Economics is a social science that aims to describe the factors that determine the production, distribution and consumption of goods and services, i.e. the economy. It is the study of how we choose to use resources.
Definitions of the term ‘economics’ can vary considerably, depending on people’s point of view. The classical definition is “Economics is the study of the use of scarce resource that have alternative uses.”
An economics expert is called an economist. Economists try to understand the economy and how it responds to various stimuli, such as when the central bank changes interest rates.
Economics is classed as a science because it uses scientific methods to develop theories that help explain the behavior of people, groups and organizations.
The Journal of Economic Literature Classification of Fields breaks down Economics into several fields (above). They include the core areas of mathematical and statistical methods as well as the many arenas in which the core methods are applied. (Data Source: American Economic Association)
The words ‘economy’ and ‘economics’ come from the Greek word ‘oikonomia’, which means ‘household management, thrift’. The Greek word ‘oikonomos’ means ‘steward, manager’. It comes from ‘oikos’, which means a ‘dwelling’.
According to the Macmillan Dictionary, economics is:
“The study of the way that goods and services are produced and sold and the way money is managed.”
Choices and Economics
Life is all about choices. However, people, companies and governments cannot have everything they want – what they are able to do is limited by both resources and time. We therefore have to choose from a range of available options.
Do I or you want more leisure time or to earn more money? Does a government want to raise expenditure on health or defense? Does a company reduce prices or increase spending on advertising to boost sales?
Economics examines how we come to these choices, and can inform policies in a wide range of areas, including health, transport, commerce, environment, defense, etc.
Economics is all around us
Unlike Latin or Ancient Greek, economics is not something that is just read in books. We all swim and wade in a pool of economics.
Every single human on this planet is an economic creature, naturally programmed to make economic decisions, which we do without thinking – instinctively.
People need resources to fulfill their desires. These resources cannot be infinite, but their desires can be. We all need to make choices on how to use our scarce resources. Economists study these choices.
The School of Economics at the University of Nottingham in the UK writes on its website:
“Understanding why we do what we do is key to the economist’s role. It requires an appreciation of many related disciplines such as politics, mathematics, statistics, sociology and psychology. Blending these elements into a coherent and effective framework is what makes an economist that little bit special.”
It all started with Adam Smith
Modern economics started with a Scottish pioneer of political economy, who was also a moral philosopher, Adam Smith (1723-1790), with the publication of his book ‘An Inquiry into the Nature and Causes of the Wealth of Nations’.
His publication was the first comprehensive defense of the free market – it still has considerable influence on current economic thinking globally.
Central to Mr. Smith’s work was the idea that the market, while seemingly chaotic, is in fact guided to produce the right quantities and variety of goods and service – what he called the ‘invisible hand’.
When a certain product is scarce and in demand, there will be great incentives within the economy to produce more of it. If there is a surplus, the incentives will influence people to produce less of it.
Most economist today see Adam Smith as the ‘father of modern economics’.
Macroeconomics and microeconomics
Economics is a vast field, which can be broken down into dozens of different divisions. Its two main branches are macroeconomics and microeconomics.
Macroeconomics – this branch examines the whole economy (aggregate economy) and how it is affected by certain factors such as interest rates.
Microeconomics – studies how households, individuals and businesses within an economy allocate limited resources. Imagine using a microscope to look at each of the tiny components that make up the whole economy.
“Economics includes the study of labor, land, and investments, of money, income, and production, and of taxes and government expenditures. Economists seek to measure well-being, to learn how well-being may increase over time, and to evaluate the well-being of the rich and the poor.”
Austrian School of Economics
The Austrian School of Economics, which was founded by Carl Menger (1840-1921) and is extremely influential among modern economists, focuses on the concept of methodological individualism and is against the state intervening in the economy.
The Austrian economic school of thought believes the market itself can find the best way to proceed. It challenges the mathematical models that economists use when trying to make predictions.
Not long after the Russian Revolution, Austrian Economists predicted the eventual collapse of the communist economic model, which they described as unsustainable.