Economics () is a social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyses what is viewed as the basic elements of economies, including individual agents and markets, their interactions, and the outcomes of those interactions. Individual agents may include households, firms, buyers, and sellers. Macroeconomics analyses economies as systems where production, distribution, consumption, savings, and investment expenditure interact; and the factors of production affecting them, such as: labour, capital, land, and enterprise, inflation, economic growth, and public policies that impact these elements. It also seeks to analyse and describe the global economy.
Other broad distinctions within economics include those between positive economics, describing "what is", and normative economics, advocating "what ought to be"; between economic theory and applied economics; between rational and behavioural economics; and between mainstream economics and heterodox economics.
Economic analysis can be applied throughout society, including business, finance, cybersecurity, health care, engineering and government. It is also applied to such diverse subjects as crime, education, the family, feminism, law, philosophy, politics, religion, social institutions, war, science, (Note the page is broken in some browsers but is still readable through the source.) and the environment.
Definitions of economics
The earlier term for the discipline was "political economy", but since the late 19th century, it has commonly been called "economics". The term is ultimately derived from Ancient Greek (oikonomia), a term for the "way (nomos) to run a household (oikos)", or in other words the know-how of an (oikonomikos), or "household or homestead manager". Derived terms such as "economy" can therefore often mean "frugal" or "thrifty".The terms derive ultimately from ( "house") and (, "custom" or "law"). By extension then, "political economy" was the way to manage a polis or state.
There are a variety of modern definitions of economics; some reflect evolving views of the subject or different views among economists. Scottish philosopher Adam Smith (1776) defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as:
Jean-Baptiste Say (1803), distinguishing the subject matter from its public-policy uses, defined it as the science of production, distribution, and consumption of wealth. On the satirical side, Thomas Carlyle (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) delimited the subject matter further:
Alfred Marshall provided a still widely cited definition in his textbook Principles of Economics (1890) that extended analysis beyond wealth and from the societal to the microeconomic level:
Lionel Robbins (1932) developed implications of what has been termed "[p]erhaps the most commonly accepted current definition of the subject":
Robbins described the definition as not classificatory in "pick[ing] out certain kinds of behaviour" but rather analytical in "focus[ing] attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." 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 its goal winning it (as a sought-after end), generates both costs and benefits, and uses resources (human life and other costs) 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. Economics cannot be defined as the science that studies wealth, war, crime, education, and any other field to which economic analysis can be applied, but rather 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 criticised the definition as overly broad, failing to limit its scope to market analysis. 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, a contributor to the expansion of economics into new areas, described the approach he favoured as "combin[ing the] assumptions of maximizing behaviour, stable preferences, and market equilibrium, used relentlessly and unflinchingly." One commentary characterises 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 [such] analysis involves." The same source reviews a range of definitions found in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter 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.
Many economists including Nobel Prize winners James M. Buchanan and Ronald Coase reject the method-based definition of Robbins and continue to prefer definitions like those of Say, in terms of its subject matter. Ha-Joon Chang has for example argued that the definition of Robbins would make economics 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, it is not said that all biology should be studied with DNA analysis. People study living organisms in many different ways: some perform DNA analysis, others analyse anatomy, and still others build game-theoretic models of animal behaviour. But they are all called biology because they all study living organisms. According to Ha Joon Chang, this view that the economy can and should be studied 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 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 and several economic historians have described him as the "first economist". However, the Greek word oikos 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 far more recent phenomenon.Cameron, Gregory. (2008). Oikos and Economy: The Greek Legacy in Economic Thought. Although Xenophon, the author of the Oeconomicus, is credited by philologues as the source of the word "economy", modern scholarship often credits Aristotle as the first author writing on economics proper in some scattered passages, particularly in the Nicomachean Ethics, where the topic of use value vs exchange value is discussed. Joseph Schumpeter described 16th and 17th century scholastic writers, including Tomás de Mercado, Luis de Molina, and Juan de Lugo, as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary, interest, and value theory within a natural-law perspective.
Two groups, who were later called "mercantilists" and "physiocrats", more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to the 18th century in a prolific pamphlet literature, whether of merchants or politicians. 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 through trade only by selling goods abroad and restricting imports to gold and silver. The doctrine called for importing inexpensive raw materials for manufacturing goods for export, and for state regulation to impose protective tariffs on foreign manufactured goods and to prohibit manufacturing in the colonies.
Physiocrats, 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 collection with a single tax on landowners' income. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire, 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 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, distinct from the physiocratic view that only agriculture was productive.
Smith discusses potential benefits of specialisation by division of labour, including increased labour productivity and gains from trade, 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" and a "fundamental principle of economic organization." To Smith has also been ascribed "the most important substantive proposition in all of economics" and the foundation of resource-allocation theory—that, under competition, 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). Also published as
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 Reverend Thomas Robert Malthus (1798) used the concept of diminishing returns to explain low living standards. Human population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The pressure of a rapidly growing population on a limited amount of land led to 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 Simon has criticised Malthus's conclusions.; and