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Economics

2007 Schools Wikipedia Selection. Related subjects: Economics

   Face-to-face trading interactions among on the New York Stock Exchange
   trading floor
   Enlarge
   Face-to-face trading interactions among on the New York Stock Exchange
   trading floor

   Economics, as a social science, studies the production, distribution,
   and consumption of resources.

   The word "economics" is from the Greek words οἶκος [oikos], meaning
   "family, household, estate," and νόμος [nomos], or "custom, law," and
   hence literally means "household management" or "management of the
   state." An economist is a person using economic concepts and data in
   the course of employment.

   The field may be divided in several different ways, most popularly
   microeconomics vs macroeconomics. It may also be divided in positive
   (descriptive) vs. normative, mainstream vs. heterodox, and by subfield.
   Economics has many direct applications in business, personal finance,
   and government. Theories developed as a part of economic theory have
   also been applied to non-monetary choices in fields as diverse as
   criminal behaviour, scientific research, death, politics, health,
   education, family, dating, etc. This is possible because economics is
   fundamentally about human decision making.

   There has been an increasing trend for ideas and methods from economics
   to be applied in wider contexts. Economic analysis focuses on decision
   making, and has been applied, with varying degrees of success, to
   various fields where people are faced with alternatives – education,
   marriage, health, law, crime, war, and religion. This has sometimes
   been described as economic imperialism by critics. Gary Becker at the
   University of Chicago was one of the important pioneers in this
   imperialistic endeavor. In a collection of his early influential
   articles, he advanced the view that economics is not to be defined by
   its subject matters, but should be defined as an approach of explaining
   human behaviors.

   Many mainstream economists feel that the combination of rigorous theory
   and empirical data ultimately gives the best understanding of
   real-world phenomena. Towards this end, economics has undergone a
   massive formalization of its ideas, concepts and methods – according to
   critics, sometimes to the detriment of its real-world relevance. This
   creates a tension in the profession on what economists should do. The
   traditional Chicago School, with its emphasis on economics being an
   empirical science aimed at explaining real-world phenomena, has
   insisted on the powerfulness of price theory as the tool of analysis.
   On the other hand, some economic theorists have formed the view that a
   consistent economic theory may be useful even if at present no real
   world economy bears out its prediction.

Areas of study in economics

   One of the main purposes is to understand how economies work, and what
   are the relations between the main economic players and institutions.

   Economics is usually divided into three main branches:
     * Microeconomics examines the economic behaviour of individual units
       such as businesses and households in the face of scarcity and
       government interactions, as well as the economic consequences of
       these decisions on other actors.
     * Macroeconomics examines an economy as a whole with a view to
       understanding the interaction between economic aggregates such as
       national income, employment and inflation. Note that general
       equilibrium theory combines concepts of a macro-economic view of
       the economy, but does so from the microeconomic viewpoint.
     * Econometrics is the application of statistical techniques to
       measuring economic phenomena.

   Attempts to join the microeconomics and macroeconomics 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. In other words, its premises ought
   to have theoretical and evidential support in microeconomics. A few
   authors (for example, Kurt Dopfer and Stuart Holland) also argue that '
   mesoeconomics', which considers the intermediate level of economic
   organization such as markets and other institutional arrangements,
   should be considered an additional branch of economic study. Further,
   modern developments in consumer psychology suggest an even greater
   level of disaggregation one might call 'picoeconomics' that reduces the
   individual consumer's behavior to the psychological components that
   drive that behaviour.

   Economics can also be divided into numerous subdisciplines including:
   international economics, development economics, labor economics,
   environmental economics, industrial organization, public finance,
   economic psychology, economic sociology, institutional economics and
   economic geography.

   Another division of the subject distinguishes positive economics, which
   seeks to predict and explain economic phenomena, from normative
   economics, which orders choices and actions by some criterion; such
   orderings necessarily involve subjective value judgments.

   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. Computational
       economics relies on mathematical methods, including econometrics.
     * Another trend which is more recent, and closer to microeconomics,
       is to use social psychology concepts ( behavioural economics) and
       methods ( experimental economics) to understand deviations from the
       predictions of neoclassical economics.
     * Evolutionary economics often deals with the otherwise difficult
       questions related to the role of 'routines' and 'capabilities' in
       explaining heterogeneity in firm outcomes.
     * Economic history is the study of economic change, and of economic
       phenomena in the past.

   Finance has traditionally been considered a part of economics – as its
   body of results emerges naturally from microeconomics – but has today
   effectively established itself as a separate, though closely related,
   discipline.

