Economics

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Economics
From Wikipedia, the free encyclopedia

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold)."[1]

Modern economics developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.[2] A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[3] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.


Areas of economics may be divided or classified into various types, including:

microeconomics and macroeconomics
positive economics ("what is") and normative economics ("what ought to be")
mainstream economics and heterodox economics
fields and broader categories within economics.
One of the uses of economics is to explain how economies, as economic systems, work and what the relations are between economic players (agents) in the larger society. Methods of economic analysis have been increasingly applied to fields that involve people (officials included) making choices in a social context, such as crime,[4] education,[5] the family, health, law, politics, religion,[6] social institutions, and war.[7]

In the beginning


Although discussions about production and distribution have a long history, economics in its modern sense as a separate discipline is conventionally dated from the publication of Adam Smith's The Wealth of Nations in 1776.[8] There Smith describes the subject in these practical and exacting terms:

Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign. [9]
Smith referred to the subject as 'political economy', but that term was gradually replaced in general usage by 'economics' after 1870.[10]


Basic concepts


Production possibilities, opportunity cost, and efficiency

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Common problems among different types of economies include:

what goods to produce and in what quantities (consumption or investment, private goods or public goods, meat or potatoes, etc.)
how to produce them (coal or nuclear power, how much and what kind of machinery, who farms or teaches, etc.)
for whom to produce them, reflecting the distribution of income from output.[11]
An analytical tool for addressing these problems is the production-possibility frontier (PPF). In the simplest case an economy can produce just two goods. Then the PPF is a table or graph (as below) that shows the different quantities of the two goods. Technology and an endowment of productive inputs (such as land, capital, and prospective labour) are taken as given, which limits feasible total output.

Point A in the diagram for example, shows that FA of food and CA of computers can be produced when production is run efficiently. So can FB of food and CB of computers (point B). Each point on the curve shows a maximal potential total output for the economy, which is the maximum 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.[12] 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 between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of an opportunity cost. Opportunity cost has been described as expressing "the basic relationship between scarcity and choice."[13] Along the PPF, scarcity means 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 can also be described as the choice of the increased output being 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 U, 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. An example of such inefficiency might be from high unemployment during a business-cycle recession. Being on the curve might still not fully satisfy allocative efficiency if it did not produce a mix of goods that consumers preferred.[14]

Consistent with the common economic problems listed above, much applied economics in public policy is concerned with determining how the efficiency of an economy can be improved.[15] 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."[16]


Specialization, division of labour, and gains from trade
Main articles: Division of labour, Comparative advantage, and Gains from trade
Specialization in production is a pervasive feature of economic organization. Its contribution to economic efficiency and technological progress has long been noted. It includes different types of output among farms, manufacturers, and service providers, economies, etc. Among each of these production systems, there may be:

a corresponding division of labour with each worker having a distinct occupation or doing a specialized task as part of the production effort,
correspondingly different types of capital equipment and differentiated land uses.[17][18][19]
Adam Smith's Wealth of Nations (1776) notably discusses the benefits of the division of labour. How individuals can best apply their own labour or any other resource is a central subject in the first book of the series. Smith claimed that an individual would invest a resource, for example, land or labour, so as to earn the highest possible return on it. Consequently, all uses of the resource must yield an equal rate of return (adjusted for the relative riskiness of each enterprise). Otherwise reallocation would result. This idea, wrote George Stigler, is the central proposition of economic theory. French economist Turgot had made the same point in 1766.[20]

In more general terms, it is theorized that market incentives, including prices of outputs and productive inputs, select the allocation of factors of production by comparative advantage, that is, so that (relatively) low-cost inputs are employed to keep down the opportunity cost of a given type of output. In the process, aggregate output increases as a by product or by design.[21] Such specialization of production creates opportunities for gains from trade 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 output (formally, the sum of increased consumer surplus and producer profits) from specialization in production and resulting trade.[22][23][24]


Money
Main articles: Money, Quantity theory of money, and Monetary policy
Money is a means of final payment for goods in most market economies and the unit of account in which prices are typically stated. 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. As a medium of exchange, money facilitates trade. 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. By comparison, 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.[25]

At the level of an economy, theory and evidence are consistent with a positive relationship running from the total money supply to the nominal value of total output and to the general price level. For this reason, management of the money supply is a key aspect of monetary policy.[26][27]


Supply and demand


The theory of demand and supply is an organizing principle to explain prices and quantities of goods sold and changes thereof in a market economy. In microeconomic theory, it refers to price and output determination in a perfectly competitive market. This has served as a building block for modeling other market structures and for other theoretical approaches.

