Economics 101
Economics, what is it anyway?
Intro
When one thinks of economics the first thoughtis of finance and banking, and while economics is certainly included in thoseareas it isn’t everything. The truth is defining economics is difficult, evenfor economists. For some economics is the understanding of prices, and forothers it is the understanding of market forces. In other cases economics isconsidered the study of human labor, land, and machines and how these functionin a market. As said by Economist JacobViner, economics is “what economists do”, which serves as both the most vagueand surely most accurate description of economics.
ABrief History
The ideas of economics have been around for aslong as civilized society has. One of the earliest iterations of economics isin the ancient Greek, “oikonomia” or “oikonomos”. The word “oikos” means houseand the word “nemein” means to manage. Literally, the earliest word foreconomics translates to the effect of “household management”. Much of theAncient Greek philosophy looked at society as a collection of interconnectedhouseholds, with the management of the households the key driving force behindthe success or failure of society. Ancient economics then was concerned on howhouseholds were successfully or poorly managed. These interactions affectedlocal markets and trading and the wealth of city states at the time. Such ideaswere present throughout ancient times and in all of history, whether clearlystated or not.
Despite its presence everywhere, economics asthe modern world knows it today did not come about officially until 1776 whenAdam Smith wrote his seminal work AnInquiry into the Nature and Causes of the Wealth of Nations. Usuallyabbreviated to Wealth of Nations, Smith’s treatise was the first formaland comprehensive discussion on what most would now call Economics. Inaddition, Smith’s work started the English school of classical politicaleconomy. In his treatise Smith discusses economic development for a nation andwhat policies help or hinder a nation’s economic success. Smith criticizes theprotectionist policies of the mercantilists of the time and argues for freetrade. Smith outlines that while each individual operates from their own selfinterest and that while one individual has a negligible effect on a market orprices 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 freeof individual decisions and is instead a result of larger social effects. Nowfor Smith, such competition that could take self interest and convert it topublic good could only exist in a context with appropriate legal andinstitutional frameworks. This is, sound laws and courts that would enforcethem fully. Without such protections, self interest could go unchecked andproduce less social goods. Smith’s work is still considered a key buildingblock on many economic studies and issues, such as international trade,distribution, and money.
EconomicSchools of Thought
As economics became a more formalizeddiscipline, more schools than the English school of classical political economysprouted. Each new development saw English, German, and French scholars takeslightly different views on the issues and would take a volume to fullydescribe. 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 focusedon universal laws that could be ubiquitously applied, the German HistoricalSchool argued that the unique historical context of each nation was moreimportant to understanding the decisions of its citizens. This school conducteda great deal of influential historical research on most of the civilizednations of the time. The marginalists followed both the English classicals andthe German Historical schools to argue that many decisions can be understood atthe micro level. The marginalists focused on an individual’s choice of buyingan additional unit of something. This analysis allowed the marginalists tounderstand an individual’s choice between competing issues. When looked at sucha microscopic level, the theory is easily applied to a multitude of differentcontexts and fields of study. The Institutionalists too were important in thatthey argued that the most important determinants of economic development werethe rules. Things such as the rule of law, the laws themselves, and the makeupof the courts that enforced them are paramount in economic success. Lastly,there is Keynes who truly marks a significant shift in the thinking ofeconomics. Keynes focused on demand on a view and scale that differed from earlierthinkers in that he created a model predicated on demand, especially useful forperspectives on a national scale. Keynes’ model of demand focused on threespending streams: consumptions, expenditures, and investment. Overall, Keynesbrought insights completely new to economics and helped bring a more distinctline between macro and macro economics. Since Keynes there have been a greatdeal of innovation and changes in the ideas of economics such as theintegration of advanced calculus and statistics into the discipline.
● English classical school
○ Believed in universal laws thatcould be applied to other contexts to understand
○ Ideas such as the invisible handof smith and the idea of self interest
● German Historical School
○ Sought to understand the economicsituation of a nation in the context of its total historical experience
○ Argued that society changed andinduction favored the dynamic nature of humans
● Marxists
○ While not accepted at the time andcontaining serious flaws in its foundational assumptions is important tounderstand
○ Current society uses certainmarxists ideas to criticize society and many time use Marxists ideasincorrectly
○ Last “Classical Economist”
● Marginalists
○ Jevon, Menger, Walras
○ Deviated from the Labor theory ofvalue to a theory that instead focused on the marginal utility value theory
○ Marginalists looked at the utilityan individual gained from buying an additional unit of something
○ Marginal thinking aided inunderstanding how individuals made decisions between competing choices
● Keynes
○ Focused macro more than micro
○ Focused on an analysis ofeffective demand and nationally aggregated concepts
○ Model was powerful for manypractical issues such as national income and employment
Microvs Macro
In economics today there is an importantdistinction between micro and macro economics despite it all seemingly dealingwith the same issues. Since Keynes, macroeconomics mainly deals with nationalissues, namely national income. Macroeconomists are concerned with largerissues, think international trade, federal, or state policy that affects largergroups of people. Macroeconomists will look at issues such as national debt orproduction of a certain country and how that affects other countries it tradeswith. On the other hand, microeconomics treats the economy as if it were onlymade up of firms and households. The reason for this is to be able to focus onthe small decisions individuals make within the economy. Institutions such asbanks or charities are usually left to macroeconomics. Microeconomics wants tounderstand why individuals make their singular choices. For example, amacroeconomist might study the effect of certain marketing techniques used onbillboards and the effect it might or might not have on consumption.
While distinct, there is much overlap betweenmicro and macroeconomics, and most economists are well-versed in both even ifthey are known for their work in a certain field. The distinction between microand macroeconomics helps break up the otherwise complex economy. It allows fortwo extremes of study to fully dissect and understand all the inner workings ofan economy. This is especially helpful in the modern world as countries haveincreasingly traded with one another and populations have grown. However, whilethe distinction is important, knowing both is vital to fully understandingeconomics and the fullness of certain contexts.
WhyIt is Important
In this brief distillation of economics therehas been origin, history, economic schools, and micro vs macro. This is allwell and good, but why is economics important in the first place? Aren'tdisciplines such as history, finance, and even psychology more specific andspecialized to address issues that economists face? While it is true that thereis much overlap from economics to other disciplines, and some of thosedisciplines are more specific than economics is, economic thought sometimes canhave valuable insights. This is not to say that the previously mentioneddisciplines aren’t useful, just that economics has its particular use too. Oneof the more unique insights from economics is incentives. Not necessarilyendemic to economics, but the idea of incentives is an important tool in howeconomics solves problems and even understands people. In an interestingexample, one economic study looked at safety precautions in NASCAR, and foundthat as safety procedures increased and the instances of injury or death from acrash decreased the rate of crashes actually increased. Since the drivers knewthat if they crashed they would have a low chance of being hurt or dying, theywere more likely to take risks. Thus, the increased safety procedures providedan incentive to drive riskier. Economics is valuable because it can helpidentify incentives in situations that are not altogether clear. In addition,economics can bridge into issues that usually do not have a clear field ofstudy that would look into the situation. Economics is, at its base,multi-disciplined and excels and takes on projects that other fields wouldnot.
