Economics is the social science that studies the production and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents. Microeconomics analyzes basic elements in the economy, including individual agents and markets, their interactions, the outcomes of interactions. Individual agents may include, for example, firms and sellers. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment of resources, economic growth, the public policies that address these issues. See glossary of economics. Other broad distinctions within economics include those between positive economics, describing "what is", normative economics, advocating "what ought to be". Economic analysis can be applied throughout society, in business, health care, government. Economic analysis is sometimes applied to such diverse subjects as crime, the family, politics, social institutions, war and the environment; the discipline was renamed in the late 19th century due to Alfred Marshall, from "political economy" to "economics" as a shorter term for "economic science".
At that time, it became more open to rigorous thinking and made increased use of mathematics, which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social sciences. There are a variety of modern definitions of economics. Scottish philosopher Adam Smith defined what was called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as: a branch of the science of a statesman or legislator a plentiful revenue or subsistence for the people... to supply the state or commonwealth with a revenue for the publick services. Jean-Baptiste Say, distinguishing the subject from its public-policy uses, defines it as the science of production and consumption of wealth. On the satirical side, Thomas Carlyle coined "the dismal science" as an epithet for classical economics, in this context linked to the pessimistic analysis of Malthus. John Stuart Mill defines the subject in a social context as: The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.
Alfred Marshall provides a still cited definition in his textbook Principles of Economics that extends analysis beyond wealth and from the societal to the microeconomic level: Economics is a study of man in the ordinary business of life. It enquires how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. Lionel Robbins developed implications of what has been termed "erhaps the most accepted current definition of the subject": Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Robbins describes the definition as not classificatory in "pick out certain kinds of behaviour" but rather analytical in "focus attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." He affirmed that previous economists have centred their studies on the analysis of wealth: how wealth is created and consumed. But he said that economics can be used to study other things, such as war, that are outside its usual focus.
This is because war has as the goal winning it, generates both cost and benefits. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors may never go to war but rather explore other alternatives. We cannot define economics as the science that studies wealth, crime and any other field economic analysis can be applied to; some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, such comments abated as the economic theory of maximizing behaviour and rational-choice modelling expanded the domain of the subject to areas treated in other fields. There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment. Gary Becker, a contributor to the expansion of economics into new areas, describes the approach he favours as "combin assumptions of maximizing behaviour, stable preferences, market equilibrium, used relentlessly and unflinchingly."
One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of social interaction that analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. A
Agricultural economics is an applied field of economics concerned with the application of economic theory in optimizing the production and distribution of food and fiber. Agricultural economics began as a branch of economics that dealt with land usage, it focused on maximizing the crop yield while maintaining a good soil ecosystem. Throughout the 20th century the discipline expanded and the current scope of the discipline is much broader. Agricultural economics today includes a variety of applied areas, having considerable overlap with conventional economics. Agricultural economists have made substantial contributions to research in economics, development economics, environmental economics. Agricultural economics influences food policy, agricultural policy, environmental policy. Economics has been defined as the study of resource allocation under scarcity. Agricultural economics, or the application of economic methods to optimizing the decisions made by agricultural producers, grew to prominence around the turn of the 20th century.
The field of agricultural economics can be traced out to works on land economics. Henry Charles Taylor was the greatest contributor with the establishment of the Department of Agricultural Economics at Wisconsin in 1909. Another contributor, 1979 Nobel Economics Prize winner Theodore Schultz, was among the first to examine development economics as a problem related directly to agriculture. Schultz was instrumental in establishing econometrics as a tool for use in analyzing agricultural economics empirically. One scholar summarizes the development of agricultural economics as follows: "Agricultural economics arose in the late 19th century, combined the theory of the firm with marketing and organization theory, developed throughout the 20th century as an empirical branch of general economics; the discipline was linked to empirical applications of mathematical statistics and made early and significant contributions to econometric methods. In the 1960s and afterwards, as agricultural sectors in the OECD countries contracted, agricultural economists were drawn to the development problems of poor countries, to the trade and macroeconomic policy implications of agriculture in rich countries, to a variety of production and environmental and resource problems."Agricultural economists have made many well-known contributions to the economics field with such models as the cobweb model, hedonic regression pricing models, new technology and diffusion models, multifactor productivity and efficiency theory and measurement, the random coefficients regression.