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For a given market of a commodity, demand shows the quantity that all prospective buyers would be prepared to purchase at each unit price of the good. Demand is often represented using a table or a graph relating price and quantity demanded (see boxed figure). Demand theory describes individual consumers as "rationally" choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is 'constrained utility maximization' (with income as the "constraint" on demand). Here, 'utility' refers to the (hypothesized) preference relation for individual consumers. Utility and income are then used to model hypothesized properties about the effect of a price change on the quantity demanded. The law of demand states that, in general, price and quantity demanded in a given market are inversely related. In other words, the higher the price of a product, the less of it people would be able and willing to buy of it (other things unchanged). As the price of a commodity rises, overall purchasing power decreases (the income effect) and consumers move toward relatively less expensive goods (the substitution effect). Other factors can also affect demand; for example an increase in income will shift the demand curve outward relative to the origin, as in the figure.

Supply is the relation between the price of a good and the quantity available for sale from suppliers (such as producers) at that price. Supply is often represented using a table or graph relating price and quantity supplied. Producers are hypothesized to be profit-maximizers, meaning that they attempt to produce the amount of goods that will bring them the highest profit. Supply is typically represented as a directly proportional relation between price and quantity supplied (other things unchanged). In other words, the higher the price at which the good can be sold, the more of it producers will supply. The higher price makes it profitable to increase production. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This pulls 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 of supply and demand predicts that for a given supply and demand curve, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. This is at the intersection of the two curves in the graph above, market equilibrium.

For a given quantity of a good, the price point on the demand curve indicates the value, or marginal utility[28] to consumers for that unit of output. It measures what the consumer would be prepared to pay for the corresponding unit of the good. The price point on the supply curve measures marginal cost, the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is determined by supply and demand. In a perfectly competitive market, supply and demand equate cost and value at equilibrium.[29]

Demand and supply can also be used to model the distribution of income to the factors of production, including labour and capital, through factor markets. In a labour market for example, the quantity of labour employed and the price of labour (the wage rate) are modeled as set by the demand for labour (from business firms etc. for production) and supply of labour (from workers).

Demand and supply are used to explain the behavior of perfectly competitive markets, but their usefulness as a standard of performance extends to any type of market. Demand and supply can also be generalized to explain variables applying to the whole economy, for example, quantity of total output and the general price level, studied in macroeconomics.


Prices and quantities


In supply-and-demand analysis, price, the going rate of exchange for a good, coordinates production and consumption quantities. Price and quantity have been described as the most directly observable characteristics of a good produced for the market.[30] Supply, demand, and market equilibrium are theoretical constructs linking price and quantity. But tracing the effects of factors predicted to change supply and demand -- and through them, price and quantity -- is a standard exercise in applied microeconomics and macroeconomics. Economic theory can specify under what circumstances price serves as an efficient communication device to regulate quantity.[31] A real-world application might attempt to measure how much variables that increase supply or demand change price and quantity.

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.[32] 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 deviating from perfect competition.

Another area of economics considers whether markets adequately take account of all social costs and benefits. An externality is said to 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 caused by these externalities.[33]


Marginalism

Marginalist economic theory, such as above, describes consumers as attempting to reach a most-preferred position, subject to constraints, including income and wealth. It describes producers as attempting to maximize profits subject to their own constraints (including demand for goods produced, technology, and the price of inputs). Thus, for a consumer, at the point where marginal utility of a good, net of price, reaches zero, further increases in consumption of that good stop. Analogously, a producer compares marginal revenue against marginal cost of a good, with the difference as marginal profit. At the point where the marginal profit reaches zero, further increases in production of the good stop. For movement to equilibrium and for changes in equilibrium, behavior also changes "at the margin" -- usually more-or-less of something, rather than all-or-nothing. Such analysis applies to not only quantity-price adjustment toward equilibrium in the supply-and-demnd model but to any variable that changes the marginal equilibirum conditions of an activity, whether resulting in a change of utility, revenue, or cost.

