Economics

The term economics refers both to an intellectual discipline and to a profession. The intellectual discipline of economics is an attempt to gain an understanding of the processes that govern the production, distribution and consumption of wealth, and to use that understanding to assist in the prediction of the consequences of economic activities. It uses the methodology of science and can be considered to be a science insofar as it produces testable propositions . The profession of economics includes academics who construct, develop and teach economic theory, and practitioners use economic theory to make forecasts or to advise upon political, commercial and regulatory decisions.

The methodology of economic theory

Economic theory has been developed by formulating hypothetical "models" of reality, and then by examining how far they reflect what happens in the real world. The objective of the process has not necessarily been to develop realistic assumptions about economic conduct, but rather to make better predictions of its outcomes. The use of empirically-based behavioural assumptions has not so far made a significant contribution to that objective.

Economics has changed from its early axiom-based deductive methodology towards a greater use of inductive logic (as noted in the article on the history of economic thought). Current methodology generally adopts an instrumental "open-systems" approach (as explained in the article on the philosophy of economics). The claims that economics is a science, and that some branches of economics must be considered to be normative are discussed on the tutorials subpage of this article.

The categories of economic theory

The techniques of economics have been applied to many different activities, leading to the development of a wide range of sub-disciplines. However, the principal categories of economics that are of interest to the general reader are microeconomics, macroeconomics, welfare economics, financial economics, and international economics.

• Microeconomics is about the use of the resources of land, capital and labour, their allocation to the production of particular goods and services, their relative prices, and how they are distributed among consumers. It examines those issues by considering transactions between consumers and producers, acting singly or in groups. Many of its theorems were developed by deductive reasoning in the late nineteenth and early twentieth centuries and most of them are now considered by economists to be uncontroversial.

• Welfare economics is about the impact of decisions upon the economic well-being of those affected. It provides the theoretical basis for the practice of cost/benefit analysis. Its methodology is derived from that of microeconomics and most of its theorems are also considered to be uncontroversial.

• Macroeconomics is about such economy-wide quantities as national income, the general level of prices, and the unemployment rate. It examines the behaviour of the economy as a unified system of interacting activities. It is a twentieth-century development that has had a major influence upon the political history of that century. Many of its theorems are considered to be controversial, and the subject is still under development.

• Financial economics treats the financial system as an open interactive system dealing both in claims upon future goods and services, and in the allocation of the risks that are associated with such claims. It is concerned with the investment choices made by individuals, with the financing choices made by corporations, with the conduct of financial institutions that act as financial intermediaries between individuals and corporations; and with the regulation of those institutions. Regulatory issues, in particular, are under review.

• International economics is about such matters as import restrictions, exchange rate regimes, international capital flows and the impact of trade policies upon developing countries. Its methodology was initially derived in the nineteenth century from the methodology of microeconomics, but it now has much in common with that of macroeconomics. Its principal theorems are widely accepted among professional economists but have been hotly contested by others.

• Behavioural economics and Neuroeconomics seek to gain an understanding of economic behaviour by means of "laboratory experiments" in which the experimentors record the conduct of groups of subjects taking part in simulated economic activities such as bargaining and decision-taking.

The uses of economics

Economic theory makes its own contribution to the sum of scientific knowledge and it makes particular contributions to the understanding of the subjects of history, geography, and politics. Its findings are essential to the practice of business management, financial management, accountancy and commercial law.

The services provided by practitioners of economics include economic forecasting, advice to company executives concerning the consequences for sales and profits of alternative courses of action, advice to investors concerning the performance of particular markets, advice to regulatory authorities concerning the impact of regulations upon the economy, and advice to governments concerning the effects of alternative policy actions upon economic efficiency, prices, output and economic stability .

Unlike most other sciences, economics is often the subject of strongly-held opinions by laymen, and one of the functions of economists is to counter damaging popular fallacies .

The economics articles

The format of the economics articles

Where they are available, diagrams and mathematical expressions relating to each economics article are placed on its tutorials subpage, together with other material considered to be mainly of interest to students of economics.

Index to topics in the articles

For an index to the topics in the Citizendium articles on economics see the related articles subpage [2]