The farm sector is cited as a prime example of the perfect competition economic paradigm. In Asia, agricultural economics was offered first by the University of the Philippines Los Baños Department of Agricultural Economics in 1919. Today, the field of agricultural economics has transformed into a more integrative discipline which covers farm management and production economics, rural finance and institutions, agricultural marketing and prices, agricultural policy and development and nutrition economics, environmental and natural resource economics. Since the 1970s, agricultural economics has focused on seven main topics, according to a scholar in the field: agricultural environment and resources. In the field of environmental economics, agricultural economists have contributed in three main areas: designing incentives to control environmental externalities, estimating the value of non-market benefits from natural resources and environmental amenities, the complex interrelationship between economic activities and environmental consequences.
With regard to natural resources, agricultural economists have developed quantitative tools for improving land management, preventing erosion, managing pests, protecting biodiversity, preventing livestock diseases. While at one time, the field of agricultural economics was focused on farm-level issues, in recent years agricultural economists have studied diverse topics related to the economics of food consumption. In addition to economists' long-standing emphasis on the effects of prices and incomes, researchers in this field have studied how information and quality attributes influence consumer behavior. Agricultural economists have contributed to understanding how households make choices between purchasing food or preparing it at home, how food prices are determined, definitions of poverty thresholds, how consumers respond to price and income changes in a consistent way, survey and experimental tools for understanding consumer preferences. Agricultural economics research has addressed diminishing returns in agricultural production, as well as farmers' costs and supply responses.
Much research has applied economic theory to farm-level decisions. Studies of risk and decision-making under uncertainty have real-world applications to crop insurance policies and to understanding how farmers in developing countries make choices about technology adoption; these topics are important for understanding prospects for producing sufficient food for a growing world population, subject to new resource and environmental challenges such as water scarcity and global climate change. Development economics is broadly concerned with the improvement of living conditions in low-income countries, the improvement of economic performance in low-inc
Education economics or the economics of education is the study of economic issues relating to education, including the demand for education, the financing and provision of education, the comparative efficiency of various educational programs and policies. From early works on the relationship between schooling and labor market outcomes for individuals, the field of the economics of education has grown to cover all areas with linkages to education. Economics distinguishes in addition to physical capital another form of capital, no less critical as a means of production – human capital. With investments in human capital, such as education, three major economic effects can be expected: increased expenses as the accumulation of human capital requires investments just as physical capital does, increased productivity as people gain characteristics that enable them to produce more output and hence return on investment in the form of higher incomes. Investments in human capital entail an investment cost.
In European countries most education expenditure takes the form of government consumption, although some costs are borne by individuals. These investments can be rather costly. EU governments spent between 3% and 8% of GDP on education in 2005, the average being 5%. However, measuring the spending this way alone underestimates the costs because a more subtle form of costs is overlooked: the opportunity cost of forgone wages as students cannot work while they study, it has been estimated that the total costs, including opportunity costs, of education are as much as double the direct costs. Including opportunity costs investments in education can be estimated to have been around 10% of GDP in the EU countries in 2005. In comparison investments in physical capital were 20% of GDP, thus the two are of similar magnitude. Human capital in the form of education shares many characteristics with physical capital. Both require an investment to create and, once created, both have economic value. Physical capital earns a return because people are willing to pay to use a piece of physical capital in work as it allows them to produce more output.
To measure the productive value of physical capital, we can measure how much of a return it commands in the market. In the case of human capital calculating returns is more complicated – after all, we cannot separate education from the person to see how much it rents for. To get around this problem, the returns to human capital are inferred from differences in wages among people with different levels of education. Hall and Jones have calculated from international data that on average that the returns on education are 13.4% per year for first four years of schooling, 10.1% per year for the next four years and 6.8% for each year beyond eight years. Thus someone with 12 years of schooling can be expected to earn, on average, 1.1344 × 1.1014 × 1.0684 = 3.161 times as much as someone with no schooling at all. Economy-wide, the effect of human capital on incomes has been estimated to be rather significant: 65% of wages paid in developed countries is payments to human capital and only 35% to raw labor.
The higher productivity of well-educated workers is one of the factors that explain higher GDPs and, higher incomes in developed countries. A strong correlation between GDP and education is visible among the countries of the world, as is shown by the upper left figure, it is less clear, how much of a high GDP is explained by education. After all, it is possible that rich countries can afford more education. To distinguish the part of GDP explained with education from other causes, Weil has calculated how much one would expect each country’s GDP to be higher based on the data on average schooling; this was based on the above-mentioned calculations of Jones on the returns on education. GDPs predicted by Weil’s calculations can be plotted against actual GDPs, as is done in the figure on the left, demonstrating that the variation in education explains some, but not all, of the variation in GDP; the matter of externalities should be considered. When speaking of externalities one thinks of the negative effects of economic activities that are not included in market prices, such as pollution.
