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Economics ()
is the
social science
Social science is one of the branches of science, devoted to the study of societies and the relationships among individuals within those societies. The term was formerly used to refer to the field of sociology, the original "science of so ...
that studies the
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
,
distribution, and
consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
of
goods and services
Goods are items that are usually (but not always) tangible, such as pens, physical books, salt, apples, and hats. Services are activities provided by other people, who include architects, suppliers, contractors, technologists, teachers, doc ...
.
Economics focuses on the behaviour and interactions of
economic agents and how
economies
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
work. Microeconomics analyzes what's viewed as basic elements in the economy, including individual agents and
markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers.
Macroeconomics analyzes the economy as a system where production, consumption, saving, and investment interact, and factors affecting it: employment of the resources of labour, capital, and land, currency
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
,
economic growth, and public policies that have impact on
these elements.
Other broad distinctions within economics include those between
positive economics
Positive economics (as opposed to normative economics) is the part of economics that deals with positive statements. That is, it focuses on the description, quantification and explanation of economic phenomena. Stanley Wong (1987). "positive econom ...
, describing "what is", and
normative economics Normative economics (as opposed to positive economics) is the part of economics that deals with normative statements. It focuses on the idea of fairness and what the outcome of the economy or goals of public policy ''ought to be''. Paul A. Samuel ...
, advocating "what ought to be"; between economic theory and
applied economics
Applied economics is the study as regards the application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other set being the ''core''), it is typically characterized by the application ...
; between
rational
Rationality is the quality of being guided by or based on reasons. In this regard, a person acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong evidence. This quality can apply to an abi ...
and
behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
; and between
mainstream economics and
heterodox economics.
Economic analysis can be applied throughout society, including
business,
finance,
health care,
engineering
Engineering is the use of scientific principles to design and build machines, structures, and other items, including bridges, tunnels, roads, vehicles, and buildings. The discipline of engineering encompasses a broad range of more speciali ...
[ ] and
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is ...
. It is also applied to such diverse subjects as crime,
education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty ...
, the
family
Family (from la, familia) is a group of people related either by consanguinity (by recognized birth) or affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its members and of society. Idea ...
,
feminism
Feminism is a range of socio-political movements and ideologies that aim to define and establish the political, economic, personal, and social equality of the sexes. Feminism incorporates the position that society prioritizes the male po ...
,
law
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
,
philosophy,
politics
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that stud ...
,
religion
Religion is usually defined as a social- cultural system of designated behaviors and practices, morals, beliefs, worldviews, texts, sanctified places, prophecies, ethics, or organizations, that generally relates humanity to supernatural, ...
,
social institutions
Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...
,
war
War is an intense armed conflict between states, governments, societies, or paramilitary groups such as mercenaries, insurgents, and militias. It is generally characterized by extreme violence, destruction, and mortality, using regular o ...
,
science
Science is a systematic endeavor that Scientific method, builds and organizes knowledge in the form of Testability, testable explanations and predictions about the universe.
Science may be as old as the human species, and some of the earli ...
, and
the environment
The natural environment or natural world encompasses all living and non-living things occurring naturally, meaning in this case not artificial. The term is most often applied to the Earth or some parts of Earth. This environment encompasses t ...
.
Definitions of economics over time
The earlier term for the discipline was '
political economy
Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...
', but since the late 19th century, it has commonly been called 'economics'. The term is derived from the
Ancient Greek
Ancient Greek includes the forms of the Greek language used in ancient Greece and the ancient world from around 1500 BC to 300 BC. It is often roughly divided into the following periods: Mycenaean Greek (), Dark Ages (), the Archaic p ...
(''oikonomikos''), "practiced in the management of a household or family" and therefore "frugal, thrifty", which in turn comes from (''oikonomia'') "household management" which in turn comes from (' "house") and (', "custom" or "law").
There are a variety of modern
definitions of economics
Various definitions of economics have been proposed, including, "what economists do". The earlier term for 'economics' was political 'economy'. It is adapted from the French Mercantilist usage of ''économie politique'', which extended ''economy ...
; some reflect evolving views of the subject or different views among economists.
Scottish philosopher
Adam Smith (1776) defined what was then called
political economy
Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...
as "an inquiry into the nature and causes of the wealth of nations", in particular as:
Jean-Baptiste Say (1803), distinguishing the subject from its
public-policy uses, defined it as the science ''of'' production, distribution, and consumption of
wealth
Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
.
On the
satirical side,
Thomas Carlyle
Thomas Carlyle (4 December 17955 February 1881) was a Scottish essayist, historian and philosopher. A leading writer of the Victorian era, he exerted a profound influence on 19th-century art, literature and philosophy.
Born in Ecclefechan, Dum ...
(1849) coined "
the dismal science" as an
epithet for
classical economics, in this context, commonly linked to the pessimistic analysis of
Malthus (1798).
John Stuart Mill (1844) defined the subject in a social context as:
Alfred Marshall provided a still widely cited definition in his textbook ''
Principles of Economics'' (1890) that extended analysis beyond
wealth
Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
and from the
societal to the
microeconomic level:
Lionel Robbins
Lionel Charles Robbins, Baron Robbins, (22 November 1898 – 15 May 1984) was a British economist, and prominent member of the economics department at the London School of Economics (LSE). He is known for his leadership at LSE, his proposed def ...
(1932) developed implications of what has been termed "
rhaps the most commonly accepted current definition of the subject":
Robbins described the definition as not ''classificatory'' in "pick
ngout certain ''kinds'' of behaviour" but rather ''analytical'' in "focus
ngattention on a particular ''aspect'' of behaviour, the form imposed by the influence of
scarcity
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
." He affirmed that previous economists have usually centred their studies on the analysis of wealth: how wealth is created (production), distributed, and consumed; and how wealth can grow. But he said that economics can be used to study other things, such as war, that are outside its usual focus. This is because war has as the goal winning it (as a sought after end), generates both cost and benefits; and, resources (human life and other costs) are used to attain the goal. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors (assuming they are rational) may never go to war (a decision) but rather explore other alternatives. We cannot define economics as the science that studies wealth, war, crime, education, and any other field economic analysis can be applied to; but, as the science that studies a particular common aspect of each of those subjects (they all use scarce resources to attain a sought after end).
Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behaviour and
rational-choice modelling
expanded the domain of the subject to areas previously treated in other fields.
There are other criticisms as well, such as in scarcity not accounting for the
macroeconomics of high unemployment.
Gary Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
, a contributor to the expansion of economics into new areas, described the approach he favoured as "combin
ng the
Ng, ng, or NG may refer to:
* Ng (name) (黄 伍 吳), a surname of Chinese origin
Arts and entertainment
* N-Gage (disambiguation), a handheld gaming system
* Naked Giants, Seattle rock band
* ''Spirit Hunter: NG'', a video game
Businesses an ...
assumptions of maximizing behaviour, stable
preferences
In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision the ...