Economic language and reasoning

   Economics relies on rigorous styles of argument. Economic methodology
   has several interacting parts:
     * Collection of economic data. This data consists of measurable
       values of price and changes in price, for measurable commodities.
       For example: the cost to hire a worker for a week, or the cost of a
       particular commodity, and how much is typically used.
     * Formulation of models of economic relationships, for example, the
       relationship between the general level of prices and the general
       level of employment. This includes observable forms of economic
       activity, such as money, consumption, preferences, buying, selling,
       and prices. Economics typically employs two types of equations:

   1) Identity equations are used to explain how certain economic values
   are calculated. An example is the relationship of the quantity theory
   of money, which is shown by the equation of exchange. M \cdot V = P
   \cdot Q . This is often used to find how fast money circulates in the
   economy and can be considered an accounting measure. Another example is
   national income. Identity equations are tautological in that the
   purpose is to define rather than to explain.

   2) Descriptive equations are used to describe how an economic agent
   behaves. For example, utility and budget equations describe the desires
   and limitations of consumers. When combined, these yield demand
   equations which describe the quantities of product consumers will seek
   to purchase at various prices. Similarly, profit and production
   equations describe the desires and limitations of firms. When combined,
   these yield supply equations. Combining demand and supply equations
   yields equilibrium equations that describe the prices and quantities
   that will prevail in the markets.

   This article will refer to such models as formal models, although they
   are not formal in the sense of formal logic. Economists often formulate
   very simple models in order to define the impact of just one variant
   changing. This is called the "ceteris paribus"-assumption (All others
   equal), meaning that all other things are assumed not to change during
   the period of observation. Example: "If the price of movie tickets
   rises, ceteris paribus the demand for popcorn falls." However it is
   possible with the use of econometric method to determine one
   relationship while removing much of the noise caused by other
   variables.
     * Production of economic statistics. Taking the data collected, and
       applying the model being used to produce a representation of
       economic activity. For example, the "general price level" is a
       theoretical idea common to macroeconomic models. The specific
       inflation rate involves taking measurable prices, and a model of
       how people consume, and calculating what the "general price level"
       is from the data within the model. For example, suppose that diesel
       fuel costs 1 euro a litre: To calculate the price level would
       require a model of how much diesel an average person uses, and what
       fraction of their income is devoted to this —but it also requires
       having a model of how people use diesel, and what other goods they
       might substitute for it.
     * Reasoning within economic models. This process of reasoning (see
       the articles on informal logic, logical argument, fallacy)
       sometimes involves advanced mathematics. For instance, an
       established (though possibly unexamined) tradition among economists
       is to reason about economic variables in two-dimensional graphs in
       which curves representing relations between the axis variables are
       parameterized by various indices. A good example of this type of
       reasoning is exhibited by Paul Krugman's online essay, There's
       something about macro. See also the article IS/LM model. One
       critical analysis of economic reasoning is studied in Paul
       Samuelson's treatise, Foundations of Economic Analysis: he
       identifies a class of assertions called operationally meaningful
       theorems which are those that can be conceivably refuted by
       empirical data. As usual in science, the conclusions obtained by
       reasoning have a predictive as well as confirmative (or dismissive)
       value. An example of the predictive value of economic theory is a
       prediction as to the effect of current deficits on interest rates
       10 years into the future. An example of the confirmative value of
       economic theory would be confirmation (or dismissal) of theories
       concerning the relation between marginal tax rates and the deficit.

   Formal modelling, which has been adapted to some extent by all branches
   of economics, is motivated by general principles of consistency and
   completeness. It is not identical to what is often referred to as
   mathematical economics; this includes, but is not limited to, an
   attempt to set microeconomics, in particular general equilibrium, on
   solid mathematical foundations. Some reject mathematical economics: The
   Austrian School of economics believes that anything beyond simple logic
   is often unnecessary and inappropriate for economic analysis. In fact,
   the entire empirical-deductive framework sketched in this section may
   be rejected outright by that school. However, the framework sketched
   here accurately represents the current predominant view of economics.

Schools of economic thought

Modern mainstream economics

   Mainstream economics begins with the premise that resources are scarce
   and that it is necessary to choose between competing alternatives. That
   is, economics deals with tradeoffs. With scarcity, choosing one
   alternative implies forgoing another alternative—the opportunity cost.
   The opportunity cost creates an implicit price relationship between
   competing alternatives. In addition, in both market oriented and
   planned economies, scarcity is often explicitly quantified by price
   relationships.

   Economics studies how individuals and societies seek to satisfy needs
   and wants through incentives, choices, and allocation of scarce
   resources. Alfred Marshall in the late 19th century informally
   described economics as "the study of man in the ordinary business of
   life".

   Understanding choices by individuals and groups is central. Economists
   believe that incentives and desires play an important role in shaping
   decision making. Concepts from the Utilitarian school of philosophy are
   used as analytical concepts within economics, though economists
   appreciate that society may not adopt utilitarian objectives. One
   example of this is the idea of a utility function, which is assumed to
   represent how economic agents rank the choices given to them. The
   utility function ranks available choices from best to worst, and the
   agent gradually learns to choose the best-ranked choice in the feasible
   set of his alternatives.

