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
Heterodoxy is a term that may be used in contrast with orthodoxy in schools of economic thought or methodologies, that may be beyond neoclassical economics. Heterodoxy is an umbrella term; these might for example include anarchist, Marxian, evolutionary, Austrian, social, post-Keynesian, ecological economics among others. Economics may be called conventional economics by its critics. Alternatively, mainstream economics deals with the "rationality–individualism–equilibrium nexus" and heterodox economics is more "radical" in dealing with the "institutions–history–social structure nexus". Many economists dismiss heterodox economics as "fringe" and "irrelevant", with little or no influence on the vast majority of academic mainstream economists in the English-speaking world. A recent review documented several prominent groups of heterodox economists since at least the 1990s as working together with a resulting increase in coherence across different constituents. Along these lines, the International Confederation of Associations for Pluralism in Economics does not define "heterodox economics" and has avoided defining its scope.
ICAPE defines its mission as "promoting pluralism in economics." In defining a common ground in the "critical commentary," one writer described fellow heterodox economists as trying to do three things: identify shared ideas that generate a pattern of heterodox critique across topics and chapters of introductory macro texts. One study suggests four key factors as important to the study of economics by self-identified heterodox economists: history, natural systems and power. A number of heterodox schools of economic thought challenged the dominance of neoclassical economics after the neoclassical revolution of the 1870s. In addition to socialist critics of capitalism, heterodox schools in this period included advocates of various forms of mercantilism, such as the American School dissenters from neoclassical methodology such as the historical school, advocates of unorthodox monetary theories such as Social credit. Other heterodox schools active before and during the Great Depression included Technocracy and Georgism.
Physical scientists and biologists were the first individuals to use energy flows to explain social and economic development. Joseph Henry, an American physicist and first secretary of the Smithsonian Institution, remarked that the "fundamental principle of political economy is that the physical labor of man can only be ameliorated by… the transformation of matter from a crude state to a artificial condition...by expending what is called power or energy."The rise, absorption into the mainstream of Keynesian economics, which appeared to provide a more coherent policy response to unemployment than unorthodox monetary or trade policies contributed to the decline of interest in these schools. After 1945, the neoclassical synthesis of Keynesian and neoclassical economics resulted in a defined mainstream position based on a division of the field into microeconomics and macroeconomics. Austrians and post-Keynesians who dissented from this synthesis emerged as defined heterodox schools. In addition, the Marxist and institutionalist schools remained active.
Up to 1980 the most notable themes of heterodox economics in its various forms included: rejection of the atomistic individual conception in favor of a embedded individual conception. From 1980 mainstream economics has been influenced by a number of new research programs, including behavioral economics, complexity economics, evolutionary economics, experimental economics, neuroeconomics; as a consequence, some heterodox economists, such as John B. Davis, proposed that the definition of heterodox economics has to be adapted to this new, more complex reality:...heterodox economics post-1980 is a complex structure, being composed out of two broadly different kinds of heterodox work, each internally differentiated with a number of research programs having different historical origins and orientations: the traditional left heterodoxy familiar to most and the'new heterodoxy' resulting from other science imports. There is no single "heterodox economic theory". What they all share, however, is a rejection of the neoclassical orthodoxy as representing the appropriate tool for understanding the workings of economic and social life.
The reasons for this rejection may vary. Some of the elements found in heterodox critiques are listed below. One of the most broadly accepted principles of neoclassical economics is the assumption of the "rationality of economic agents". Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior; when some economists' studies do not embrace the rationality assumption, they are seen as placing the analyses outside the boundaries of the Neoclassical economics discipline. Neoclassical economics begins with the a priori assumptions that agents are rational and that they seek to maximize their individual utility (or prof
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other, its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton. Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions; the earlier tradition continues today as a leading heterodox approach to economics."Traditional" institutionalism rejects the reduction of institutions to tastes and nature. Tastes, along with expectations of the future and motivations, not only determine the nature of institutions but are limited and shaped by them. If people live and work in institutions on a regular basis, it shapes their world views. Fundamentally, this traditional institutionalism emphasizes the legal foundations of an economy and the evolutionary and volitional processes by which institutions are erected and changed Institutional economics focuses on learning, bounded rationality, evolution.