, and
market equilibrium
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
, used relentlessly and unflinchingly." One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of
social interaction that
uch
Uch ( pa, ;
ur, ), frequently referred to as Uch Sharīf ( pa, ;
ur, ; ''"Noble Uch"''), is a historic city in the southern part of Pakistan's Punjab province. Uch may have been founded as Alexandria on the Indus, a town founded by Alexan ...
analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which the author believes economics is evolving, or should evolve.
[
According to economist ]Ha-Joon Chang
Ha-Joon Chang (; ; born 7 October 1963) is a South Korean institutional economist, specialising in development economics. Chang is the author of several widely discussed policy books, most notably ''Kicking Away the Ladder: Development Strateg ...
economics should be defined not in terms of its methodology or theoretical approach but in terms of its subject matter. Ha-Joon Chang finds a definition like "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses" very peculiar because all other sciences define themselves in terms of the area of inquiry or object of inquiry rather than the methodology. In the biology department, they don't say that all biology should be studied with DNA analysis. People study living organisms in many different ways, so some people will do DNA analysis, others might do anatomy, and still others might build game theoretic models of animal behavior. But they are all called biology because they all study living organisms. According to Ha Joon Chang, this view that you can and should study the economy in only one way (for example by studying only rational choices), and going even one step further and basically redefining economics as a theory of everything, is very peculiar.
History of economic thought
From antiquity through the physiocrats
Questions regarding distribution of resources are found throughout the writings of the Boeotian poet Hesiod
Hesiod (; grc-gre, Ἡσίοδος ''Hēsíodos'') was an ancient Greek poet generally thought to have been active between 750 and 650 BC, around the same time as Homer. He is generally regarded by western authors as 'the first written poet ...
and several economic historians have described Hesiod himself as the "first economist". However, the word Oikos
The ancient Greek word ''oikos'' (ancient Greek: , plural: ; English prefix: eco- for ecology and economics) refers to three related but distinct concepts: the family, the family's property, and the house. Its meaning shifts even within texts.
The ...
, the Greek word from which the word economy derives, was used for issues regarding how to manage a household (which was understood to be the landowner, his family, and his slaves) rather than to refer to some normative societal system of distribution of resources, which is a much more recent phenomenon. Xenophon
Xenophon of Athens (; grc, Ξενοφῶν ; – probably 355 or 354 BC) was a Greek military leader, philosopher, and historian, born in Athens. At the age of 30, Xenophon was elected commander of one of the biggest Greek mercenary armies o ...
, the author of the Oeconomicus
The ''Oeconomicus'' ( grc-gre, Οἰκονομικός) by Xenophon is a Socratic dialogue principally about household management and agriculture.
''Oeconomicus'' comes from the Ancient Greek words ''oikos'' for home or house and ''nemein'' w ...
, is credited by philologues for being the source of the word economy. Other notable writers from Antiquity through to the Renaissance
The Renaissance ( , ) , from , with the same meanings. is a period in European history
The history of Europe is traditionally divided into four time periods: prehistoric Europe (prior to about 800 BC), classical antiquity (800 BC to AD ...
which wrote on include Aristotle
Aristotle (; grc-gre, Ἀριστοτέλης ''Aristotélēs'', ; 384–322 BC) was a Greek philosopher and polymath during the Classical period in Ancient Greece. Taught by Plato, he was the founder of the Peripatetic school of ph ...
, Chanakya
Chanakya (Sanskrit: चाणक्य; IAST: ', ; 375–283 BCE) was an ancient Indian polymath who was active as a teacher, author, strategist, philosopher, economist, jurist, and royal advisor. He is traditionally identified as Kauṭil ...
(also known as Kautilya), Qin Shi Huang
Qin Shi Huang (, ; 259–210 BC) was the founder of the Qin dynasty and the first emperor of a unified China. Rather than maintain the title of " king" ( ''wáng'') borne by the previous Shang and Zhou rulers, he ruled as the First Empero ...
, Ibn Khaldun, and Thomas Aquinas
Thomas Aquinas, OP (; it, Tommaso d'Aquino, lit=Thomas of Aquino; 1225 – 7 March 1274) was an Italian Dominican friar and priest who was an influential philosopher, theologian and jurist in the tradition of scholasticism; he is known wit ...
. Joseph Schumpeter
Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at H ...
described 16th and 17th century scholastic writers, including Tomás de Mercado, Luis de Molina
Luis de Molina (29 September 1535 – 12 October 1600) was a Spanish Jesuit Catholic priest, priest and Scholasticism, scholastic, a staunch defender of free will in the controversy over human liberty and God's grace. His theology is known ...
, and Juan de Lugo
John de Lugo (also Juan de Lugo y de Quiroga and Xoan de Lugo) (1583–1660), a Spanish Jesuit and Cardinal, was an eminent theologian of the Baroque.monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are ...
, interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
, and value
Value or values may refer to:
Ethics and social
* Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them
** Values (Western philosophy) expands the notion of value beyo ...
theory within a natural-law perspective.
Two groups, who later were called "mercantilists" and "physiocrats", more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism
Economic nationalism, also called economic patriotism and economic populism, is an ideology that favors state interventionism over other market mechanisms, with policies such as domestic control of the economy, labor, and capital formation, incl ...
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.
Physiocrats
Physiocracy (; from the Greek for "government of nature") is an economic theory developed by a group of 18th-century Age of Enlightenment French economists who believed that the wealth of nations derived solely from the value of "land agricultur ...
, a group of 18th-century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. 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. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of ''laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups ...
'', which called for minimal government intervention in the economy.
Adam Smith (1723–1790) was an early economic theorist. Smith was harshly critical of the mercantilists but described the physiocratic system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject.
Classical political economy
The publication of Adam Smith's ''The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...
'' in 1776, has been described as "the effective birth of economics as a separate discipline." The book identified land, labour, and capital as the three factors of production and the major contributors to a nation's wealth, as distinct from the physiocratic idea that only agriculture was productive.
Smith discusses potential benefits of specialization by division of labour, including increased labour productivity
Workforce productivity is the amount of goods and services that a group of workers produce in a given amount of time. It is one of several types of productivity that economists measure. Workforce productivity, often referred to as labor product ...
and gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
, whether between town and country or across countries. His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the functions of firm and industry
Industry may refer to:
Economics
* Industry (economics), a generally categorized branch of economic activity
* Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery
* The wider industrial sector ...
" and a "fundamental principle of economic organization." To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource-allocation theory – that, under competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indiv ...
, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment).
In an argument that includes "one of the most famous passages in all economics," Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society, and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce. In this:
The Rev. Thomas Robert Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book '' An Essay on the Principle of Population'', Ma ...
