Economics





Economics (formerly known as political economy) studies the governance of
the production, distribution and consumption of wealth and the various
related problems of scarcity, finance, debt, taxation, labor, law,
inequality, poverty, pollution, war, etc.

A further aspect is how the consequences of different courses of action
affect individual or group behavior. Economists tend to think that
incentives and preferences (tastes) together play an important role in
shaping decision making. Aspects receiving particular attention in economics
are trade, resource allocation and competition.

Economics is often said to be positive when it attempts to explain the
consequences of different choices and normative when it prescribes a certain
route of action. The nature of positive and normative economics is discussed
further below.

Mathematical economics is based on the belief that mathematical methods
encourage researchers to focus on essentials and makes exposition less prone
to ambiguity. However, the basic ideas of economics can be taught with no
more than simple arithmetic and graphs, without knowledge of the underlying
formal mathematical theory. Indeed, the Austrian School of economics
believes that anything beyond simple logic is not only unnecessary but
inappropriate for economic analysis.

Most contemporary theory assumes that humans (or more generally, economic
agents) act rationally and have access to perfect information. This idea
("homo economicus") is not accepted by all. But rationality and perfect
information were essential ingredients of the seminal work of Von Neumann
and Morgenstern on game theory in the 1940s, and dropping these assumptions
may make otherwise simple economic models intractable. More recently,
irrational behavior and imperfect information have increasingly been the
subject of formal modelling (often referred to as behavioral economics),
resulting in some Nobel Prizes in economics.

In any case, economics relies on formal, mathematical styles of argument
more than other social sciences. However, formal modelling is also
increasingly used in other social sciences, such as political science, as
well as philosophy. Formal modelling can involve advanced mathematical
methods, but often only relatively straightforward algebra or elementary
calculus is needed.

Areas of study in economics

Economics is usually divided into two main categories:

   * Microeconomics, which deals with the behaviour and interaction of
     individual agents and firms.
   * Macroeconomics, which examines an economy as a whole with a view to
     understanding the interaction between economic aggregates such as
     income, employment and inflation.

Attempts to join these two branches or to refute the distinction between
them have been important motivators in much of recent economic thought,
especially in the late 1970s and early 1980s. Today, the consensus view is
arguably that good macroeconomics has solid microeconomic foundations i.e.
its premises have support in microeconomics.

Within these major divisions there are specialized areas of study that try
to answer questions on a broad spectrum of human economic activity (see
below). There are also methodologies used by economists whose underlying
theories are important. The most significant example may be econometrics,
which applies statistical techniques to the study of economic data.

There has been an increasing trend for ideas from economics to be applied in
wider contexts. There is an economic aspect to any field where people are
faced with alternatives - education, marriage, health, public policy, etc.
Public Choice Theory studies how economic analysis can apply to those fields
traditionally considered outside of economics. The areas of investigation in
Economics therefore overlap with other social sciences, including political
science and sociology.

Development of economic thought

Modern economic thought is usually said to have begun with Adam Smith in the
late 18th century. For an overview of precursors to Smith as well as an
overview of schools that have developed later, see history of economic
thought. Modern mainstream economics is primarily a further refinement of
neoclassical economics.

Macroeconomics began with Keynes in the 1930s. For an overview of a number
of competing schools, see macroeconomics.

Many economists use a combination of Neoclassical microeconomics and
Keynesian macroeconomics. This combination, sometimes known as the
Neoclassical synthesis, was dominant in Western teaching and public policy
in the years following World War II and up to the late 1970s.

In principle, economics can be applied to any type of economic organization.
However, it developed historically in market societies, and its most
detailed and precise work has dealt with the institutions belonging to them.
To what extent economics must be adjusted to be applied to earlier forms of
social organization has been the source of discussion. Generally, mainstream
economists mostly feel that the basic framework of economics is relevant and
flexible enough to be applied to virtually any form of society. Marxist
economists, who were more influential a few decades ago, often feel that
each era of history obeys its very own set of laws, and that contemporary
economics can only be applied to industrialized societies.

Economics and political economy

The term economics was coined in around 1870, and popularised by influential
neoclassical economists such as Alfred Marshall. Prior to this the subject
had been known as political economy. This term is still often used instead
of economics, especially by radical economists such as Marxists.