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Revision as of 00:42, 14 June 2007

Economics is a social science. It studies the production, distribution, and consumption of goods and services. The word 'economics', originally "rules of the house", comes from the Greek οἶκος (oikos: house) and νόμος (nomos: custom or law). Economics stems from the natural propensity of human beings to barter, to exchange or trade goods. Whilst there are no records of dogs ever having bartered bones, humans have been bartering all sorts of goods since pre-history. Economics as an independent science - and as we understand the word today - begins with the work of Adam Smith, The Wealth of Nations. [1]. Before Smith, Economics was just a chapter in political science, the art of managing a state. This article will focus on economics since it became a science independent from politics. For the history of early economics leading up to the development of The Wealth of Nations see the article History of Ancient Economics.

Definition of economics

Even the definition of economics is subject to controversy. Many economists view economics as the study of how scarce resources are allocated to satisfy alternative competing human wants. This is a "neo-classical" view first formulated by Lionel Robbins in 1935 and repeated in most economics texts; for example, [2] Paul Samuelson, who, in his famous book Economics - An Introductory Analysis [2], defines Economics as:

the study of how men and society 'choose', with or without the use of money, to employ 'scarce' productive resources to produce various commodities over time and distribute them for consumption, now an in the future, among various people and groups in society. [2]

However, a more traditional view is that "Economics is the subject concerned with the material welfare of individuals and groups in society" (Asimakopulos, 1978). or "The economic problem is the study of the process of providing for the material well-being of society". (Heilbroner), or the famous Alfred Marshall "Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing."

The list of acceptable definitions of economics is endless. Economics can be described as the study of those activities which, with or without money, involve exchange transactions among people. Economics is also the study of wealth.

One can play with definitions, but a favourite remains the one proposed by a Canadian economist, Jacob Viner [3] (1892-1970) as "Economics is what economists do". Economics is far from being an exact science. Formal economics is awash in ostensible experts who disagree on the most basic questions of theory and evidence; some Nobel laureates who shared the same prize may have diametrically opposed views on some economic issues. "(...)changes in the economy mean that economic theories are continually being applied under new circumstances, under which they have never been tested". [4] Schumpeter's insight clarifies the matter:

Let us begin in a thoroughly common-sense manner. What distinguishes the 'scientific' economist from all the other people who think, talk, and write about economic topics is a command of techniques that we class under three heads: history, statistics, and 'theory'. The three together make up what we shall call Economic Analysis.
Of these three fundamental fields, economic history -- which issues into and includes present day facts -- is by far the most important. I wish to state right now that if, starting my work in economics afresh, I were told that I could study only one of the three but have my choice, it would economic history that I would choose. And this on three grounds.
First the subject matter of economics is essentially a unique process in historic time. Nobody can hope to understand the economic phenomena of any epoch, including the present, who has not an adequate command of historical facts and an adequate amount of historical sense or of what may be described as historical experience.
Second, the historical report cannot be purely economic but must inevitably reflect also 'institutional' facts that are not purely economic: therefore it affords the best method for understanding how economic and non-economic facts are related to one another and how the various social sciences would be related to one another.
Third, it is, I believe, the fact that most of the fundamental errors currently committed in economic analysis are due to a lack of historical experience more often than to any other shortcoming of the economist's equipment. [5]

Classical economy

The "Classical" [6] period of economic thought began in 1776 with the publication of Adam Smith's The Wealth of Nations [1]. Written during the gentle era of Enlightenment, the laissez-faire policies of Adam Smith did not anticipate the economic and social upheavals that the industrial era was about to unleash. Only 13 years later the French court was bankrupt and the French people took to the streets and beheaded their king; it was the French Revolution.

Among the economists who tried to understand the new phenomena three were outstanding: Jean-Baptiste Say[7] , Thomas Robert Malthus[8] and David Ricardo[9]. They all had different visions for political economy after Smith. Of those, Ricardo was the most succesful and influential and laid the basis for the Classical Economy [6] that would become the mainstream economy thought for the whole of the XIX century

Thomas Robert Malthus[8] (1766-1834) is most famous for his "Essay on the Principle of Population" [10] where he formulated the theory that population expanded at a geometric rate (or exponentially) while food production could only increase arithmetically. At a certain point, the population increase would outrun the food supply, and result in general misery. Malthus was one of the major inspirations for Darwin’s theory of Natural Selection, and his echoes can be found in today’s environmental literature that warn of depleting resources.