(1798) used the concept of diminishing returns
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal ( ceteris parib ...
to explain low living standards. Human 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 labour. 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. Economist Julian Lincoln Simon
Julian Lincoln Simon (February 12, 1932 – February 8, 1998) was an American professor of business administration at the University of Maryland and a Senior Fellow at the Cato Institute at the time of his death, after previously serving as a ...
has criticized Malthus's conclusions.
While Adam Smith emphasized the production of income, David Ricardo
David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
(1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour 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. Ricardo was the first to state and prove the principle of comparative advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
, according to which each country should specialize in producing and exporting goods in that it has a lower ''relative'' cost of production, rather relying only on its own production. It has been termed a "fundamental analytical explanation" for gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
.
Coming at the end of the classical tradition, John Stuart Mill (1848) 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". Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Other classical economists presented variations on Smith, termed the 'labour theory of value
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it.
The LTV is usually associated with Marxian ...
'. Classical economics focused on the tendency of any market economy to settle in a final stationary state made up of a constant stock of physical wealth (capital) and a constant population size.
Marxian economics
Marxist (later, Marxian) economics descends from classical economics and it derives from the work of Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
. The first volume of Marx's major work, ''Das Kapital
''Das Kapital'', also known as ''Capital: A Critique of Political Economy'' or sometimes simply ''Capital'' (german: Das Kapital. Kritik der politischen Ökonomie, link=no, ; 1867–1883), is a foundational theoretical text in materialist phi ...
'', was published in German in 1867. In it, Marx focused on the labour theory of value
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it.
The LTV is usually associated with Marxian ...
and the theory of surplus value which, he believed, explained the exploitation of labour by capital. The labour theory of value held that the value of an exchanged commodity was determined by the labour that went into its production and the theory of surplus value demonstrated how the workers only got paid a proportion of the value their work had created.
Marxian economics was further developed by Karl Kautsky
Karl Johann Kautsky (; ; 16 October 1854 – 17 October 1938) was a Czech-Austrian philosopher, journalist, and Marxist theorist. Kautsky was one of the most authoritative promulgators of orthodox Marxism after the death of Friedrich Engels i ...
(1854-1938)'s ''The Economic Doctrines of Karl Marx'' and ''The Class Struggle (Erfurt Program)
The Class Struggle (Erfurt Program) (german: Das Erfurter Programm in seinem grundsätzlichen Theil erläutert von Karl Kautsky) is an 1892 book-length work by Karl Kautsky. It was first published in Stuttgart and was the official commentary of ...
'', Rudolf Hilferding
Rudolf Hilferding (10 August 1877 – 11 February 1941) was an Austrian-born Marxist economist, socialist theorist,International Institute of Social History, ''Rodolf Hilferding Papers''. http://www.iisg.nl/archives/en/files/h/10751012.php poli ...
's (1877-1941) '' Finance Capital'', Vladimir Lenin
Vladimir Ilyich Ulyanov. ( 1870 – 21 January 1924), better known as Vladimir Lenin,. was a Russian revolutionary, politician, and political theorist. He served as the first and founding head of government of Soviet Russia from 1917 to 1 ...
(1870-1924)'s ''The Development of Capitalism in Russia
''The Development of Capitalism in Russia'' () was an early economic work by Lenin written whilst he was in exile in Siberia. It was published in 1899 under the pseudonym of "Vladimir Ilyin".Paul Le Blanc (2008) ''Revolution, Democracy, Socialism ...
'' and ''Imperialism, the Highest Stage of Capitalism
''Imperialism, the Highest Stage of Capitalism'' (russian: Империализм как высшая стадия капитализма, Imperializm kak vysshaja stadija kapitalizma, link=no), originally published as ''Imperialism, the Newest S ...
'', and Rosa Luxemburg (1871-1919)'s ''The Accumulation of Capital
''The Accumulation of Capital'' (full title: ''The Accumulation of Capital: A Contribution to an Economic Explanation of Imperialism'', ''Die Akkumulation des Kapitals: Ein Beitrag zur ökonomischen Erklärung des Imperialismus'') is the princip ...
''.
Neoclassical economics
At the dawn as a social science, economics was defined and discussed at length as the study of production, distribution, and consumption of wealth by Jean-Baptiste Say in his ''Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth'' (1803). These three items are considered by the science only in relation to the increase or diminution of wealth, and not in reference to their processes of execution. Say's definition has prevailed up to our time, saved by substituting the word "wealth" for "goods and services" meaning that wealth may include non-material objects as well. One hundred and thirty years later, Lionel Robbins
Lionel Charles Robbins, Baron Robbins, (22 November 1898 – 15 May 1984) was a British economist, and prominent member of the economics department at the London School of Economics (LSE). He is known for his leadership at LSE, his proposed def ...
noticed that this definition no longer sufficed, because many economists were making theoretical and philosophical inroads in other areas of human activity. In his '' Essay on the Nature and Significance of Economic Science'', he proposed a definition of economics as a study of a particular aspect of human behaviour, the one that falls under the influence of scarcity, which forces people to choose, allocate scarce resources to competing ends, and economize (seeking the greatest welfare while avoiding the wasting of scarce resources). For Robbins, the insufficiency was solved, and his definition allows us to proclaim, with an easy conscience, education economics, safety and security economics, health economics, war economics, and of course, production, distribution and consumption economics as valid subjects of the economic science." Citing Robbins: "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses". After discussing it for decades, Robbins' definition became widely accepted by mainstream economists, and it has opened way into current textbooks. Although far from unanimous, most mainstream economists would accept some version of Robbins' definition, even though many have raised serious objections to the scope and method of economics, emanating from that definition. Due to the lack of strong consensus, and that production, distribution and consumption of goods and services is the prime area of study of economics, the old definition still stands in many quarters.
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 and Mary Paley Marshall as a concise synonym for "economic science" and a substitute for the earlier "political economy
Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...
". This corresponded to the influence on the subject of mathematical methods used in the natural sciences.
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
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it.
The LTV is usually associated with Marxian ...
inherited from classical economics in favour of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side. In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favour of ordinal utility In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to a ...
, which hypothesizes merely behaviour-based relations across persons.
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
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
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.
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
Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...
, game theory, analysis of market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indi ...
and imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
, and the neoclassical model of economic growth for analysing long-run variables affecting national income.
Neoclassical economics studies the behaviour of individuals, household
A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is i ...
s, and organization
An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is an legal entity, entity—such as ...
s (called economic actors, players, or agents), when they manage or use scarce
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
resources, which have alternative uses, to achieve desired ends. Agents are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science, when a decision (choice) is made by one or more resource-controlling players to attain the best possible outcome under bounded rational conditions. In other words, resource-controlling agents maximize value subject to the constraints imposed by the information the agents have, their cognitive limitations, and the finite amount of time they have to make and execute a decision. Economic science centres on the activities of the economic agents that comprise society. They are the focus of economic analysis.