Related conditions and considerations apply more generally to any type of economic system, whether market-****d or not, where there is scarcity.[34] The marginalist notion of opportunity cost is a device to measure the size of the trade-off between competing alternatives. Such costs, reflected in prices, are used for predicting responses to public-policy changes or disturbances in a market economy. They are also used for evaluating economic efficiency. Similarly, in a centrally planned economy, shadow-price relations must be satisfied for efficient use of resources.[35] There shadow pricing can be used for modeling production units or sectors in relation to objectives of planners.[36]


Economic reasoning

Economics as a contemporary discipline relies on rigorous styles of argument. Various methods and beliefs have influenced development of the subject.[37][38] Analysis may begin with a simple model that proposes the hypothesis of one variable to be explained by another variable. Often an economic hypothesis is only qualitative, not quantitative. That is, the hypothesis implies the direction of a change in one variable, not the size of the change, for a given change of another variable..[39] For clarity of exposition, theory may proceed with an assumption of ceteris paribus, which means holding constant explanatory terms other than the one under consideration. For example, the quantity theory of money predicts an increase in the nominal value of output from an increase in the money supply, ceteris paribus. Common objectives of economic analysis include formulating theories that, compared to competing theories, are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research.[40]

Economic theory is open to criticisms that it relies on unrealistic, unverifiable, or highly simplified assumptions. An example is the assumption of profit maximization by business firms. Answers of businesspersons to questions about the factors affecting their decisions may show no such calculation. One methodological response invokes hypothesized implications, such as that a profit-maximizing firm would raise total price with an increase in the sales tax. If firms act as if they are trying to maximize profits, the assumption may be accepted, whatever businesspersons say they are doing. More generally, while unrealistic assumptions do not help an unsuccessful theory, many descriptive details might be irrelevant to the predictive success of the theory and omitted for that reason.[41][42] Still, unrealistic assumptions may challenge the epistemic status of economics as a science, even as concepts and models help explain economic phenomena.[43]

Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) used mathematical methods to represent the theory, 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 theorems that can conceivably be refuted by empirical data.[44]

Economic data, broadly or narrowly construed, may permit testing the theory, if the theory has empirical implications. Statistical methods such as regression analysis can represent unknown random influences on the variable to be explained. 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 provisional, dependent on the hypothesis surviving tests that expose it to rejection. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data sets, and prior beliefs. Here, criticism ****d on professional standards and non-replicability of results serve as further checks against bias, errors, and over-generalization,[45][38] 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.[46] Like theories, uses of test statistics are themselves open to critical analysis,[47][48][49] although critical commentary on papers in economics in prestigious journals such as the American Economic Review has declined precipitously in the past 40 years.[50] This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).[51] Deirdre McCloskey, a longstanding critic of economics, claims that her criticisms have gone largely unheard over the years,[52] although her contention is controversial.[53]

In recent decades, the use of experimental methods in economics, including controlled experiments, has greatly expanded. This has removed one long-noted distinction of some natural sciences from economics and allowed more direct tests of what were previously taken as axioms.[54][55] Development of theories, data, and methods have transformed some assumptions into testable models. An example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences.[56][57]

Other fields commonly described as sciences use methods similar to those above. Their widespread use in economics underlies an argument that economics is a "genuine science.".[58] Still, critics have challenged the net gains. For example, Friedrich Hayek in his 1974 Nobel Prize lecture attributed policy failures in economic advising to an uncritical and unscientific propensity to imitate procedures used in the physical sciences. He argued that even much-studied economic phenomena, such as labor-market unemployment, are inherently more complex than their counterparts in the physical sciences where such methods were earlier formed. Similarly, theory and data are often very imprecise and lend themselves only to the direction of a change needed, not its size.[59] In part because of criticism, economics has undergone a thorough cumulative formalization and elaboration of concepts and methods since the 1940s, some of which have been toward application of the hypothetico-deductive method to explain real-world phenomena.[60] An example of the latter is the extension of microeconomic analysis to seemingly non-economic areas, sometimes called economic imperialism.[58][61]


Areas and classifications in economics
Economics is one social science among several but has fields bordering on other areas, including economic geography, economic history, public choice, cultural economics, and institutional economics.

