism,"
Nature 425, October 23,
pp. 785–791.Sigmund, Karl, Ernst Fehr, and Martin A. Nowak (2002),"The Economics of Fair Play,"
Scientific American, 286(1) January,
pp. 82–87. These techniques have led some to argue that economics is a "genuine science.".
Game theory
Game theory is a branch of
applied mathematics that studies strategic interactions between agents. In
strategic games,
agents choose strategies that will maximize their payoff, given the strategies the other agents choose. It provides a formal modeling approach to social situations in which decision makers interact with other agents.
Game theory generalizes maximization approaches developed to analyze markets such as the
supply and demand model. The field dates from the 1944 classic
Theory of Games and Economic Behavior by
John von Neumann and
Oskar Morgenstern. It has found significant applications in many areas outside economics as usually construed, including formulation of
nuclear strategies,
ethics,
political science, and
evolutionary theory.
Aumann, R.J. (1987). "Game Theory",
, v. 2, pp. 460–82.
Profession
The professionalization of economics, reflected in the growth of graduate programs on the subject, has been described as "the main change in economics since around 1900".
O. Ashenfelter (2001), "Economics: Overview," The Profession of Economics,
International Encyclopedia of the Social & Behavioral Sciences, v. 6, p. 4159. Most major
universities and many colleges have a major, school, or department in which
academic degrees are awarded in the subject, whether in the
liberal arts, business, or for professional study.
The
Nobel Memorial Prize in Economic Sciences (commonly known as the Nobel Prize in Economics) is a prize awarded to economists each year for outstanding intellectual contributions in the field. In the private sector, professional economists are employed as consultants and in industry, including
banking and
finance. Economists also work for various government departments and agencies, for example, the national
Treasury,
Central Bank or
Bureau of Statistics.
Economics and other subjects
Economics is one
social science among several and has fields bordering on other areas, including
economic geography,
economic history,
public choice,
energy economics, , and
institutional economics.
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of legal rules, to assess which legal rules are
economically efficient, and to predict what the legal rules will be.
Friedman, David (1987). "Law and Economics,"
The New Palgrave: A Dictionary of Economics, v. 3, p. 144.
Posner, Richard A. (1972).
Economic Analysis of Law. Aspen, 7th ed., 2007) ISBN 978-0-7355-6354-4. A seminal article by
Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of
externalities.
Coase, Ronald, "The Problem of Social Cost",
The Journal of Law and Economics Vol.3, No.1 (1960). This issue was actually published in 1961.
Political economy is the interdisciplinary study that combines economics, law, and
political science in explaining how political institutions, the political environment, and the economic system (
capitalist,
socialist, mixed) influence each other. It studies questions such as how
monopoly,
rent seeking behavior, and
externalities should impact government policy.Groenwegen (1987, p.906)Anne O. Krueger, "The Political Economy of the Rent-Seeking Society,"
American Economic Review, 64(3), June 1974, pp.291–303
Historians have employed
political economy to explore the ways in the past that persons and groups with common economic interests have used politics to effect changes beneficial to their interests.McCoy, Drew R. "The Elusive Republic: Political Ecocomy in Jeffersonian America", Chapel Hill, University of North Carolina, 1980.
Energy economics is a broad
scientific subject area which includes topics related to
energy supply and
energy demand.
Georgescu-Roegen reintroduced the concept of
entropy in relation to
economics and energy from
thermodynamics, as distinguished from what he viewed as the mechanistic foundation of neoclassical economics drawn from Newtonian physics. His work contributed significantly to
thermoeconomics and to
ecological economics. He also did foundational work which later developed into
evolutionary economics.Cleveland, C. and Ruth, M. 1997. When, where, and by how much do biophysical limits constrain the economic process? A survey of Georgescu-Roegen's contribution to ecological economics.
Ecological Economics 22: 203-223.Daly, H. 1995. On Nicholas Georgescu-Roegen’s contributions to economics: An obituary essay.
Ecological Economics 13: 149-54.Mayumi, K. 1995. Nicholas Georgescu-Roegen (1906-1994): an admirable epistemologist.
Structural Change and Economic Dynamics 6: 115-120.Mayumi,K. and Gowdy, J. M. (eds.) 1999.
Bioeconomics and Sustainability: Essays in Honor of Nicholas Georgescu-Roegen. Cheltenham: Edward Elgar.Mayumi, K. 2001.
The Origins of Ecological Economics: The Bioeconomics of Georgescu-Roegen. London: Routledge.
The
sociological subfield of
economic sociology arose, primarily through the work of
Émile Durkheim,
Max Weber and
Georg Simmel, as an approach to analysing the effects of economic phenomena in relation to the overarching social paradigm (i.e.
modernity). Classic works include
Max Weber's
The Protestant Ethic and the Spirit of Capitalism (1905) and
Georg Simmel's
The Philosophy of Money (1900). More recently, the works of
Mark Granovetter,
Peter Hedstrom and
Richard Swedberg have been influential in this field.
Criticisms of economics
"
The dismal science" is a derogatory alternative name for economics devised by the
Victorian historian
Thomas Carlyle in the 19th century. It is often stated that Carlyle gave economics the nickname "the dismal science" as a response to the late 18th century writings of The Reverend
Thomas Robert Malthus, who grimly predicted that starvation would result, as projected population growth exceeded the rate of increase in the food supply. The teachings of Malthus eventually became known under the umbrella phrase "
Malthus' Dismal Theorem". His predictions were forestalled by unanticipated dramatic improvements in the efficiency of
food production in the 20th century; yet the bleak end he proposed remains as a disputed future possibility, assuming human innovation fails to keep up with population growth.