An approach to understanding these processes, through the study of agent behaviour under scarcity, may go as follows:
The continuous interplay (exchange or trade) done by economic actors in all markets sets the prices for all goods and services which, in turn, make the rational managing of scarce resources possible. At the same time, the decisions (choices) made by the same actors, while they are pursuing their own interest, determine the level of output (production), consumption, savings, and investment, in an economy, as well as the remuneration (distribution) paid to the owners of labour (in the form of wages), capital (in the form of profits) and land (in the form of rent). Each period, as if they were in a giant feedback system, economic players influence the pricing processes and the economy, and are in turn influenced by them until a steady state (equilibrium) of all variables involved is reached or until an external shock throws the system toward a new equilibrium point. Because of the autonomous actions of rational interacting agents, the economy is a complex adaptive system.
Keynesian economics
Keynesian economics derives from John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
, in particular his book ''The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'' (1936), which ushered in contemporary macroeconomics as a distinct field. 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
In economics, effective demand (ED) in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not ...
" and why even price flexibility and monetary policy might be unavailing. The term "revolutionary" has been applied to the book in its impact on economic analysis.
Keynesian economics has two successors. Post-Keynesian economics
Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...
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
The University of Cambridge is a public collegiate research university in Cambridge, England. Founded in 1209 and granted a royal charter by Henry III in 1231, Cambridge is the world's third oldest surviving university and one of its most pr ...
and the work of Joan Robinson
Joan Violet Robinson (''née'' Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.
B ...
.
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 behaviour 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
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract. Ben Bernanke, former 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 13 September 1970 issue of ''The New York Times Magazine'', in which 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."
Austrian School of economics
The Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian schoo ...
emphasizes human action
''Human Action: A Treatise on Economics'' is a work by the Austrian economist and philosopher Ludwig von Mises. Widely considered Mises' ''magnum opus'', it presents the case for laissez-faire capitalism based on praxeology, his method to under ...
, property rights
The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically h ...
and the freedom to contract and transact to have a thriving and successful economy. It also emphasizes that the state should play an infinitesimally small role (if any role) in the regulation of economic activity between two transacting parties. A key component of Austrian economics is the principle of sound money. As Ludwig Von Mises
Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and Sociology, sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberali ...
, one of the most prominent 20th century Austrian economists, stated, "Ideologically it (sound money) belongs in the same class with political constitutions and bills of rights." Austrian economists assert that sound money prevents government actors from debasing the currency, disrupting the savings rate of the population and artificially distorting the economic choices of individual actors.
Other schools and approaches
Other well-known schools or trends of thought referring to a particular style of economics practised at and disseminated from well-defined groups of academicians that have become known worldwide, include the Freiburg School
__notoc__
The Freiburg school (german: Freiburger Schule) is a school of History of economic thought, economic thought founded in the 1930s at the University of Freiburg.
It builds somewhat on the earlier historical school of economics but stresse ...
, the School of Lausanne, post-Keynesian economics
Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...
and the Stockholm school. Contemporary mainstream economics is sometimes separated into the Saltwater approach of those universities along the Eastern
Eastern may refer to:
Transportation
*China Eastern Airlines, a current Chinese airline based in Shanghai
*Eastern Air, former name of Zambia Skyways
*Eastern Air Lines, a defunct American airline that operated from 1926 to 1991
*Eastern Air Li ...
and Western
Western may refer to:
Places
*Western, Nebraska, a village in the US
*Western, New York, a town in the US
*Western Creek, Tasmania, a locality in Australia
*Western Junction, Tasmania, a locality in Australia
*Western world, countries that id ...
coasts of the US, and the Freshwater, or Chicago-school approach.
Within macroeconomics there is, in general order of their historical appearance in the literature; classical economics, neoclassical economics, Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...
, the neoclassical synthesis, monetarism
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on nation ...
, new classical economics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundat ...
, New Keynesian economics
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
and the new neoclassical synthesis
The new neoclassical synthesis (NNS), which is now generally referred to as New Keynesian economics, and occasionally as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics/ real ...
. In general, alternative developments include ecological economics, constitutional economics
Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...
, institutional economics, evolutionary economics
Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, stru ...
, dependency theory
Dependency theory is the notion that resources flow from a " periphery" of poor and underdeveloped states to a " core" of wealthy states, enriching the latter at the expense of the former. A central contention of dependency theory is that poor ...
, structuralist economics Structuralist economics is an approach to economics that emphasizes the importance of taking into account structural features (typically) when undertaking economic analysis. The approach originated with the work of the Economic Commission for Lati ...
, world systems theory, econophysics
Econophysics is a heterodox interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynam ...
, econodynamics
Econodynamics is an empirical science that studies emergences, motion and disappearance of Value (economics), value—a specific concept that is used for description of the processes of creation and distribution of wealth. Any economic theory deals ...
, feminist economics
Feminist economics is the critical study of economics and economies, with a focus on gender-aware and inclusive economic inquiry and policy analysis. Feminist economic researchers include academics, activists, policy theorists, and practition ...
and biophysical economics.
Methodology
Theoretical research
Mainstream economic theory relies upon ''a priori
("from the earlier") and ("from the later") are Latin phrases used in philosophy to distinguish types of knowledge, justification, or argument by their reliance on empirical evidence or experience. knowledge is independent from current ...
'' quantitative economic models
In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework design ...
, 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. While neoclassical economic theory constitutes both the dominant or orthodox theoretical as well as methodological framework
In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...
, economic theory can also take the form of other schools of thought
A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy, discipline, belief, social movement, economics, cultural movement, or art movement.
...
such as in heterodox economic theories.
In microeconomics, principal concepts include supply and demand, marginalism, rational choice theory, opportunity cost, budget constraints, utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosoph ...
, and the theory of the firm
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in ec ...
. Early macroeconomic
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
models focused on modelling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists, including new Keynesian
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
s, reformulated their models in microfoundations
Microfoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions.Maarten Janssen (2008),Microfoundations, in ''The New Palgrave Dictionary of Economics'', 2nd ed. Research in microf ...
.
The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory
Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and unit of account), and it ...
, the quantity theory of money
In monetary economics, the quantity theory of money (often abbreviated QTM) is one of the directions of Western economic thought that emerged in the 16th-17th centuries. The QTM states that the general price level of goods and services is directly ...
predicts that increases in the growth rate of the money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
increase inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
, and inflation is assumed to be influenced by rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...
. In development economics
Development economics is a branch of economics which deals with economic aspects of the development process in low- and middle- income countries. Its focus is not only on methods of promoting economic development, economic growth and structural ...
, 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
The Four Asian Tigers (also known as the Four Asian Dragons or Four Little Dragons in Chinese and Korean) are the developed East Asian economies of Hong Kong, Singapore, South Korea, and Taiwan. Between the early 1960s and 1990s, they underwent ...