One division of the subject distinguishes two types of economics. Positive economics ("what is") seeks to explain economic phenomena or behavior. Normative economics ("what ought to be," usually as to public policy) prioritizes choices and actions by some set of criteria; such priorities reflect value judgments, including selection of the criteria.

Another distinction is between mainstream economics and heterodox economics. One broad characterization describes mainstream economics as dealing with the "rationality-individualism-equilibrium nexus" and heterodox economics as defined by a "institutions-history-social structure nexus."[62]

The JEL classification codes of the Journal of Economic Literature provide a comprehensive, detailed way of classifying and searching for economics publiications by subject matter. An alternative classification of often-detailed entries by mutually-exclusive categories and subcategories is The New Palgrave: A Dictionary of Economics.[63]


Analysis of the economy
Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics.


Microeconomics

Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. A given market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time. This is broadly termed demand-and-supply analysis. Market structures, such as perfect competition and monopoly, are examined as to implications for behavior and economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that behavioral relations in other markets remain unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for changes in different markets and aggregates across all markets, including their movements and interactions toward equilibrium.[64][65]


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 theory.[66] Such aggregates include national income and output, the unemployment rate, and price inflation 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 micro-****d modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.[67] This has addressed a long-standing concern about inconsistent developments of the same subject.[68] Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labor force growth. [69][70]


Mathematical and quantitative methods
Economics as an academic subject often uses geometric methods, in addition to literary methods. Other general mathematical and quantitative methods are also often used for rigorous analysis of the economy or areas within economics. Such methods include the following.


Mathematical economics

Mathematical economics refers to application of mathematical methods to represent economic theory or analyze problems posed in economics. It uses such methods as calculus and matrix algebra. Expositors cite its advantage in allowing formulation and derivation of key relationships in an economic model with clarity, generality, rigor, and simplicity.[71] For example, Paul Samuelson's book Foundations of Economic Analysis (1947) identifies a common mathematical structure across multiple fields in the subject.


Econometrics

Econometrics applies mathematical and statistical methods to analyze data related to economic models. For example, a theory may hypothesize that a person with more education will on average earn more income than a person with less education holding everything else equal. Econometric estimates can estimate the magnitude and statistical significance of the relation. Econometrics can be used to draw quantitative generalizations. These include testing or refining a theory, describing the relation of past variables, and forecasting future variables.[72]


National accounting

National accounting is a method for summarizing aggregate economic activity of a nation. The national accounts are double-entry accounting systems that provide detailed underlying measures of such information. These include the national income and product accounts (NIPA), which provide estimates for the money value of output and income per year or quarter. NIPA allows for tracking the performance of an economy and its components through business cycles or over longer periods. Price data may permit distinguishing nominal from real amounts, that is, correcting money totals for price changes over time.[73][74] The national accounts also include measurement of the capital stock, wealth of a nation, and international capital flows.[75]


Selected fields

Agricultural economics

Agricultural economics is one the oldest and most established fields of economics. It is the study of the economic forces that affect the agricultural sector and the agricultural sector's impact on the rest of the economy. It is an area of economics that, thanks to the necessity of applying microeconomic theories to complex real world situations, has given rise to many important advances of more general applicability; the role of risk and uncertainty, the behaviour of households and links between property rights and incentives. More recently policy areas such as international commodity trade and the environment have been stressed. [76]


Development and growth economics

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Growth economics studies factors that explain economic growth – the increase in output per capita of country over a long period of time. The same factors are used to explain differences in the level of output per capita between countries. Much-studied factors include the rate of investment, population growth, and technological change. These are represented in theoretical and empirical forms (as in the neoclassical growth model) and in growth accounting.[77][78] The distinct field of development economics examines economic aspects of the development process in relatively low-income countries focussing on structural change, poverty, and economic growth. Approaches in development economics frequently incorporate social and political factors.[79][80]


Economic systems

Economic systems is the branch of economics that studies the methods and institutions by which societies determine the ownership, direction, and allocaton of economic resources. An economic system of a society is the unit of analysis. Among contemporary systems at different ends of the organizational spectrum are socialist systems and capitalist systems, in which most production occurs in respectively state-run and private enterprises. In between are mixed economies. A common element is the interaction of economic and political influences, broadly described as political economy. Comparative economic systems studies the relative performance and behavior of different economies or systems.[81][82]


Environmental economics

Environmental economics is concerned with issues related to degradation, enhancement, or preservation of the environment. In particular, public bads from production or consumption, such as air pollution, can lead to market failure. The subject considers how public policy can be used to correct such failures. Policy options include regulations that reflect cost-benefit analysis or market solutions that change incentives, such as emission fees or redefinition of property rights.[83][84] Environmental Economics should not be conflated with new schools of economic thought sometimes referred to as ecological economics.