These are negative externalities. However, there are positive externalities – that is, positive effects of which someone can benefit without having to pay for it. Education bears with it major positive externalities: giving one person more education raises not only his or her output but the output of those around him or her. Educated workers can bring new technologies and information to the consideration of others, they can act as an example. The positive externalities of education include the effects of personal networks and the roles educated workers play in them. Positive externalities from human capital are one explanation for why governments are involved in education. If people were left on their own, they would not take into account the full social benefit of education – in other words the rise in the output and wages of others – so the amount they would choose to obtain would be lower than the social optimum. A 2013 study assesses demand- and supply-side factors that affect educational access and attainment in development countries, it shows that addressing demand-side factors, such as geographic gaps between rural and urban areas, higher levels of population growth and child labour, can have greater impact on increasing levels of education in developing countries than supply-side factors, such as constructing additional school facilities, hiring more teachers etc.
The dominant model of th
Development economics is a branch of economics which deals with economic aspects of the development process in low income countries. Its focus is not only on methods of promoting economic development, economic growth and structural change but on improving the potential for the mass of the population, for example, through health and workplace conditions, whether through public or private channels. Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level; this may involve restructuring market incentives or using mathematical methods such as intertemporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods. Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans. Unlike many other fields of economics, there is no consensus on what students should know.
Different approaches may consider the factors that contribute to economic convergence or non-convergence across households and countries. The earliest Western theory of development economics was mercantilism, which developed in the 17th century, paralleling the rise of the nation state. Earlier theories had given little attention to development. For example, the dominant school of thought during medieval feudalism, emphasized reconciliation with Christian theology and ethics, rather than development; the 16th- and 17th-century School of Salamanca, credited as the earliest modern school of economics did not address development specifically. Major European nations in the 17th and 18th century all adopted mercantilist ideals to varying degrees, the influence only ebbing with the 18th-century development of physiocrats in France and classical economics in Britain. Mercantilism held that a nation's prosperity depended on its supply of capital, represented by bullion held by the state, it emphasised the maintenance of a high positive trade balance as a means of accumulating this bullion.
To achieve a positive trade balance, protectionist measures such as tariffs and subsidies to home industries were advocated. Mercantilist development theory advocated colonialism. Theorists most associated with mercantilism include Philipp von Hörnigk, who in his Austria Over All, If She Only Will of 1684 gave the only comprehensive statement of mercantilist theory, emphasizing production and an export-led economy. In France, mercantilist policy is most associated with 17th-century finance minister Jean-Baptiste Colbert, whose policies proved influential in American development. Mercantilist ideas continue in the theories of economic neomercantilism. Following mercantilism was the related theory of economic nationalism, promulgated in the 19th century related to the development and industrialization of the United States and Germany, notably in the policies of the American System in America and the Zollverein in Germany. A significant difference from mercantilism was the de-emphasis on colonies, in favor of a focus on domestic production.
The names most associated with 19th-century economic nationalism are the American Alexander Hamilton, the German-American Friedrich List, the American Henry Clay. Hamilton's 1791 Report on Manufactures, his magnum opus, is the founding text of the American System, drew from the mercantilist economies of Britain under Elizabeth I and France under Colbert. List's 1841 Das Nationale System der Politischen Ökonomie, which emphasized stages of growth, proved influential in the US and Germany, nationalist policies were pursued by politician Henry Clay, by Abraham Lincoln, under the influence of economist Henry Charles Carey. Forms of economic nationalism and neomercantilism have been key in Japan's development in the 19th and 20th centuries, the more recent development of the Four Asian Tigers, most China. Following Brexit and the United States presidential election, 2016, some experts have argued a new kind of "self-seeking capitalism" popularly known as Trumponomics could have a considerable impact on cross-border investment flows and long-term capital allocation The origins of modern development economics are traced to the need for, problems with the industrialization of eastern Europe in the aftermath of World War II.