. Sometimes an economic hypothesis is only '' qualitative'', not ''quantitative''.
Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, mathematical economics is the application of mathematical
Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. These topics are represented in modern mathematics ...
methods to represent theories and analyze problems in economics. Paul Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he " ...
's treatise ''Foundations of Economic Analysis
''Foundations of Economic Analysis'' is a book by Paul A. Samuelson published in 1947 (Enlarged ed., 1983) by Harvard University Press. It is based on Samuelson's 1941 doctoral dissertation at Harvard University. The book sought to demonstrate a ...
'' (1947) exemplifies the method, 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 theorem
In mathematics, a theorem is a statement that has been proved, or can be proved. The ''proof'' of a theorem is a logical argument that uses the inference rules of a deductive system to establish that the theorem is a logical consequence of t ...
s that can conceivably be refuted by empirical data.
Empirical research
Economic theories are frequently tested empirically, largely through the use of econometrics
Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...
using economic data
Economic data are data describing an actual economy, past or present. These are typically found in time-series form, that is, covering more than one time period (say the monthly unemployment rate for the last five years) or in cross-sectional data ...
. The controlled experiments common to the physical science
Physical science is a branch of natural science that studies non-living systems, in contrast to life science. It in turn has many branches, each referred to as a "physical science", together called the "physical sciences".
Definition
Phy ...
s are difficult and uncommon in economics, 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. However, the field of experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic expe ...
is growing, and increasing use is being made of natural experiments
A natural experiment is an empirical study in which individuals (or clusters of individuals) are exposed to the experimental and control conditions that are determined by nature or by other factors outside the control of the investigators. The pro ...
.
Statistical methods
Statistics (from German: ''Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industria ...
such as regression analysis
In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable (often called the 'outcome' or 'response' variable, or a 'label' in machine learning parlance) and one ...
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
Falsifiability is a standard of evaluation of scientific theories and hypotheses that was introduced by the philosopher of science Karl Popper in his book ''The Logic of Scientific Discovery'' (1934). He proposed it as the cornerstone of a so ...
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 set A data set (or dataset) is a collection of data. In the case of tabular data, a data set corresponds to one or more database tables, where every column of a table represents a particular variable, and each row corresponds to a given record of the ...
s, and prior beliefs.
Criticisms based on professional standards and non-replicability
Reproducibility, also known as replicability and repeatability, is a major principle underpinning the scientific method. For the findings of a study to be reproducible means that results obtained by an experiment or an observational study or in a ...
of results serve as further checks against bias, errors, and overgeneralization, 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, although critical commentary on papers in economics in prestigious journals such as the '' American Economic Review'' has declined precipitously in the past 40 years. This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).
In applied economics, input–output models employing linear programming methods are quite common. Large amounts of data are run through computer programs to analyse the impact of certain policies; Minnesota IMPLAN Group, IMPLAN is one well-known example.
Experimental economics has promoted the use of Scientific control, scientifically controlled experiments. This has reduced the long-noted distinction of economics from natural sciences because it allows direct tests of what were previously taken as axioms. 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 behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his and Amos Tversky's empirical discovery of several cognitive biases and heuristics in judgment and decision making, 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. These techniques have led some to argue that economics is a "genuine science".
Branches of economics
Microeconomics
Microeconomics examines how entities, forming a market structure, interact within a Market (economics), market to create a market system. These entities include private and public players with various classifications, typically operating under scarcity of tradable units and light government regulation. The item traded may be a tangible product (business), product such as apples or a Service (economics), service such as repair services, legal counsel, or entertainment.
In theory, in a free market the Aggregation problem, aggregates (sum of) of ''quantity demanded'' by buyers and ''quantity supplied'' by sellers may reach economic equilibrium over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not necessarily be Equity (economics), morally equitable. For example, if the supply of healthcare services is limited by exogenous, external factors, the equilibrium price may be unaffordable for many who desire it but cannot pay for it.
Various market structures exist. In perfect competition, perfectly competitive markets, no participants are large enough to have the market power to set the price of a homogeneous product. In other words, every participant is a "price taker" as no participant influences the price of a product. In the real world, markets often experience imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
.
Forms include monopoly (in which there is only one seller of a good), duopoly (in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition (in which there are many sellers producing highly differentiated goods), monopsony (in which there is only one buyer of a good), and oligopsony (in which there are few buyers of a good). Unlike perfect competition, imperfect competition invariably means market power is unequally distributed. Firms under imperfect competition have the potential to be "price makers", which means that, by holding a disproportionately high share of market power, they can influence the prices of their products.
Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets. This method of analysis is known as supply and demand, partial-equilibrium analysis (supply and demand). This method aggregates (the sum of all activity) in only one market. General equilibrium, General-equilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across ''all'' markets. This method studies both changes in markets and their interactions leading towards equilibrium.
Production, cost, and efficiency
In microeconomics, production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
is the conversion of factor of production, inputs into Output (economics), outputs. It is an economic process that uses inputs to create a good (economics), commodity or a service for trade, exchange or direct use. Production is a Stock and flow, flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
(food, haircuts, etc.) vs. Investment#In economics or macroeconomics, investment goods (new tractors, buildings, roads, etc.), Public good (economics), public goods (national defence, smallpox vaccinations, etc.) or private goods (new computers, bananas, etc.), and Guns versus butter model, "guns" vs "butter".
Opportunity cost is the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
and choice". For example, if a baker uses a sack of flour to make pretzels one morning, then the baker cannot use either the flour or the morning to make bagels instead. Part of the cost of making pretzels is that neither the flour nor the morning are available any longer, for use in some other way. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the Real versus nominal value (economics), real cost of Production-possibility frontier#Opportunity cost, output forgone, leisure, or anything else that provides the alternative benefit (utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosoph ...
).
Inputs used in the production process include such primary factors of production as Labour (economics), labour services, Capital (economics), capital (durable produced goods used in production, such as an existing factory), and Land (economics), land (including natural resources). Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car.
Economic efficiency measures how well a system generates desired output 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 "waste" is reduced. A widely accepted general standard is Pareto efficiency, which is reached when no further change can make someone better off without making someone else worse off.
The production–possibility frontier (PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case an economy can produce just two goods (say "guns" and "butter"). The PPF is a table or graph (as at the right) showing the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows Potential output, potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.
Scarcity is represented in the figure by people being willing but unable in the aggregate to consume ''beyond the PPF'' (such as at ''X'') and by the negative slope of the curve. If production of one good ''increases'' along the curve, production of the other good ''decreases'', an inverse relationship. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter.