David Ricardo [9] (1772-1823) was perhaps the most important of the XIXth century political economists. He combined Smith's labour theory of value with Malthus's population dynamics in a system which showed that capitalist economies would eventually result in a steady state of universal misery. On his On the Principles of Political Economy and Taxation [11] Ricardo set the theoretical fundaments of the Classical Economy.

Ricardo's system depended on the idea of the marginal productivity of land, and was the inventor of the "marginal" concept. His idea was that the value of agricultural products (and hence food) was based on the amount of labour required to produce on the least fertile parcel of land. Hence the "Law of diminishing marginal productivity". Landlords owning land that was more fertile, and who could produce more for a given amount of land, obtained "rents". His conclusion was that the future was in buying land. He, of course, did not predict the tremendous increase in technology and productive capacity brought about by the capitalist system.

Ricardo was also responsible for the idea of comparative advantage in international trade [9]. His classic example was between wine and clothing and England and Portugal. Portugal was more efficient than England in producing both cloth and wine, but England had a comparative advantage in cloth production. He showed that it would be advantageous for Portugal to specialize in wine and England to specialize in cloth, and to trade with each other. This resulted in more wine and cloth all around.

Karl Marx[12] is the most famous of Ricardo's followers. Marx challenged the foundations of Classical theory. Writing during the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism would ultimately destroy itself and be succeeded by a world without private property. In Samuelson's words, he was a "minor Ricardian" - and had little impact on the development of pure economic theory. His economics differed little from Ricardo's, but had different conclusions. He placed little emphasis on the diminishing marginal productivity of land, but more importance on the falling rate of profit. To Marx, capitalist competition would lead to the impoverishment of the "proletariat" or working class and a falling rate of profit. The ultimate resolution would be a communist revolution with the workers seizing power. Soon after the death of Karl Marx [12], a Marxian school of economics [13] emerged under the leadership of Marx's inner circle of companions and co-writers, notably Friedrich Engels[14] and Karl Kautsky [15] , both of whom were German.

For more information, see: Classical economy.
For more information, see: Marxist Socialism.
For more information, see: Karl Marx.


The marginalist revolution

The Prussian civil servant Hermann Heinrich Gossen [16] (1810-1859) was the first one to formulate in 1854, in an obscure book writen in German [17], "The Second Gossen Law" or "the law of diminishing marginal utility", which was actually the first "marginalist law"; but Gossen's work was dismissed by his conteporaries and remained completely unknown until 1878. In the 1870's, three economists became responsible for what is called the "Marginalist Revolution" [18] - William Stanley Jevons [19] , Carl Menger [20] and Léon Walras [21] . They, independently of each other, developed a new theory of value based on utility. The three are responsible for the concept of marginal utility [22] , and the derivation of a downward sloping demand curve [23]. The Marginalist Revolution would eventually put an end to the The Classical Scholl [6] and the era of the Neoclassical School [24], which lasts to today, began. This made possible the logical analysis of the "Producers's Decision" [25] or how and why "producer" transforms factors of production into finished goods.

Alfred Marshall [26] (1900-1920) was responsible for the combination of "demand" [23] and "supply" [27],where demand was based on "marginal utility"[28]. He was responsible for developing numerous concepts still used in economics, including: demand [23] and supply [27] curves or schedules and their equilibrium, "elasticity of demand" [29], consumer surplus, the distinction between short- and long-period, etc. Modern microeconomics [30] [31], the study of individual economic agents and individual markets, is a continuation and elaboration of his work.

For more information, see: Microeconomics.

Marshall's work was only the beginning. His work was refined and further developed, and continues to be extended to this day. Neoclassical economists have built a truly astounding logical edifice into a "Production Function" [32] that rival Newtonian mechanics in completeness and rigour. The basis of neo-classical economics is maximisation under constraint, and this constantly involves the "marginal concept" [28]. The tools developed by economists are even now beginning to be used by other social sciences such as anthropology, sociology and even psychology.

For more information, see: Marginalist Revolution.



The monetarist "counterrevolution"

While the Keynesian-Neoclassical synthesis took over the profession, an unregenerate rearguard of neo-classical economists centred at the University of Chicago continued to exist. See Chicago School of Economics They never accepted the idea of involuntary unemployment or government intervention to ensure full employment, and strongly believed in the virtues of markets and laissez-faire. The most famous economist of the Chicago School is Milton Friedman. He was mainly responsible for what is known as the Monetarist counterrevolution of the 1970s.

With the perceived failure of Keynesian economics to explain and correct the "stagflation" of the 1970's, the free market prescriptions of monetarism became much more popular, and were eventually espoused by many right wing governments in the 1980's (Reagan, Thatcher, Mulroney), and, perhaps more importantly, by the central banks of most industrialized countries.

