Economics
What Is Economics?
Economics
is a social science concerned with the production, distribution, and
consumption of goods and services. It studies how individuals, businesses,
governments and nations make choices about how to allocate resources.
Economics
can generally be broken down into macroeconomics, which concentrates on
the behavior of the economy as a whole, and microeconomics, which focuses
on individual people and businesses.
KEY TAKEAWAYS
- Economics
is the study of how people allocate scarce resources for production,
distribution, and consumption, both individually and collectively.
- Two
major types of economics are microeconomics, which focuses on
the behavior of individual consumers and producers, and macroeconomics,
which examine overall economies on a regional, national, or international
scale.
- Economics
is especially concerned with efficiency in production and exchange and
uses models and assumptions to understand how to create incentives and
policies that will maximize efficiency.
- Economists
formulate and publish numerous economic indicators, such as gross domestic
product (GDP) and the Consumer Price Index (CPI).
- Capitalism, socialism, and communism are types of economic systems.
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Understanding Economics
One of
the earliest recorded economic thinkers were the 8th-century B.C. Greek
farmer/poet Hesiod, who wrote that labor, materials, and time needed to be
allocated efficiently to overcome scarcity. But the founding of modern Western
economics occurred much later, generally credited to the publication
of Scottish philosopher Adam Smith's 1776 book, An Inquiry Into
the Nature and Causes of the Wealth of Nations.
The
principle (and problem) of economics is that human beings have unlimited wants
and occupy a world of limited means. For this reason, the concepts
of efficiency and productivity are held paramount by economists.
Increased productivity and more efficient use of resources, they argue, could
lead to a higher standard of living.
Despite
this view, economics has been pejoratively known as the "dismal
science," a term coined by Scottish historian Thomas Carlyle in 1849. He
used it to criticize the liberal views on race and social equality of
contemporary economists like John Stuart Mill, though some sources suggest
Carlyle was actually describing the gloomy predictions by Thomas Robert
Malthus that population growth would always outstrip the food supply.
Types of Economics
- Microeconomics
focuses on how individual consumers and firm make decisions; these
individuals can be a single person, a household, a business/organization
or a government agency. Analyzing certain aspects of human behavior,
microeconomics tries to explain they respond to changes in price and why
they demand what they do at particular price levels. Microeconomics tries
to explain how and why different goods are valued differently, how
individuals make financial decisions, and how individuals best trade,
coordinate and cooperate with one another. Microeconomics' topics range
from the dynamics of supply and demand to the efficiency and costs
associated with producing goods and services; they also include how labor
is divided and allocated, uncertainty, risk, and strategic game
theory.
- Macroeconomics
studies an overall economy on both a national and international level. Its
focus can include a distinct geographical region, a country, a continent,
or even the whole world. Topics studied include foreign trade, government
fiscal and monetary policy, unemployment rates, the level of inflation and
interest rates, the growth of total production output as reflected by
changes in the Gross Domestic Product (GDP), and business
cycles that result in expansions, booms, recessions, and
depressions.
Micro-
and macroeconomics are intertwined; as economists gain an understanding of certain
phenomena, they can help us make more informed decisions when allocating
resources. Many believe that microeconomics' foundations of individuals and
firms acting in aggregate constitute macroeconomic phenomena.
Schools of Economic Theory
There are
also schools of economic thought. Two of the most common
are monetarist and Keynesian. Monetarists have generally
favorable views on free markets as the best way to allocate resources and argue
that stable monetary policy is the best course for managing the economy. In contrast, the Keynesian approach believes that markets often don’t work well at
allocating resources on their own and favors fiscal policy by an activist
government in order to manage irrational market swings and recessions.
Economic
analysis often progresses through deductive processes, including mathematical
logic, where the implications of specific human activities are considered in a
"means-ends" framework. Some branches of economic thought emphasize
empiricism, rather than formal logic—specifically, macroeconomics
or Marshallian microeconomics, which attempt to use the procedural
observations and falsifiable tests associated with the natural
sciences.