It was a central part of American economics in the first part of the 20th century, including such famous but diverse economists as Thorstein Veblen, Wesley Mitchell, John R. Commons; some institutionalists see Karl Marx as belonging to the institutionalist tradition, because he described capitalism as a historically-bounded social system. A significant variant is the new institutional economics from the 20th century, which integrates developments of neoclassical economics into the analysis. Law and economics has been a major theme since the publication of the Legal Foundations of Capitalism by John R. Commons in 1924. Since there has been heated debate on the role of law on economic growth. Behavioral economics is another hallmark of institutional economics based on what is known about psychology and cognitive science, rather than simple assumptions of economic behavior; some of the authors associated with this school include Robert H. Frank, Warren Samuels, Marc Tool, Geoffrey Hodgson, Daniel Bromley, Jonathan Nitzan, Shimshon Bichler, Elinor Ostrom, Anne Mayhew, John Kenneth Galbraith and Gunnar Myrdal, but the sociologist C. Wright Mills was influenced by the institutionalist approach in his major studies.
Thorstein Veblen wrote his first and most influential book while he was at the University of Chicago, on The Theory of the Leisure Class. In it he analyzed the motivation in capitalism for people to conspicuously consume their riches as a way of demonstrating success. Conspicuous leisure was another focus of Veblen's critique; the concept of conspicuous consumption was in direct contradiction to the neoclassical view that capitalism was efficient. In The Theory of Business Enterprise Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power.
These two books, focusing on criticism first of consumerism, second of profiteering, did not advocate change. Through the 1920s and after the Wall Street Crash of 1929 Thorstein Veblen's warnings of the tendency for wasteful consumption and the necessity of creating sound financial institutions seemed to ring true. Thorstein Veblen wrote in 1898 an article entitled "Why is Economics Not an Evolutionary Science" and he became the precursor of current evolutionary economics. John R. Commons came from mid-Western America. Underlying his ideas, consolidated in Institutional Economics was the concept that the economy is a web of relationships between people with diverging interests. There are large corporations, labour disputes and fluctuating business cycles, they do however have an interest in resolving these disputes. Commons thought. Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions. Wesley Clair Mitchell was an American economist known for his empirical work on business cycles and for guiding the National Bureau of Economic Research in its first decades.
Mitchell’s teachers included economists Thorstein Veblen and J. L. Laughlin and philosopher John Dewey. Clarence Ayres was the principal thinker of what some have called the Texas school of institutional economics. Ayres developed on the ideas of Thorstein Veblen with a dichotomy of "technology" and "institutions" to separate the inventive from the inherited aspects of economic structures, he claimed. It can be argued that Ayres was not an "instit
Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions, it analyzes market failure, where markets fail to produce efficient results. Microeconomics stands in contrast to macroeconomics, which involves "the sum total of economic activity, dealing with the issues of growth and unemployment and with national policies relating to these issues". Microeconomics deals with the effects of economic policies on microeconomic behavior and thus on the aforementioned aspects of the economy. In the wake of the Lucas critique, much of modern macroeconomic theories has been built upon microfoundations—i.e. Based upon basic assumptions about micro-level behavior.
Microeconomic theory begins with the study of a single rational and utility maximizing individual. To economists, rationality means an individual possesses stable preferences that are both complete and transitive; the technical assumption that preference relations are continuous is needed to ensure the existence of a utility function. Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable. Microeconomic theory progresses by defining a competitive budget set, a subset of the consumption set, it is at this point that economists make the technical assumption that preferences are locally non-satiated. Without the assumption of LNS there is no 100% guarantee but there would be a rational rise in individual utility. With the necessary tools and assumptions in place the utility maximization problem is developed; the utility maximization problem is the heart of consumer theory.
The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences and mathematically modeling and analyzing the consequences. The utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well; that is, the utility maximization problem is used by economists to not only explain what or how individuals make choices but why individuals make choices as well. The utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint. Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists; that is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence; the utility maximization problem has so far been developed by taking consumer tastes as the primitive.
However, an alternative way to develop microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as revealed preference theory; the theory of supply and demand assumes that markets are competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions. Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where market failures lead to resource allocation, suboptimal and creates deadweight loss. A classic example of suboptimal resource allocation is that of a public good.