The key authors are Paul Rosenstein-Rodan, Kurt Mandelbaum, Ragnar Nurkse, Sir Hans Wolfgang Singer. Only after the war did economists turn their concerns towards Asia and Latin America. At the heart of these studies, by authors such as Simon Kuznets and W. Arthur Lewis was an analysis of not only economic growth but structural transformation. An early theory of development economics, the linear-stages-of-growth model was first formulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following work of Marx and List; this theory modifies Marx's stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, development. The linear-stages-of-growth model posits that there are a series of five consecutive stages of development which all countries must go through during the process of development.
These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, the age of high mass-consumption" Simple versi
Cultural economics is the branch of economics that studies the relation of culture to economic outcomes. Here, ` culture' is defined by shared preferences of respective groups. Programmatic issues include whether and how much culture matters as to economic outcomes and what its relation is to institutions; as a growing field in behavioral economics, the role of culture in economic behavior is being demonstrate to cause significant differentials in decision-making and the management and valuation of assets. Applications include the study of social norms. Social identity, beliefs in redistributive justice, hatred, trust, family ties, long-term orientation, the culture of economics. A general analytical theme is how ideas and behaviors are spread among individuals through the formation of social capital, social networks and processes such as social learning, as in the theory of social evolution and information cascades. Methods include case studies and theoretical and empirical modeling of cultural transmission within and across social groups.
In 2013 Said E. Dawlabani added the value systems approach to the cultural emergence aspect of macroeconomics. Cultural economics develops from how wants and tastes are formed in society; this is due to nurture aspects, or what type of environment one is raised in, as it is the internalization of one’s upbringing that shapes their future wants and tastes. Acquired tastes can be thought of as an example of this, as they demonstrate how preferences can be shaped socially. A key thought area that separates the development of cultural economics from traditional economics is a difference in how individuals arrive at their decisions. While a traditional economist will view decision making as having both implicit and explicit consequences, a cultural economist would argue that an individual will not only arrive at their decision based on these implicit and explicit decisions but based on trajectories; these trajectories consist of regularities, which have been built up throughout the years and guide individuals in their decision-making process.
Economists have started to look at cultural economics with a systems thinking approach. In this approach, the economy and culture are each viewed as a single system where "interaction and feedback effects were acknowledged, where in particular the dynamic were made explicit". In this sense, the interdependencies of culture and the economy can be combined and better understood by following this approach. Said E. Dawlabani's book MEMEnomics: The Next-Generation Economic System combines the ideas of value systems and systems thinking to provide one of the first frameworks that explores the effect of economic policies on culture; the book explores the intersections of multiple disciplines such as cultural development, organizational behavior, memetics all in an attempt to explore the roots of cultural economics. The advancing pace of new technology is transforming how the public shares culture; the cultural economic field has seen great growth with the advent of online social networking which has created productivity improvements in how culture is consumed.
New technologies have lead to cultural convergence where all kinds of culture can be accessed on a single device. Throughout their upbringing, younger persons of the current generation are consuming culture faster than their parents did, through new mediums; the smartphone is a blossoming example of this where books, talk and more can all be accessed on a single device in a matter of seconds. This medium and the culture surrounding it is beginning to have an effect on the economy, whether it be increasing communication while lowering costs, lowering the barriers of entry to the technology economy, or making use of excess capacity; this field has seen growth through the advent of new economic studies that have put on a cultural lens. For example, a recent study on Europeans living with their families into adulthood was conducted by Paola Sapienza, a professor at Northwestern University; the study found that those of Southern European descent tend to live at home with their families longer than those of Northern European descent.
Sapienza added cultural critique to her analysis of the research, revealing that it is Southern European culture to stay at home longer and related this to how those who live at home longer have fewer children and start families thus contributing to Europe's falling birthrates. Sapienza's work is an example of how the growth of cultural economics is beginning to spread across the field. An area that cultural economics has a strong presence in is sustainable development. Sustainable development has been defined as "...development that meets the needs of the present without compromising the ability of future generations to meet their own needs...". Culture plays an important role in this as it can determine how people view preparing for these future generations. Delayed gratification is a cultural economic issue that developed countries are dealing with. Economists argue that to ensure that the future is better than today, certain measures must be taken such as collecting taxes or "going green" to protect the environment.