The Chicago School of Microeconomics

The Chicago School of Economics not only challenged established theories in macroeconomics, they pioneered the expansion of microeconomics to include many unexpected topics, such as marriage and divorce, criminal behavior, and slavery. The main tool was price theory as developed by Alfred Marshall. [30]

Thematic schools

Thematic Schools refer to those schools of economic thought which concentrate on the study of some particluar aspect of economics. The most important themes studied by the Thematic Schools are: Business Cycle Theory, Land economics (somewhat neglected), Empirics and Econometrics, Imperfect Competition, Economic Development, Uncertainty and Information, Game Theory and Finance Theory.

For more information, see: Thematic schools.


Economics subdisciplines

Modern Economic Theory is divided in two main branches: Microeconomics which is concerned with the actions of "individual economic agents" and Macroeconomics which studies the aggregate economy.

Some of the Economics subdisciplines do not fit neatly into those major divisions, reaching parts of both; they are the "Comprehensive subdisciplines".

For more information, see: Economics subdisciplines.


External links

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See also

References

  1. ↑ 1.0 1.1 SMITH, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Modern Library, 1ª edition, 2000, ISBN 0679783369
  2. ↑ 2.0 2.1 2.2 SAMUELSON, Paul Anthony e NORDHAUS, William D.Economics. McGraw Hill Professional, 18ª edition, 2004, ISBN 0072872055 Cite error: Invalid <ref> tag; name "ECONOMICS" defined multiple times with different content Cite error: Invalid <ref> tag; name "ECONOMICS" defined multiple times with different content
  3. ↑ Jacob Viner
  4. ↑ BACHOUSE, Roger E. A History of Modern Economic Analysis, Oxford: First published by Basil Blackwell, 1985. Ch. 30.2 P. 410
  5. ↑ Joseph A. Schumpeter, History of Economic Analysis, edited from manuscript by Elizabeth Boody Schumpeter (Oxford and New York: Oxford University Press, 1954), Chapter 2: Interlude I: The Techniques of Economic Analysis: on pp. 12-13
  6. ↑ 6.0 6.1 6.2 Classical School Cite error: Invalid <ref> tag; name "CLASSICALHET" defined multiple times with different content Cite error: Invalid <ref> tag; name "CLASSICALHET" defined multiple times with different content
  7. ↑ Jean-Baptiste Say
  8. ↑ 8.0 8.1 Thomas Robert Malthus
  9. ↑ 9.0 9.1 9.2 David Ricardo
  10. ↑ "Essay on the Principle of Population"
  11. ↑ RICARDO, David. On the Principles of Political Economy and Taxation
  12. ↑ 12.0 12.1 Karl Marx
  13. ↑ Marxian school of economics]
  14. ↑ Friedrich Engels
  15. ↑ Karl Kautsky
  16. ↑ Hermann Heinrich Gossen
  17. ↑ GOSSEN, Hermann Heinrich. The Laws of Human Relations and the Rules of Human Action Derived Therefrom.Translated by Rudolph C. Blitz; introduction by Nicholas Georgescu-Roegen. Cambridge, MA: MIT Press, 1983. ISBN 0262070901
  18. ↑ The Marginalist Revolution
  19. ↑ William Stanley JEVONS, 1835-1882
  20. ↑ Carl MENGER, 1841-1921
  21. ↑ Marie Esprit Léon WALRAS (1834-1910)
  22. ↑ Marginal Utility Animated graph
  23. ↑ 23.0 23.1 23.2 Demand Functions and Demand Curves
  24. ↑ Neoclassical School
  25. ↑ "Producers's Decision"
  26. ↑ Alfred Marshall
  27. ↑ 27.0 27.1 Supply Functions and Supply Curve
  28. ↑ 28.0 28.1 Marginal Utility and Optimization
  29. ↑ "Elasticity of demand"
  30. ↑ 30.0 30.1 MICROECONOMICS: Most important concepts explained in detail. Text and workable problems. WARNING: Internet Explorer will not work! Get "Firefox" or "Netscape" for free. Requires "Adobe Acrobat Reader" as a helper to your web browser. You will need "Excel 97" or higher running on your computer to use the spreadsheets.
  31. ↑ RUBINSTEIN, Ariel. Lecture notes in microeconomic theory : the economic agent. Princeton: Princeton University Press, 2006.
  32. ↑ "Production Function"
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Bibliography

Historical Classics

Modern economics

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