Financial economics

Financial economics, often simply referred to as finance, is concerned with the allocation of financial resources in an uncertain (or risky) environment. Thus, its focus is on the operation of financial markets, the pricing of financial instruments, and the financial structure of companies.[85]


Game theory

Game theory is a branch of applied mathematics that studies strategic interactions between agents. In strategic games, agents choose strategies that will maximize their payoff, given the strategies the other agents choose. It provides a formal modeling approach to social situations in which decision makers interact with other agents. Game theory generalizes maximization approaches developed to analyze markets such as the supply and demand model. The field dates from the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. It has found significant applications in many areas outside economics as usually construed, including formulation of nuclear strategies, ethics, political science, and evolutionary theory.[86]


Industrial organization

Industrial organization studies the strategic behavior of firms, the structure of markets and their interactions. The common market structures studied include perfect competition, monopolistic competition, various forms of oligopoly, and monopoly.[87]


Information economics

Information economics examines how information (or a lack of it) affects economic decision-making. An important focus is the concept of information asymmetry, where one party has more or better information than the other. The existence of information asymmetry gives rise to problems such as moral hazard, and adverse selection, studied in contract theory. The economics of information has relevance in many fields, including finance, insurance, contract law, and decision-making under risk and uncertainty.[88]


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. 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.[89] [90] [91]


Labour economics

Labour economics seeks to understand the functioning of the market and dynamics for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting patterns of wages and other labour income and of employment and unemployment, Practical uses include assisting the formulation of full employment of policies.[92]


Law and 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 economically efficient, and to predict what the legal rules will be.[93][94] A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities.[95]


Managerial economics

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 the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions.[96][97]


Public finance

Public finance is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, 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 behavior analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.[98]


Welfare economics

Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society.[99]


History and schools of economics


Early economic thought

Ancient economic thought dates from earlier Mesopotamian, Greek, Roman, Indian, Chinese, Persian and Arab civilizations. Notable writers include Aristotle, Chanakya, Qin Shi Huang, Thomas Aquinas and Ibn Khaldun through to the 14th century. Joseph Schumpeter initially considered the late scholastics of the 14th to 17th centuries 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.[100] After discovering Ibn Khaldun's Muqaddimah, however, Schumpeter later viewed Ibn Khaldun as being the closest forerunner of modern economics,[101] as many of his economic theories were not known in Europe until relatively modern times.[102]

Two other groups, 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 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.[103][104]

Physiocrats, a group of 18th century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. Adam Smith described their system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject. 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. Variations on such a land tax were taken up by subsequent economists (including Henry George a century later) as a relatively non-distortionary source of tax revenue. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire, which called for minimal government intervention in the economy.[105][106]


Classical economics

Publication of Adam Smith's The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline."[107] The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.

In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace. He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.

In his famous invisible-hand analogy, Smith argued for the seemingly paradoxical notion that competitive markets tended to advance broader social interests, although driven by narrower self-interest. The general approach that Smith helped initiate was called political economy and later classical economics. It included such notables as Thomas Malthus, David Ricardo, and John Stuart Mill writing from about 1770 to 1870.[108]

While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labor 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.

Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. 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 labor. 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.

Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s.

Coming at the end of the Classical tradition, John Stuart Mill 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" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[109] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium.


Marxist economics

Marxist (later, Marxian) economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx's major work, Capital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital. Thus, the labour theory of value, rather than simply a theory of price, was a method for measuring the exploitation of labour in a capitalist society,[110][111] although concealed by appearances of "vulgar" political economy.[112][113]


Neoclassical economics

A body of theory later termed 'neoclassical economics' or 'marginalist economics' formed from about 1870 to 1910. The term 'economics' was popularized by neoclassical economists such as Alfred Marshall as a substitute for the earlier term 'political economy'. 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 inherited from classical economics in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.[114]

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 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.[115][116]

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, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for analyzing long-run variables affecting national income.


