Economics 101

Intro

When one thinks of economics the first thought is of finance and banking, and while economics is certainly included in those areas it isn’t everything. The truth is defining economics is difficult, even for economists. For some economics is the understanding of prices, and for others it is the understanding of market forces. In other cases, economics is considered the study of human labor, land, and machines and how these function in a market.  As said by Economist Jacob Viner, economics is “what economists do”, which serves as the vaguest and surely most accurate description of economics.

A Brief History

The ideas of economics have been around for as long as civilized society has. One of the earliest iterations of economics is in the ancient Greek, “oikonomia” or “oikonomos”. The word “oikos” means house and the word “nemein” means to manage. Literally, the earliest word for economics translates to the effect of “household management”. Much of the Ancient Greek philosophy looked at society as a collection of interconnected households, with the management of the households the key driving force behind the success or failure of society. Ancient economics then was concerned on how households were successfully or poorly managed. These interactions affected local markets and trading and the wealth of city states at the time. Such ideas were present throughout ancient times and in all of history, whether clearly stated or not.

Despite its presence everywhere, economics as the modern world knows it today did not come about officially until 1776 when Adam Smith wrote his seminal work An InquiryAnInquiry into the Nature and Causes of the Wealth of Nations. Usually abbreviated to Wealth of Nations, Smith’s treatise was the first formal and comprehensive discussion on what most would now call Economics. In addition, Smith’s work started the English school of classical political economy. In his treatise Smith discusses economic development for a nation and what policies help or hinder a nation’s economic success. Smith criticizes the protectionist policies of the mercantilists of the time and argues for free trade. Smith outlines that while each individual operates from their own self-interest and that while one individual has a negligible effect on a market or prices in general, the sum of all people’s decisions do in fact cause prices. Smith calls this the “invisible hand” of competition, which is relatively free of individual decisions and is instead a result of larger social effects. Now for Smith, such competition that could take self-interest and convert it to public good could only exist in a context with appropriate legal and institutional frameworks. This is sound laws and courts that would enforce them fully. Without such protections, self-interest could go unchecked and produce fewer social goods. Smith’s work is still considered a key building block on many economic studies and issues, such as international trade, distribution, and money.

Economic Schools of Thought

As economics became a more formalized discipline, more schools than the English school of classical political economy sprouted. Each new development saw English, German, and French scholars take slightly different views on the issues and would take a volume to fully describe. Notably among the many schools were the English classical school, German Historical School, the Marxists, the marginalists, institutionalists, and Keynes.

While the English classical school was focused on universal laws that could be ubiquitously applied, the German Historical School argued that the unique historical context of each nation was more important to understanding the decisions of its citizens. This school conducted a great deal of influential historical research on most of the civilized nations of the time. The marginalists followed both the English classicals and the German Historical schools to argue that many decisions can be understood at the micro level. The marginalists focused on an individual’s choice of buying an additional unit of something. This analysis allowed the marginalists to understand an individual’s choice between competing issues. When looked at such a microscopic level, the theory is easily applied to a multitude of different contexts and fields of study. The Institutionalists too were important in that they argued that the most important determinants of economic development were the rules. Things such as the rule of law, the laws themselves, and the makeup of the courts that enforced them are paramount in economic success. Lastly, there is Keynes who truly marks a significant shift in the thinking of economics. Keynes focused on demand on a view and scale that differed from earlier thinkers in that he created a model predicated on demand, especially useful for perspectives on a national scale. Keynes’ model of demand focused on three spending streams: consumptions, expenditures, and investment. Overall, Keynes brought insights completely new to economics and helped bring a more distinct line between macro and macroeconomics. Since Keynes there have been a great deal of innovation and changes in the ideas of economics such as the integration of advanced calculus and statistics into the discipline.

●     English classical school

○     Believed in universal laws that could be applied to other contexts to understand

○     Ideas such as the invisible hand of smith and the idea of self interest

●     German Historical School

○     Sought to understand the economic situation of a nation in the context of its total historical experience

○     Argued that society changed, and induction favored the dynamic nature of humans

●     Marxists

○     While not accepted at the time and containing serious flaws in its foundational assumptions is important to understand

○     Current society uses certain Marxists ideas to criticize society and many time use Marxists ideas incorrectly

○     Last “Classical Economist”

●     Marginalists

○     Jevon, Menger, Walras

○     Deviated from the Labor theory of value to a theory that instead focused on the marginal utility value theory

○     Marginalists looked at the utility an individual gained from buying an additional unit of something

○     Marginal thinking aided in understanding how individuals made decisions between competing choices

●     Keynes

○     Focused macro more than micro

○     Focused on an analysis of effective demand and nationally aggregated concepts

○     Model was powerful for many practical issues such as national income and employment

Micro vs Macro

In economics today there is an important distinction between micro and macroeconomics despite it all seemingly dealing with the same issues. Since Keynes, macroeconomics mainly deals with national issues, namely national income. Macroeconomists are concerned with larger issues, think international trade, federal, or state policy that affects larger groups of people. Macroeconomists will look at issues such as national debt or production of a certain country and how that affects other countries it trades with. On the other hand, microeconomics treats the economy as if it were only made up of firms and households. The reason for this is to be able to focus on the small decisions individuals make within the economy. Institutions such as banks or charities are usually left to macroeconomics. Microeconomics wants to understand why individuals make their singular choices. For example, a macroeconomist might study the effect of certain marketing techniques used on billboards and the effect it might or might not have on consumption.

While distinct, there is much overlap between micro and macroeconomics, and most economists are well-versed in both even if they are known for their work in a certain field. The distinction between micro and macroeconomics helps break up the otherwise complex economy. It allows fortwo extremes of study to fully dissect and understand all the inner workings of an economy. This is especially helpful in the modern world as countries have increasingly traded with one another and populations have grown. However, while the distinction is important, knowing both is vital to fully understanding economics and the fullness of certain contexts.

Why It is Important

In this brief distillation of economics there has been origin, history, economic schools, and micro vs macro. This is all well and good, but why is economics important in the first place? Aren't disciplines such as history, finance, and even psychology more specific and specialized to address issues that economists face? While it is true that there is much overlap from economics to other disciplines, and some of those disciplines are more specific than economics is, economic thought sometimes can have valuable insights. This is not to say that the previously mentioned disciplines aren’t useful, just that economics has its particular use too. One of the more unique insights from economics is incentives. Not necessarily endemic to economics, but the idea of incentives is an important tool in how economics solves problems and even understands people. In an interesting example, one economic study looked at safety precautions in NASCAR, and found that as safety procedures increased and the instances of injury or death from a crash decreased the rate of crashes actually increased. Since the drivers knew that if they crashed, they would have a low chance of being hurt or dying, they were more likely to take risks. Thus, the increased safety procedures provided an incentive to drive riskier. Economics is valuable because it can help identify incentives in situations that are not altogether clear. In addition, economics can bridge into issues that usually do not have a clear field of study that would look into the situation. Economics is, at its base, multi-disciplined and excels and takes on projects that other fields would not.  

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