Some economists, like
John Stuart Mill or
Leon Walras, have maintained that the production of wealth should not be tied to its distribution. The former is in the field of "applied economics" while the latter belongs to "social economics" and is largely a matter of power and politics.
The Origin of Economic Ideas, Guy Routh (1989)
In
The Wealth of Nations,
Adam Smith addressed many issues that are currently also the subject of debate and dispute. Smith repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate a government into doing their bidding. In Smith's day, these were referred to as
factions, but are now more commonly called
special interests, a term which can comprise international bankers, corporate conglomerations, outright
oligopolies,
monopolies,
trade unions and other groups.See Noam Chomsky (
Understanding Power),
link on Smith's emphasis on class conflict in the Wealth of Nations
Economics per se, as a social science, is independent of the political acts of any government or other decision-making organization, however, many
policymakers or individuals holding highly ranked positions that can influence other people's lives are known for arbitrarily using a plethora of economic concepts and
rhetoric as vehicles to legitimize
agendas and
value systems, and do not limit their remarks to matters relevant to their responsibilities. The close relation of economic theory and practice with
politics Research Paper No. 2006/148 Ethics, Rhetoric and Politics of Post-conflict Reconstruction How Can the Concept of Social ContractHelp Us in Understanding How to Make Peace Work? Sirkku K. Hellsten, pg. 13 is a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with specific social agendas and value systems.
Political Communication: Rhetoric, Government, and Citizens, second edition, Dan F. Hahn Notwithstanding, economics legitimately has a role in informing government policy. It is, indeed, in some ways an outgrowth of the older field of political economy. Some academic economic journals are currently focusing increased efforts on gauging the consensus of economists regarding certain policy issues in hopes of effecting a more informed political environment. Currently, there exists a low approval rate from professional economists regarding many public policies. Policy issues featured in a recent survey of AEA economists include trade restrictions, social insurance for those put out of work by international competition, genetically modified foods, curbside recycling, health insurance (several questions), medical malpractice, barriers to entering the medical profession, organ donations, unhealthy foods, mortgage deductions, taxing internet sales, Wal-Mart, casinos, ethanol subsidies, and inflation targeting.Whaples, Robert. "The Policy Views of American Economic Association Members: The Results of a New Survey".
Econ Journal Watch 6(3): 337-348.
link
In
Steady State Economics 1977,
Herman Daly argues that there exist logical inconsistencies between the emphasis placed on economic growth and the limited availability of natural resources.http://dieoff.org/page88.htm Steady-State Economics, by Herman Daly
Issues like
central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of
macroeconomic policiesJohan Scholvinck, Director of the UN Division for Social Policy and Development in New York,
Making the Case for the Integration of Social and Economic Policy, The Social Development Review (
monetary and
fiscal policy) of the
States, are focus of contention and criticism.Bernd Hayo (Georgetown University & University of Bonn),
Do We Really Need Central Bank Independence? A Critical Re- examination, IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of ConnecticutGabriel Mangano (Centre Walras-Pareto, University of Lausanne BFSH 1, 1015 Lausanne, Switzerland, and London School of Economics), Measuring Central Bank Independence: A Tale of Subjectivity and of Its Consequences, Oxford Economic Papers. 1998; 50: 468–492Friedrich Heinemann,
Does it Pay to Watch Central Bankers' Lips? The Information Content of ECB Wording, IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of ConnecticutStephen G. Cecchetti,
Central Bank Policy Rules: Conceptual Issues and Practical Considerations, IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut
Deirdre McCloskey has argued that many empirical economic studies are poorly reported, and while
her critique has been well-received, she and Stephen Ziliak argue that practice has not improved.{{cite journal | author = Ziliak, S.T. | coauthors =
McCloskey, D.N. | year = 2004 | title = Size Matters: The Standard Error of Regressions in the American Economic Review | journal = Econ Journal Watch | volume = 1 | issue = 2
| pages = 331–358 | url =http://www.econjournalwatch.org/pdf/ZiliakMcCloskeyAugust2004.pdf | accessdate = 2008-06-10|format=PDF}} This latter contention is controversial.
A 2002
International Monetary Fund study looked at “consensus forecasts” (the forecasts of large groups of economists) that were made in advance of 60 different national recessions in the ’90s: in 97% of the cases the economists did not predict the contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated their severity."How Accurate Are Private Sector Forecasts? Cross-Country Evidence from Consensus Forecasts of Output Growth", by Prakash Loungani, International Monetary Fund (IMF), December 2002.
Criticism of assumptions
Economics has been subject to criticism that it relies on unrealistic, unverifiable, or highly simplified assumptions, in some cases because these assumptions lend themselves to elegant mathematics. Examples include
perfect information,
profit maximization and
rational choices.Rappaport, Steven (1996). "Abstraction and Unrealistic Assumptions in Economics,"
Journal of Economic Methodology, 3(2}, pp. 215–236.
Abstract, (1998).
Models and Reality in Economics. Edward Elgar, p. 6, ch. 6–8.
Friedman, Milton (1953), "The Methodology of Positive Economics,"
Essays in Positive Economics, University of Chicago Press, pp. 14–15, 22, 31.Boland, Lawrence A. (2008). "Assumptions Controversy",
The New Palgrave Dictionary of Economics, 2nd Edition Online abstract. Accessed May 30, 2008. Some contemporary economic theory has focused on addressing these problems through the emerging subdisciplines of
information economics,
behavioral economics, and
complexity economics, with
Geoffrey Hodgson forecasting a major shift in the mainstream approach to economics. }} Nevertheless, prominent mainstream economists such as Keynes