The slope of the curve at a point on it gives the trade-off#Examples from common life, trade-off between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a ''real opportunity cost''. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. ''Along the PPF'', scarcity implies that choosing ''more'' of one good in the aggregate entails doing with ''less'' of the other good. Still, in a market economy, movement along the curve may indicate that the utility, choice of the increased output is anticipated to be worth the cost to the agents.
By construction, each point on the curve shows ''productive efficiency'' in maximizing output for given total inputs. A point ''inside'' the curve (as at ''A''), is feasible but represents ''production inefficiency'' (wasteful use of inputs), in that output of ''one or both goods'' could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment during a business cycle, business-cycle recession or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it does not produce a mix of goods that consumers prefer over other points.
Much applied economics
Applied economics is the study as regards the application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other set being the ''core''), it is typically characterized by the application ...
in public policy is concerned with determining how the efficiency of an economy can be improved. Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been described as the "essence of economics", where the subject "makes its unique contribution."
Specialization
Specialization is considered key to economic efficiency based on theoretical and empirical considerations. Different individuals or nations may have different real opportunity costs of production, say from differences in stock and flow, stocks of human capital per worker or capital (economics), capital/labor force, labour ratios. According to theory, this may give a comparative advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
in production of goods that make more intensive use of the relatively more abundant, thus ''relatively'' cheaper, input.
Even if one region has an absolute advantage as to the ratio of its outputs to inputs in every type of output, it may still specialize in the output in which it has a comparative advantage and thereby gain from trading with a region that lacks any absolute advantage but has a comparative advantage in producing something else.
It has been observed that a high volume of trade occurs among regions even with access to a similar technology and mix of factor inputs, including high-income countries. This has led to investigation of economies of Returns to scale, scale and economies of agglomeration, agglomeration to explain specialization in similar but differentiated product lines, to the overall benefit of respective trading parties or regions.
The general theory of specialization applies to trade among individuals, farms, manufacturers, Service (economics), service providers, and economies
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
. Among each of these production systems, there may be a corresponding '' division of labour'' with different work groups specializing, or correspondingly different types of Capital (economics), capital equipment and differentiated Land (economics), land uses.
An example that combines features above is a country that specializes in the production of high-tech knowledge products, as developed countries do, and trades with developing nations for goods produced in factories where labour is relatively cheap and plentiful, resulting in different in opportunity costs of production. More total output and utility thereby results from specializing in production and trading than if each country produced its own high-tech and low-tech products.
Theory and observation set out the conditions such that market prices of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) Production-possibility frontier#Opportunity cost, low-cost inputs go to producing low-cost outputs. In the process, aggregate output may increase as a invisible hand, by-product or by mechanism design, design. Such specialization of production creates opportunities for gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
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 income levels'' that trade may facilitate.
Supply and demand
Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting market power, power.
For a given market of a Good (economics and accounting), commodity, ''demand'' is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). consumer theory, Demand theory describes individual consumers as rational choice theory, rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is "constrained utility maximization" (with income and Wealth (economics), wealth as the budget constraint, constraints on demand). Here, utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosoph ...
refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred.
The law of demand states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy (other things ceteris paribus, unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect). In addition, purchasing power from the price decline increases ability to buy (the income effect). Other factors can change demand; for example an increase in income will shift the demand curve for a normal good outward relative to the origin, as in the figure. All determinants are predominantly taken as constant factors of demand and supply.
''Supply'' is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be ''profit maximizers'', meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a function relating price and quantity, if other factors are unchanged.
That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement. The "Law of Supply" states that, in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply. Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors inputs of production are all taken to be constant for a specific time period of evaluation of supply.
Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is posited to bid 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 (economics), 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. Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply.
Firms
People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through ''firms''. The most obvious kinds of firms are corporations, partnerships and trusts. According to Ronald Coase, people begin to organize their production in firms when the costs of doing business becomes lower than doing it on the market. Firms combine labour and capital, and can achieve far greater economies of scale (when the average cost per unit declines as more units are produced) than individual market trading.
In perfect competition, perfectly competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price. Industrial organization generalizes from that special case to study the strategic behaviour of firms that do have significant control of price. It considers the structure of such markets and their interactions. Common market structures studied besides perfect competition include monopolistic competition, various forms of oligopoly, and monopoly.
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 statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable (often called the 'outcome' or 'response' variable, or a 'label' in machine learning parlance) and one ...
in the absence of certainty and perfect knowledge. A unifying theme is the attempt to Optimization (mathematics), optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions.
Uncertainty and game theory
Uncertainty in economics is an unknown prospect of gain or loss, whether quantifiable as Risk#Risk and uncertainty, risk or not. Without it, household behaviour would be unaffected by uncertain employment and income prospects, financial market, financial and capital markets would reduce to exchange of a single financial instrument, instrument in each market period, and there would be no communications industry. Given its different forms, there are various ways of representing uncertainty and modelling economic agents' responses to it.
Game theory is a branch of applied mathematics that considers Strategy#Strategies in game theory, strategic interactions between agents, one kind of uncertainty. It provides a mathematical microfoundation, foundation of industrial organization, discussed above, to model different types of firm behaviour, for example in a solipsistic industry (few sellers), but equally applicable to wage negotiations, Bargaining#Game theory, bargaining, Contract theory, contract design, and any situation where individual agents are few enough to have perceptible effects on each other. In behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, it has been used to model the strategies Agent (economics), agents choose when interacting with others whose interests are at least partially adverse to their own.
In this, it generalizes maximization approaches developed to analyse market actors such as in the supply and demand model and allows for incomplete information of actors. The field dates from the 1944 classic ''Theory of Games and Economic Behavior'' by John von Neumann and Oskar Morgenstern. It has significant applications seemingly outside of economics in such diverse subjects as the formulation of nuclear strategies, Game theory#Philosophy, ethics, Game theory#Political science, political science, and evolutionary biology.
Risk aversion may stimulate activity that in well-functioning markets smooths out risk and communicates information about risk, as in markets for insurance, commodity futures market, futures contracts, and financial instruments. Financial economics or simply finance describes the allocation of financial resources. It also analyses the pricing of financial instruments, the capital structure, financial structure of companies, the efficiency and fragility of financial markets, Financial crisis, financial crises, and related government policy or Financial regulation, regulation.
Some market organizations may give rise to inefficiencies associated with uncertainty. Based on George Akerlof's "Market for Lemons" article, the paradigm example is of a dodgy second-hand car market. Customers without knowledge of whether a car is a "lemon" depress its price below what a quality second-hand car would be. Information asymmetry arises here, if the seller has more relevant information than the buyer but no incentive to disclose it. Related problems in insurance are adverse selection, such that those at most risk are most likely to insure (say reckless drivers), and moral hazard, such that insurance results in riskier behaviour (say more reckless driving).