Keynesian economics

Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field.[117][118] 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" and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis.[119][120][121]

Keynesian economics has two successors. Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as ****d on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge and the work of Joan Robinson.[122] 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 behavior 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.


Other schools and approaches
Other well-known schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, include the Austrian School, Chicago School, the Freiburg School, the School of Lausanne and the Stockholm school.

Within macroeconomics there is, in general order of their appearance in the literature; classical economics, Keynesian economics, the neoclassical synthesis, post-Keynesian economics, monetarism, new classical economics, and supply-side economics. New alternative developments include ecological economics, evolutionary economics, dependency theory, structuralist economics, Abstinence theory and world systems theory.


Historic definitions of economics
This section extends the discussion of the definitions of Economics at the beginning of the article.

Influential early discussions of political economy were related to wealth broadly defined, as in the work of David Hume and Adam Smith. Hume argued that additional gold without increased production only served to raise prices.[123] Smith also described real wealth, not in earlier terms of gold and silver, but the "annual produce of the labour and land of the society."[124]

John Stuart Mill defined economics as "the practical science of production and distribution of wealth"; this definition was adopted by the Concise Oxford English Dictionary even though it does not include the vital role of consumption. For Mill, wealth is defined as the stock of useful things.[125]

Definitions of the subject in terms of wealth emphasize production and consumption. This emphasis was charged by critics as too narrow a focus in placing wealth to the forefront and man in the background. For example, John Ruskin referred disparagingly to political economy as "the science of getting rich"[126] and a "bastard science."[127]

Broader later definitions evolved to include the study of man, human activity, and human welfare, not wealth as such. Alfred Marshall in his 1890 book Principles of Economics wrote, "Political Economy or Economics is a study of mankind in the ordinary business of Life; it examines that part of the individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being."[128]


Criticism

Economics and politics
Some economists, like John Stuart Mill or Leon Walras, have maintained that the production of wealth should not be tied to its distribution. The former is in the field of "applied economics" while the latter belongs to "social economics" and is largely a matter of power and politics.[129]

Economics per se, as a social science, do not stand on the political acts of any government or other decision-making organization, however, many policymakers or individuals holding highly ranked positions that can influence other people's lives are known for arbitrarily use a plethora of economic theory concepts and rhetoric as vehicles to legitimize agendas and value systems, and do not limit their remarks to matters relevant to their responsibilities.[130] The close relation of economic theory and practice with politics[131] is a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with specific social agendas and value systems.[132]

Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of macroeconomic policies[133] (monetary and fiscal policy) of the States, are focus of contention and criticism.[134][135][136][137]


Ideologies and economics
For example, it is possible to associate the U. S. promotion of democracy by force in the 21st century, the 19th century work of Karl Marx or the cold war era debate of capitalism vs. communism, as issues of economics. Although economics makes no such value claims, this may be one of the reasons why economics could be perceived as not being ****d on empirical observation and testing of hypothesis. As a social science, economics tries to focus on the observable consequences and efficiencies of different economic systems without necessarily making any value judgments about such systems, for example, examine the economics of authoritarian systems, egalitarian systems, or even a caste system without making judgments about the morality of any of them.


Ethics and economics
The relationship between economics and ethics is complex. Many economists consider normative choices and value judgments, like what needs or wants, or what is good for society, to be political or personal questions outside the scope of economics. Once a person or government has established a set of goals, however, economics can provide insight as to how they might best be achieved.

Others see the influence of economic ideas, such as those underlying modern capitalism, to promote a certain system of values with which they may or may not agree. (See, for example, consumerism and Buy Nothing Day.) According to some thinkers, a theory of economics is also, or implies also, a theory of moral reasoning.[138]

The premise of ethical consumerism is that one should take into account ethical and environmental concerns, in addition to financial and traditional economic considerations, when making buying decisions.

On the other hand, the rational allocation of limited resources toward public welfare and safety is also an area of economics. Some have pointed out that not studying the best ways to allocate resources toward goals like health and safety, the environment, justice, or disaster assistance is a sort of willful ignorance that results in less public welfare or even increased suffering.[139] In this sense, it would be unethical not to assess the economics of such issues. In fact, federal agencies in the United States routinely conduct economic analysis studies toward that end.


