Economics

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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 (see economics as a science), although some branches of the subject are widely considered to be normative (see normative economics). Like other sciences, it is subject to a continuing process of revision.

The profession of economics includes academics^[1] who construct, develop and teach economic theory, and practitioners who use economic theory to make forecasts or to advise upon political, commercial and regulatory decisions. Its most influential application is to the management of the economy. Mistaken decisions in that context can do more damage than in most others.

Economic Theory[edit]

The methodology of economics[edit]

The traditional methodology of economics has been first to formulate a theory, and then to examine how far it provides operationally useful conclusions. Its pioneers have often adopted an instrumentalist approach: basing a theory on arbitrary axioms - such as consistently rational human behaviour - and then advocating its acceptance solely on the grounds that it had provided operationally useful results. That methodology has proved to be vulnerable to changing conditions, however, and there has recently been a tendency to move away from an exclusively axiom-based approach towards a greater recognition of observed behaviour. Among the techniques that have been coming into use for that purpose are those of behavioural economics and neuroeconomics.

Economists' tools[edit]

Economists normally combine the use of a range of concepts - such as utility, equilibrium, supply and demand, and opportunity cost - with quantitative observations including economic statistics and other survey-based data, using the techniques of statistical inference, applied mathematics and econometrics. Since the use of that combination of tools does not provide an explanation of some observed occurrences such as herding, asset price bubbles, risk aversion or banking panics, it has recently been augmented by experiments on human behaviour in contrived situations, including those of behavioural economics, neuroeconomics and prospect theory.

The categories of economic theory[edit]

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.

Main disciplines[edit]

• 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 inference 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. Its theorems concerning the measurement and comparison of welfare provide the theoretical basis for the practice of cost-benefit analysis. Its methodology is derived from that of microeconomics, using formally-defined axioms that are often remote from observed circumstances.

• Macroeconomics is about such economy-wide quantities as national income, inflation and unemployment. It examines the behaviour of the economy as a complex interactive system. It is a twentieth-century development that has had a major influence upon fiscal policy, and monetary policy. Many of its theorems are considered to be controversial, and the subject is still under development.

• Financial economics treats the financial system as a complex 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 decisions made by investors, corporations, financial institutions, and with the regulation of those institutions. The practical usefulness of some of its theorems has been questioned following the Great Recession and previously accepted regulatory policies are under review.

• International economics is about such matters as tariffs, exchange rates and international capital flows and the effects of trade policy. 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.

Sub-disciplines[edit]

The sub-disciplines of economics combine one or more of its main disciplines with the disciplines of other fields. They include agricultural economics, demographic economics, development economics, energy economics, environmental economics, health economics, labour economics, industrial economics, regulatory economics and transport economics. They typically involve the application of cost-benefit analysis and of the above-mentioned economists' tools to the assessment of alternative policies and practices. Some sub-disciplines draw upon a wider range of economics disciplines: for example, development economics - which is the economic assessment of policies toward developing countries - calls also upon macroeconomics and international economics.

The uses of economics[edit]

Economics 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, accounting and commercial law. They are also essential to the practice of national economic management, for the purpose of which economic forecasters use computerised models based upon observed behaviour, as reflected in economic statistics and surveys.

The practice of economics[edit]

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, inflation, output and fiscal 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 ^{[3] [4]}.

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