Both problems may raise insurance costs and reduce efficiency by driving otherwise willing transactors from the market ("incomplete markets"). Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, may add to another, say moral hazard. Information economics, which studies such problems, has relevance in subjects such as insurance, contract theory, contract law, mechanism design, monetary economics, and health economics, health care. Applied subjects include market and legal remedies to spread or reduce risk, such as warranties, government-mandated partial insurance, restructuring or bankruptcy law, inspection, and Regulatory economics, regulation for quality and information disclosure.
Market failure
The term "market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indi ...
" encompasses several problems which may undermine standard economic assumptions. Although economists categorize market failures differently, the following categories emerge in the main texts.
Critique of political economy, Authors critical of economics tend to view the talk of "market failiures", as a term which is used when economic theories don't correspond with reality, making these theories and paradigms in which these terms are used Falsifiability, unfalsifiable.
Information asymmetries and incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies, as discussed above.
Natural monopoly, or the overlapping concepts of "practical" and "technical" monopoly, is an extreme case of ''failure of competition'' as a restraint on producers. Extreme economies of scale are one possible cause.
Public goods are goods which are under-supplied 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 (economics), distortions caused by these externalities. 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.
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 Imperfect competition, deviating from perfect competition.
Some specialized fields of economics deal in market failure more than others. The economics of the public sector is one example. 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 Emissions trading, emission fees or redefinition of property rights.
Welfare
Welfare economics uses microeconomics techniques to evaluate well-being from Allocation of resources, allocation of factors of production, productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes ''social welfare'', however Social welfare function, measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the methodological individualism, basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units.
Macroeconomics
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, general-equilibrium theory. Such aggregates include measures of national income and output, national income and output, the unemployment rate, and price inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
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 microfoundations, micro-based modelling of sectors, including rational expectations, rationality of players, Efficient market hypothesis, efficient use of market information, and imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
. This has addressed a long-standing concern about inconsistent developments of the same subject.
Macroeconomic analysis also considers factors affecting the long-term level and economic growth, growth of national income. Such factors include capital accumulation, Technological progress, technological change and labour force growth.
Growth
''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 catch-up effect, converge at the same rates of growth.
Much-studied factors include the rate of Investment (macroeconomics), investment, population growth, and Technological progress, technological change. These are represented in theoretical and empirical forms (as in the neoclassical growth model, neoclassical and endogenous growth model, endogenous growth models) and in growth accounting.
Business cycle
The economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline. During the Great Depression of the 1930s, John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
authored a book entitled ''The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'' outlining the key theories of Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...
. 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.
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, understanding of the business cycle has branched into various research programmes, mostly related to or distinct from Keynesianism. The neoclassical synthesis refers to the reconciliation of Keynesian economics with neoclassical economics, stating that Keynesianism is correct in the short run but qualified by neoclassical-like considerations in the intermediate and long run.
New classical macroeconomics, as distinct from the Keynesian view of the business cycle, posits market clearing with imperfect information. It includes Friedman's permanent income hypothesis on consumption and "rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...
" theory, led by Robert Lucas, Jr., Robert Lucas, and real business cycle theory.
In contrast, the New Keynesian economics, new Keynesian approach retains the rational expectations assumption, however it assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "Sticky (economics), 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.
Unemployment
The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labour force. The labour force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged worker, discouraged from seeking work by a lack of job prospects are excluded from the labour force. Unemployment can be generally broken down into several types that are related to different causes.
Classical models of unemployment occurs when wages are too high for employers to be willing to hire more workers. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.[
Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process.
While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.
]
Inflation and monetary policy
Money is a ''means of final payment'' for goods in most price system economies, and is the unit of account in which prices are typically stated. Money has general acceptability, relative consistency in value, divisibility, durability, portability, elasticity in supply, and longevity with mass public confidence. 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. In the words of Francis Amasa Walker, a well-known 19th-century economist, "Money is what money does" ("Money is ''that'' money does" in the original).
As a medium of exchange, money facilitates trade. It is essentially a measure of value and more importantly, a store of value being a basis for credit creation. 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.
At the level of an economy, quantity theory of money, theory and evidence are consistent with a positive relationship running from the total money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
to the nominal value of total output and to the general price level. For this reason, management of the money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
is a key aspect of monetary policy.
Fiscal policy
Governments implement fiscal policy to influence macroeconomic conditions by adjusting spending and taxation policies to alter aggregate demand. When aggregate demand falls below the potential output of the economy, there is an output gap where some productive capacity is left unemployed. Governments increase spending and cut taxes to boost aggregate demand. Resources that have been idled can be used by the government.
For example, unemployed home builders can be hired to expand highways. Tax cuts allow consumers to increase their spending, which boosts aggregate demand. Both tax cuts and spending have Fiscal multiplier, multiplier effects where the initial increase in demand from the policy percolates through the economy and generates additional economic activity.
The effects of fiscal policy can be limited by Crowding out (economics), crowding out. When there is no output gap, the economy is producing at full capacity and there are no excess productive resources. If the government increases spending in this situation, the government uses resources that otherwise would have been used by the private sector, so there is no increase in overall output. Some economists think that crowding out is always an issue while others do not think it is a major issue when output is depressed.
Sceptics of fiscal policy also make the argument of Ricardian equivalence. They argue that an increase in debt will have to be paid for with future tax increases, which will cause people to reduce their consumption and save money to pay for the future tax increase. Under Ricardian equivalence, any boost in demand from tax cuts will be offset by the increased saving intended to pay for future higher taxes.
Public economics
Public economics is the field of economics that deals with economic activities of a public sector, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programmes, 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 behaviour analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.
Much of economics is positive economics, positive, seeking to describe and predict economic phenomena. Normative economics seeks to identify what economies ''ought'' to be like.
Welfare economics is a normative branch of economics that uses microeconomics, microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income Distribution (economics), distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society.
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
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
. 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.
Labor economics
Labor economics seeks to understand the functioning and dynamics of the Market (economics), markets for wage labor. Labor markets function through the interaction of workers and employers. Labor economics looks at the suppliers of labor services (workers), the demands of labor services (employers), and attempts to understand the resulting pattern of wages, employment, and income. In economics, labor is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as Land (economics), land and Capital (economics), capital. There are theories which have developed a concept called human capital (referring to the skills that workers possess, not necessarily their actual work), although there are also counter posing macro-economic system theories that think human capital is a contradiction in terms.
Development economics
Development economics examines economic aspects of the economic development process in relatively developing countries, low-income countries focusing on structural change, poverty, and economic growth. Approaches in development economics frequently incorporate social and political factors.
Criticism
Economics has historically been subject to criticism that it relies on unrealistic, unverifiable, or highly simplified assumptions, in some cases because these assumptions simplify the proofs of desired conclusions. For example, the economist Friedrich Hayek claimed that economics (at least historically) used a Scientism, scientistic approach which he claimed was "''decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed''". Latter-day examples of such assumptions include perfect information, profit maximization and rational choice theory, rational choices, axioms of neoclassical economics. Such criticisms often conflate neoclassical economics with all of contemporary economics. The field of information economics includes both mathematical-economical research and also behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, akin to studies in behavioural psychology, and confounding factors to the neoclassical assumptions are the subject of substantial study in many areas of economics.