In such cases, economists may attempt to find policies that avoid waste, either directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing markets" to enable efficient trading where none had existed. This is studied in the field of public choice theory. "Optimal welfare" takes on a Paretian norm, a mathematical application of the Kaldor–Hicks method. This can diverge from the Utilitarian goal of maximizing utility because it does not consider the distribution of goods between people. Market failure in positive economics is limited in implications without mixing the belief of the economist and their theory; the demand for various commodities by individuals is thought of as the outcome of a utility-maximizing process, with each individual trying to maximize their own utility under a budget constraint and a given consumption set. The study of microeconomics involves several "key" areas: Supply and demand is an economic model of price determination in a competitive market.
It concludes that in a competitive market with no externalities, per unit taxes, or price controls, the unit price for a particular good is the price at which the quantity demanded by consumers equals the quantity supplied by producers. This price results in a stable economic equilibrium. Elasticity is the measurement of how resp
Public economics is the study of government policy through the lens of economic efficiency and equity. At its most basic level, public economics provides a framework for thinking about whether or not the government should participate in economic markets and to what extent it should do so. In order to do this, microeconomic theory is utilized to assess whether the private market is to provide efficient outcomes in the absence of governmental interference. Inherently, this study involves the analysis of government taxation and expenditures; this subject encompasses a host of topics including market failures and the creation and implementation of government policy. Public economics builds on the theory of welfare economics and is used as a tool to improve social welfare. Broad methods and topics include: the theory and application of public finance analysis and design of public policy distributional effects of taxation and government expenditures analysis of market failure and government failure.
Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from ideology. Examples of topics covered are tax incidence, optimal taxation, the theory of public goods; the Journal of Economic Literature classification codes are one way categorizing the range of economics subjects. There, Public Economics, one of 19 primary classifications, has 8 categories, they are listed below with JEL-code links to corresponding available article-preview links of The New Palgrave Dictionary of Economics Online and with similar footnote links for each respective subcategory if available: JEL: H – Public Economics JEL: H0 – General JEL: H1 – Structure and Scope of Government JEL: H2 – Taxation and Revenue JEL: H3 – Fiscal Policies and Behavior of Economic Agents JEL: H4 – Publicly Provided Goods JEL: H5 – National Government Expenditures and Related Policies JEL: H6 – National Budget and Debt JEL: H7 – State and Local Government. In 1971, Peter A. Diamond and James A. Mirrlees published a seminal paper which showed that when lump-sum taxation is not available, production efficiency is still desirable.
This finding is known as the Diamond–Mirrlees efficiency theorem, it is credited with having modernized Ramsey's analysis by considering the problem of income distribution with the problem of raising revenue. Joseph E. Stiglitz and Partha Dasgupta have criticized this theorem as not being robust on the grounds that production efficiency will not be desirable if certain tax instruments cannot be used. One of the achievements for which the great English economist A. C. Pigou is known, was his work on the divergences between marginal private costs and marginal social costs. In his book, The Economics of Welfare, Pigou describes how these divergences come about:...one person A, in the course of rendering some service, for which payment is made, to a second person B, incidentally renders services or disservices to other persons, of such a sort that payment cannot be extracted from the benefited parties or compensation enforced on behalf of the injured parties. In particular, Pigou is known for his advocacy of what are known as corrective taxes, or Pigouvian taxes: It is plain that divergences between private and social net product of the kinds we have so far been considering cannot, like divergences due to tenancy laws, be mitigated by a modification of the contractual relation between any two contracting parties, because the divergence arises out of a service or disservice to persons other than the contracting parties.
It is, possible for the State, if it so chooses, to remove the divergence in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The most obvious forms which these encouragements and restraints may assume are, of course, those of bounties and taxes. Externalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms. Positive externalities are education, public health and others while examples of negative externalities are air pollution, noise pollution, non-vaccination and more; the government can intervene in the market, using an emission tax for example to create a more efficient outcome. Pigou describes as positive externalities, examples such as resources invested in private parks that improve the surrounding air, scientific research from which discoveries of high practical utility grow. Alternatively, he describes negative externalities, such as the factory that destroys a great part of the amenities of neighboring sites.