Effect on society
Some would say that market forms and other means of distribution of scarce goods, suggested by economics, affect not just their "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is considered involuntary, certainly given by social conditioning because people have come to expect a certain quality of life. This leads to one of the most hotly debated areas in economic policy, namely, the effect and efficacy of welfare policies. Libertarians view this as a failure to respect economic reasoning. They argue that redistribution of wealth is morally and economically wrong. Socialists view it as a failure of economics to respect society. They argue that disparities of wealth should not have been allowed in the first place. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory.

The older term for economics, political economy, is still often used instead of "economics", especially by certain economists such as Marxists. The use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings social political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (many in the United Kingdom) have a "political economy" department rather than an "economics" department.


Preoccupation with mathematics
Mainstream economics is often criticized for its focus on formalized mathematical theorems and technique over content, and its relative lack of attention to institutions, uncertainty, and real world problems.[140][141] Although much of the most groundbreaking economic research in history involved concepts rather than math, today it is nearly impossible to publish a non-mathematical paper in top economic journals.[142] Engineering Ph.D and economics graduate student Warren Gibson remarks that he had thought that economics would, similar to engineering, "leave the theorems and the existence proofs to the mathematicians and do everything possible to get to an answer", but he was surprised to find instead that "many of the economics papers ... seem obsessed with math for its own sake, with real human problems hardly anywhere to be seen".[143] Widespread disillusionment with neoclassical economics lead to the dawn of the post-autistic economics movement, which began in France in 2000.


Economics in practice

The professionalization of economics, reflected in the growth of graduate programs on the subject, has been described as "the main change in economics since around 1900."[144] 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. The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (colloquially, the Nobel Prize in Economics) is a prize awarded to economists each year for outstanding intellectual contributions in the field. 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 Bureau of Statistics.


Notes
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^ Bernd Hayo (Georgetown University & University of Bonn), Do We Really Need Central Bank Independence? A Critical Re- examination, IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut
^ Gabriel Mangano (Centre Walras-Pareto, University of Lausanne BFSH 1, 1015 Lausanne, Switzerland, and London School of Economics), Measuring central bank independence: a tale of subjectivity and of its consequences, Oxford Economic Papers. 1998; 50: 468-492
^ Friedrich Heinemann, Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording, IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut
^ Stephen G. Cecchetti, Central Bank Policy Rules: Conceptual Issues and Practical Considerations, IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut
^ E.F.Schumacher: Small is Beautiful, Economics as if People matter.
^ Douglas Hubbard, "How to Measure Anything: Finding the Value of Intangibles in Business", John Wiley & Sons, 2007.
^ Hodgson, G.M (200). "Evolutionary and Institutional Economics as the New Mainstream". Evolutionary and Institutional Economics Review 4 (1): 7-25. Retrieved on 2008-06-0.
^ Johansson D. (2004). "Economics without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate Textbooks". Econ Journal Watch 1 (3): 515-538. Retrieved on 2008-06-07.
^ Sutter D, Pjesky R. (2007). "Where Would Adam Smith Publish Today? The Near Absence of Math-free Research in Top Journals". Scholarly Comments on Academic Economics 4 (2): 230-240. Retrieved on 2008-06-07.
^ Gibson, W.C. (2005). "The Mathematical Romance:An Engineer's View of Mathematical Economics". Econ Journal Watch 2 (1). Retrieved on 2008-06-07.
^ O. Ashenfelter (2001), "Economics: Overview," The Profession of Economics, International Encyclopedia of the Social & Behavioral Sciences, v. 6, p. 4159.
Study resources
Economics textbooks on Wikibooks
MERLOT Learning Materials: Economics: US-****d data**** of learning materials
Online Learning and Teaching Materials for Economics: The Economics Network (UK)'s data**** of text, slides, glossaries and other resources
MIT OpenCourseWare: Economics: Archive of study materials from MIT courses
A guide to several online economics textbooks
The Library of Economics and Liberty (Econlib): Economics Books, Articles, Blog (EconLog), Podcasts (EconTalk)
Schools of Thought: Compare various economic schools of thought on particular issues
Economics at About.com
Ask The Professor section of EH.Net Economic History Services
Introduction to Economics: Short Creative commons-licensed introduction to basic economics[/align]