Since
true experiments cannot be created in economics, empirical economists rely on simplifying assumptions and retroactive data analysis. However,
some economists argue economics is not well suited to empirical testing, and
that such methods often generate incorrect or inconsistent answers.
The Economics of Labor, Trade, and Human Behavior
The
building blocks of economics are the studies of labor and trade. Since
there are many possible applications of human labor and many different ways to
acquire resources, it is difficult to determine which methods yield the best
results.
Economics
demonstrates, for example, that it is more efficient for individuals or
companies to specialize in specific types of labor and then trade for their
other needs or wants, rather than trying to produce everything they need or
want on their own. It also demonstrates trade is most efficient when
coordinated through a medium of exchange, or money.
Economics
focuses on the actions of human beings. Most economic models are based on
assumptions that humans act with rational behavior, seeking the most
optimal level of benefit or utility. But of course, human behavior can be
unpredictable or inconsistent, and based on personal, subjective values
(another reason why economic theories often are not well suited to empirical
testing). This means that some economic models may be unattainable or
impossible, or just not work in real life.
Still,
they do provide key insights for understanding the behavior
of financial markets, governments, economies—and human decisions behind
these entities. As it is, economic laws tend to be very general, and
formulated by studying human incentives: economics can say profits incentivize
new competitors to enter a market, for example, or
that taxes disincentivize spending.
Types of Economic Systems
Economic
systems are defined either by the way that stuff is produced or by how that
stuff is allocated to people. For example, in primitive agrarian societies,
people tend to self-produce all of their needs and wants at the level of the
household or tribe. Family members would build their own dwellings, grow their
own crops, hunt their own game, fashion their own clothes, bake their own
bread, etc. This self-sufficient economic system is defined by very
little division of labor and is also based on reciprocal
exchange with other family or tribe members. In such a primitive society,
the concept of private property didn’t typically exist as the needs of the
community were produced by all for the sake of all.
Later, as
civilizations developed, economies based on production by social class emerged,
such as feudalism and slavery. Slavery involved production by enslaved
individuals who lacked personal freedom or rights and existed as the property
of their owners. Feudalism was a system where a class of nobility, known as
lords, owned all of the lands and leased out small parcels to peasants to farm,
with peasants handing over much of their production to the lord. In return, the
lord offered the peasants relative safety and security, including a place to
live and food to eat.
Capitalism
Capitalism
emerged with the advent of industrialization. Capitalism is defined
as a system of production whereby business owners (capitalists) produce goods
for sale in order to make a profit and not for personal consumption. In
capitalism, capitalists own the business including the tools used for
production as well as the finished product. Workers are hired in return for
wages, and the worker owns neither the tools he uses in the production process
nor the finished product when it’s complete. If you work at a shoe factory and
you take home a pair of shoes at the end of the day, that’s stealing even
though you made them with your own hands. This is because capitalist economies
rely on the concept of private property to distinguish who legally owns what.
Capitalist production relies on the market for the allocation and distribution
of the goods that are produced for sale. A market is a venue that brings
together buyers and sellers, and where prices are established determines
who gets what and how much of it. The United States and much of the developed
world today can be described as capitalist market economies.
Capitalism Alternatives
Alternatives
to capitalist production exist. Two of the most significant ones developed in
the 19th century as a response to what was seen as capitalism's abuses.
Socialism is
a system of production whereby workers collectively own the business, the tools
of production, the finished product, and share the profits – instead of having
business owners who retain private ownership of all of the business and simply
hire workers in return for wages. Socialist production often does produce for
profits and utilizes the market to distribute goods and services. In the U.S.,
worker co-ops are an example of socialist production organized under a broader
capitalist system.
Communism is
a system of production where private property ceases to exist and the people of
a society collectively own the tools of production. Communism does not use a
market system but instead relies on a central planner who organizes
production (tells people who will work in what job) and distributes goods and
services to consumers based on need. Sometimes this is called a command
economy.
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