In 1960, the economist Ronald H. Coase proposed an alternative scheme whereby negative externalities are dealt with through the appropriate assignment of property rights; this result is known as the Coase theorem. Public goods, or collective consumption goods, exhibit two properties. Something is non-rivaled if one person's consumption of it does not deprive another person, a firework display is non-rivaled - since one person watching a firework display does not prevent another person from doing so. Something is non-excludable. Again, since one cannot prevent people from viewing a firework display it is non-excludable. Conceptually, another example of public good is the service, provided by law enforcement organizations, such as sheriffs and police. Cities and towns are served by only one
Operations research, or operational research in British usage, is a discipline that deals with the application of advanced analytical methods to help make better decisions. Further, the term operational analysis is used in the British military as an intrinsic part of capability development and assurance. In particular, operational analysis forms part of the Combined Operational Effectiveness and Investment Appraisals, which support British defense capability acquisition decision-making, it is considered to be a sub-field of applied mathematics. The terms management science and decision science are sometimes used as synonyms. Employing techniques from other mathematical sciences, such as mathematical modeling, statistical analysis, mathematical optimization, operations research arrives at optimal or near-optimal solutions to complex decision-making problems; because of its emphasis on human-technology interaction and because of its focus on practical applications, operations research has overlap with other disciplines, notably industrial engineering and operations management, draws on psychology and organization science.
Operations research is concerned with determining the extreme values of some real-world objective: the maximum or minimum. Originating in military efforts before World War II, its techniques have grown to concern problems in a variety of industries. Operational research encompasses a wide range of problem-solving techniques and methods applied in the pursuit of improved decision-making and efficiency, such as simulation, mathematical optimization, queueing theory and other stochastic-process models, Markov decision processes, econometric methods, data envelopment analysis, neural networks, expert systems, decision analysis, the analytic hierarchy process. Nearly all of these techniques involve the construction of mathematical models that attempt to describe the system; because of the computational and statistical nature of most of these fields, OR has strong ties to computer science and analytics. Operational researchers faced with a new problem must determine which of these techniques are most appropriate given the nature of the system, the goals for improvement, constraints on time and computing power.
The major sub-disciplines in modern operational research, as identified by the journal Operations Research, are: Computing and information technologies Financial engineering Manufacturing, service sciences, supply chain management Policy modeling and public sector work Revenue management Simulation Stochastic models Transportation In the decades after the two world wars, the tools of operations research were more applied to problems in business and society. Since that time, operational research has expanded into a field used in industries ranging from petrochemicals to airlines, finance and government, moving to a focus on the development of mathematical models that can be used to analyse and optimize complex systems, has become an area of active academic and industrial research. In the 17th century, mathematicians like Christiaan Huygens and Blaise Pascal tried to solve problems involving complex decisions with probability. Others in the 18th and 19th centuries solved these types of problems with combinatorics.
Charles Babbage's research into the cost of transportation and sorting of mail led to England's universal "Penny Post" in 1840, studies into the dynamical behaviour of railway vehicles in defence of the GWR's broad gauge. Beginning in the 20th century, study of inventory management could be considered the origin of modern operations research with economic order quantity developed by Ford W. Harris in 1913. Operational research may have originated in the efforts of military planners during World War I. Percy Bridgman brought operational research to bear on problems in physics in the 1920s and would attempt to extend these to the social sciences. Modern operational research originated at the Bawdsey Research Station in the UK in 1937 and was the result of an initiative of the station's superintendent, A. P. Rowe. Rowe conceived the idea as a means to analyse and improve the working of the UK's early warning radar system, Chain Home, he analysed the operating of the radar equipment and its communication networks, expanding to include the operating personnel's behaviour.
This allowed remedial action to be taken. Scientists in the United Kingdom including Patrick Blackett, Cecil Gordon, Solly Zuckerman, C. H. Waddington, Owen Wansbrough-Jones, Frank Yates, Jacob Bronowski and Freeman Dyson, in the United States with George Dantzig looked for ways to make better decisions in such areas as logistics and training schedules The modern field of operational research arose during World War II. In the World War II era, operational research was defined as "a scientific method of providing executive departments with a quantitative basis for decisions regarding the operations under their control". Other names for it included quantitative management. During the Second World War close to 1,000 men and women in Britain were engaged in operational research. About 200 operational research scientists worked for the British Army. Patrick Blackett worked for several different organizations during the war. Early in the war while working for the Royal Aircraft Establishment he set up a team known as the "Circus" which helped to reduce the number of anti-aircraft artillery rounds needed to shoot down an enemy aircraft from an