Economics

The term economics is used to refer both to an intellectual discipline and to a profession.

As an intellectual discipline it is an attempt to understand the processes that govern the production, distribution and consumption of wealth.

Its ability to do so is limited by two important characteristics of those processes:

• their complexity and variety are often too great to permit anything approaching a comprehensive description;
• they are governed by the behaviour of differently-informed individuals with different motives.

It adapts the methods of the physical sciences to those characteristics, and may be considered to be a science on the grounds that it aims to produce testable propositions.

As a profession it includes academics who construct, develop and teach economic theory, and practitioners who use economic theory, together with economic statistics to make forecasts or to advise upon political, commercial and regulatory decisions.

The methodology of economic theory

The majority of economic theory has been based upon deduction from simple axioms, but many of its findings have been verified, qualified or modified by inductive methods. The fact that some of its axioms are grossly over-simplified representations of reality (such as its assumption of generally well-informed rational behaviour) has not always invalidated its conclusions. It has often been found that the process under investigation behaves “as if” the underlying axioms were true of the real world. The difficulty of making acceptable assumptions, without making the deductive process intractable, has nevertheless limited what could be achieved by that method. Economists of The Austrian School tend to reject model-building procedures in favour of a more pragmatic approach, and builders of computer-operated forecasting models make direct use of empirical evidence. However, the mainstream of academic economists continue to use deductive methods based upon untested axioms to generate hypotheses that are then tested empirically. The developing methodology of neuroeconomics has yet to make a significant impact.

The categories of economics

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 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 are now considered by economists to be uncontroversial.

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

• 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 similar to that of microeconomics and most of its theorems are also considered to be uncontroversial.

• 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 principal theorems are widely accepted among professional economists but have been hotly contested by others.

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 .

See also

Economic philosophy, Economic history, History of economic thought

Index

See related articles (above) for an index to the topics referred to in the economics articles