Policies such as these are hard for today's politicians to promote who want to win the vote of today's voters who are concerned with the present and not the future. People want to see the benefits now, not in the future. Economist David Throsby has proposed the idea of culturally sustainable development which compasses both the cultural industries and culture, he has created a set of criteria in regards to for which policy prescriptions can be compared to in order to ensure growth for future generations. The
Game theory is the study of mathematical models of strategic interaction between rational decision-makers. It has applications in all fields of social science, as well as in computer science, it addressed zero-sum games, in which one person's gains result in losses for the other participants. Today, game theory applies to a wide range of behavioral relations, is now an umbrella term for the science of logical decision making in humans and computers. Modern game theory began with the idea regarding the existence of mixed-strategy equilibria in two-person zero-sum games and its proof by John von Neumann. Von Neumann's original proof used the Brouwer fixed-point theorem on continuous mappings into compact convex sets, which became a standard method in game theory and mathematical economics, his paper was followed by the 1944 book Theory of Games and Economic Behavior, co-written with Oskar Morgenstern, which considered cooperative games of several players. The second edition of this book provided an axiomatic theory of expected utility, which allowed mathematical statisticians and economists to treat decision-making under uncertainty.
Game theory was developed extensively in the 1950s by many scholars. It was explicitly applied to biology in the 1970s, although similar developments go back at least as far as the 1930s. Game theory has been recognized as an important tool in many fields; as of 2014, with the Nobel Memorial Prize in Economic Sciences going to game theorist Jean Tirole, eleven game theorists have won the economics Nobel Prize. John Maynard Smith was awarded the Crafoord Prize for his application of game theory to biology. Early discussions of examples of two-person games occurred long before the rise of modern, mathematical game theory; the first known discussion of game theory occurred in a letter written by Charles Waldegrave, an active Jacobite, uncle to James Waldegrave, a British diplomat, in 1713. In this letter, Waldegrave provides a minimax mixed strategy solution to a two-person version of the card game le Her, the problem is now known as Waldegrave problem. In his 1838 Recherches sur les principes mathématiques de la théorie des richesses, Antoine Augustin Cournot considered a duopoly and presents a solution, a restricted version of the Nash equilibrium.
In 1913, Ernst Zermelo published Über eine Anwendung der Mengenlehre auf die Theorie des Schachspiels. It proved that the optimal chess strategy is determined; this paved the way for more general theorems. In 1938, the Danish mathematical economist Frederik Zeuthen proved that the mathematical model had a winning strategy by using Brouwer's fixed point theorem. In his 1938 book Applications aux Jeux de Hasard and earlier notes, Émile Borel proved a minimax theorem for two-person zero-sum matrix games only when the pay-off matrix was symmetric. Borel conjectured that non-existence of mixed-strategy equilibria in two-person zero-sum games would occur, a conjecture, proved false. Game theory did not exist as a unique field until John von Neumann published the paper On the Theory of Games of Strategy in 1928. Von Neumann's original proof used Brouwer's fixed-point theorem on continuous mappings into compact convex sets, which became a standard method in game theory and mathematical economics, his paper was followed by his 1944 book Theory of Games and Economic Behavior co-authored with Oskar Morgenstern.
The second edition of this book provided an axiomatic theory of utility, which reincarnated Daniel Bernoulli's old theory of utility as an independent discipline. Von Neumann's work in game theory culminated in this 1944 book; this foundational work contains the method for finding mutually consistent solutions for two-person zero-sum games. During the following time period, work on game theory was focused on cooperative game theory, which analyzes optimal strategies for groups of individuals, presuming that they can enforce agreements between them about proper strategies. In 1950, the first mathematical discussion of the prisoner's dilemma appeared, an experiment was undertaken by notable mathematicians Merrill M. Flood and Melvin Dresher, as part of the RAND Corporation's investigations into game theory. RAND pursued the studies because of possible applications to global nuclear strategy. Around this same time, John Nash developed a criterion for mutual consistency of players' strategies, known as Nash equilibrium, applicable to a wider variety of games than the criterion proposed by von Neumann and Morgenstern.
Nash proved that every n-player, non-zero-sum non-cooperative game has what is now known as a Nash equilibrium. Game theory experienced a flurry of activity in the 1950s, during which time the concepts of the core, the extensive form game, fictitious play, repeated games, the Shapley value were developed. In addition, the first applications of game theory to philosophy and political science occurred during this time. In 1979 Robert Axelrod tried setting up computer programs as players and found that in tournaments between them the winner was a simple "tit-for-tat" program that cooperates on the first step on subsequent steps just does whatever its opponent did on the previous step; the same winner was often obtained by natural selection. In 1965, Reinhard Selten introduced his solution concept of subgame perfect equilibria, which further refined the Nash equilibrium. In 1994 Nash and Harsanyi became Economics Nobel Laureates for their contributi