Prominent historical mainstream economists such as Keynes and Joskow observed that much of the economics of their time was conceptual rather than quantitative, and difficult to model and formalize quantitatively. In a discussion on oligopoly research, Paul Joskow pointed out in 1975 that in practice, serious students of actual economies tended to use "informal models" based upon qualitative factors specific to particular industries. Joskow had a strong feeling that the important work in oligopoly was done through informal observations while formal models were "trotted out ''ex post''". He argued that formal models were largely not important in the empirical work, either, and that the fundamental factor behind the theory of the firm, behaviour, was neglected. Deirdre McCloskey has argued that many empirical economic studies are poorly reported, and she and Stephen Ziliak argue that although McCloskey critique, her critique has been well-received, practice has not improved. The extent to which practice has improved since the early 2000s is contested: although economists have noted the discipline's adoption of increasingly rigorous modeling, other have criticized the field's focus on creating computer simulations detached from reality, as well as noting the loss of prestige suffered by the field for failing to anticipate the Great Recession.
Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of Macroeconomic policy, macroeconomic policies (monetary policy, monetary and fiscal policy) of the State (polity), state are a focus of contention and criticism.
In the 1990s, feminist critiques of neoclassical economic models gained prominence, leading to the formation of feminist economics
Feminist economics is the critical study of economics and economies, with a focus on gender-aware and inclusive economic inquiry and policy analysis. Feminist economic researchers include academics, activists, policy theorists, and practition ...
. Feminist economists call attention to the social construction of economics and claims to highlight the ways in which its models and methods reflect masculine preferences. Primary criticisms focus on: the assumed selfish nature of actors (homo economicus); exogenous variable, exogenous tastes ; the difficulty of utility comparisons across agents; the exclusion of unpaid work in Macroeconomic measures; and the lack of consideration for class and gender.
Economics has been derogatorily dubbed " the dismal science", first coined by the Victorian era, Victorian historian Thomas Carlyle in the 19th century. It is often stated that Carlyle gave it this nickname as a response to the work of Thomas Robert Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book '' An Essay on the Principle of Population'', Ma ...
, who predicted widespread starvation resulting from projections that population growth would exceed the rate of increase in the food supply. However, the actual phrase was coined by Carlyle in the context of a debate with John Stuart Mill on slavery, in which Carlyle argued for slavery; the "dismal" nature of economics in Carlyle's view was that it "[found] the secret of this Universe in 'supply and demand', and reduc[ed] the duty of human governors to that of letting men alone"."
Related subjects
Economics is one social science
Social science is one of the branches of science, devoted to the study of societies and the relationships among individuals within those societies. The term was formerly used to refer to the field of sociology, the original "science of so ...
among several and has fields bordering on other areas, including economic geography, economic history, public choice, energy economics, JEL classification codes#Other special topics (economics) JEL: Z Subcategories, cultural economics, family 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 economic efficiency, economically efficient, and to predict what the legal rules will be. A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities.
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 behaviour, and externalities should impact government policy. 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.
Energy economics is a broad science, 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
Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, stru ...
.
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 James Samuel Coleman, James S. Coleman, Mark Granovetter, Peter Hedstrom and Richard Swedberg have been influential in this field.
Gary Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
in 1974 presented an economic theory of social interactions, whose applications included the family economics, family, charity, merit goods and multiperson interactions, and envy and hatred.
He and Kevin M. Murphy, Kevin Murphy authored a book in 2001 that analyzed market behavior in a social environment.
Profession
The professionalization of economics, reflected in the growth of graduate programmes on the subject, has been described as "the main change in economics since around 1900". 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.
See Bachelor of Economics and Master of Economics.
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 List of national and international statistical services, National Bureau of Statistics. See Economic analyst.
There are dozens of prizes awarded to economists each year for outstanding intellectual contributions to the field, the most prominent of which is the Nobel Memorial Prize in Economic Sciences, though it is not a Nobel Prize.
Contemporary economics uses mathematics. Economists draw on the tools of calculus, linear algebra, statistics, game theory, and computer science. Professional economists are expected to be familiar with these tools, while a minority specialize in econometrics and mathematical methods.
Women in economics
Harriet Martineau (1802-1876) was a widely-read populariser of classical economic thought. Mary Paley Marshall (1850-1944), the first women lecturer at a British economics faculty, wrote ''The Economics of Industry'' with her husband Alfred Marshall. Joan Robinson
Joan Violet Robinson (''née'' Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.
B ...
(1903-1983) was an important post-Keynesian economist. The economic historian Anna Schwartz (1915-2012) coauthored ''A Monetary History of the United States, 1867–1960'' with Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
. Two women have received the Nobel Prize in Economics: Elinor Ostrom (2009) and Esther Duflo (2019). Five have received the John Bates Clark Medal: Susan Athey (2007), Esther Duflo (2010), Amy Finkelstein (2012), Emi Nakamura (2019) and Melissa Dell (2020).
Women's authorship share in prominent economic journals reduced from 1940 to the 1970s, but has subsequently risen, with different patterns of gendered coauthorship. Women remain globally under-represented in the profession (19% of authors in the RePEc database in 2018), with national variation.
See also
* Critical juncture theory
* Economics terminology that differs from common usage
* Economic ideology
* Economic policy
* Economic union
* Free trade
* Happiness economics
* Humanistic economics
*
* List of economics films
* List of economics awards
* Socioeconomics
General
* Glossary of economics
* Index of economics articles
* JEL classification codes for classifying articles in economics journals and books on economics by subject matter from 1886 to the present.
* Outline of economics
Notes
References
Further reading
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External links
General information
*
Economic journals on the web.
Economics
at ''Encyclopædia Britannica''
Economics A-Z.
Definitions from ''The Economist''.
Economics Online
(UK-based), with drop-down menus at top, incl. Definitions.
Intute: Economics
Internet directory of UK universities.
Research Papers in Economics (RePEc)
Resources For Economists
: American Economic Association-sponsored guide to 2,000+ Internet resources from "Data" to "Neat Stuff", updated quarterly.
Institutions and organizations
Economics Departments, Institutes and Research Centers in the World
Organization For Co-operation and Economic Development (OECD) Statistics
United Nations Statistics Division
World Bank Data
American Economic Association
Study resources
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Economics at About.com
* b:Economics, Economics textbooks on b:Main Page, Wikibooks
MERLOT Learning Materials: Economics
: US-based database of learning materials
UK Economics Network's database of text, slides, glossaries and other resources
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Economics,
Economic theories,