   On a microeconomic level, some economists extend economic analysis to
   all personal decisions. An alternative can be thought of as a vector
   where the entries are answers not only to questions like "How many eggs
   should I buy?", but also "How many hours should I spend with my kids?",
   and "How long should I spend brushing my teeth?".

   Modern mainstream economics builds primarily on neoclassical economics,
   which began to develop in the late 1800s and models choices made in the
   allocation of scarce resources. Mainstream economics also acknowledges
   the existence of market failure and some insights from Keynesian
   economics. It looks to game theory and asymmetric information to solve
   problems on a microeconomic level. Many important insights on
   collective behaviour (for example, emergence of organizations) have
   been incorporated from institutional economics via new
   institutionalism.

   It is sometimes referred to as the study of choice under conditions of
   scarcity. Another more simplified way of explaining economics is the
   study of how people or a society seek to satisfy their needs and wants.

Alternative approaches

   The approach to economics that is dominant today is usually referred to
   as mainstream economics, and has developed primarily from neoclassical
   economics. The more specific definition this approach implies was
   captured by Lionel Robbins in 1932: "the science which studies human
   behaviour as a relation between scarce means having alternative uses."
   Scarcity means that available resources are insufficient to satisfy all
   wants and needs; if there is no scarcity and no alternative uses of
   available resources, then there is no economic problem. Other schools
   of thought are called heterodox economics, including institutional
   economics, Marxist economics, socialism, and green economics.
     * Post-Keynesian economics: An alternative school - one of the
       successors to the Keynesian tradition with a focus on
       macroeconomics. They concentrate on macroeconomic rigidities and
       adjustment processes, and research microfoundations for their
       models based on real-life practices rather than simple optimizing
       models. Generally associated with Cambridge, England and the work
       of Joan Robinson. (see Post-Keynesian economics)
     * New-Keynesian economics: The other school associated with
       developments in the Keynesian fashion. These researchers tend to
       share with other Neoclassical economists the emphasis on models
       based on microfoundations and optimizing behaviour but focus more
       narrowly on standard Keynesian themes such as price and wage
       rigidity. These are usually made to be endogenous features of these
       models, rather than simply assumed as in older style Keynesian
       ones. (see New-Keynesian economics)
     * Other alternatives: There are many types of economist, and many of
       them are considerably outside the mainstream. Marxian economics,
       Socialist economics, green economics, Austrian economics, and Old
       Keynesian economics have many voices in academia.
     * Eclectic Economists: The term 'eclectic' means selecting and using
       what seems best from various sources, systems or schools of
       thought. Eclectic economists tend to economize to get an optimal
       result for the problem at hand. The assumption of utility can for
       example be used, not to imply that people really have such a
       utility, but as an efficient approximation. Such economists might
       be 'main stream' or neoclassical in one publication and do
       political economy in another publication.
     * Biophysical economics
     * Thermoeconomics

   Famous schools or trends of thought referring to a particular style of
   economics practiced at and disseminated from well-defined groups of
   academicians that have become known worldwide, may be generally
   summarized as follows:
     * Austrian School
     * Chicago School
     * Freiburg School
     * Keynesian economics
     * Post-Keynesian economics
     * School of Lausanne
     * Stockholm school

Economics and ecology

   Another premise is that economics fits within a finite ecosystem where
   there are at least some abundant resources. For instance, when fuelling
   a fire, people are usually concerned with finding the wood, and not
   with finding the air to burn it with. Traditional economics explicitly
   does not deal with free or abundant natural inputs – one criticism is
   that it often conflicts with ecology's view of what affects what.

   Ecological economics attempts to address this criticism by calculating
   the financial contribution of nature's services, adding environmental
   considerations such as biodiversity to traditional list of human wants
   and needs, and proposing policy tools to address the negative impacts
   of economic growth on the environment.

   Green economics is a closely related field which views the human
   economy as a subset of the larger ecosystem.

Alternative definitions of economics

   This section extends the discussion of the definition of Economics at
   the beginning of the article.

   Torianto S. Johnson states that "economics is the science of scarcity."
   "It is where our infinite wants meet our finite resources and choices
   must be made."

   Economics is the study of human choice behaviour. All of economics
   whether represented through articulation or empirically through
   mathematical means is essentially an analysis of the behaviour choices
   of human beings.

   Refer to Economics, Ninth Canadian edition 1997 by Richard Lipsey,
   Christopher Ragan and Paul Courant, economics is the study of the use
   of scare resources to satisfy unlimited human wants.

Wealth definition

   The earliest definitions of political economy were simple, elegant
   statements defining it as the study of wealth. The first scientific
   approach to the subject was inaugurated by Aristotle, whose influence
   is still recognised, inter alia, today by the Austrian School. Adam
   Smith, author of the seminal work The Wealth of Nations and regarded by
   some as the "father of modern economics," defines economics simply as
   "The science of wealth." Smith offered another definition, "The Science
   relating to the laws of production, distribution and exchange." Wealth
   was defined as the specialization of labour which allowed a nation to
   produce more with its supply of labour and resources. This definition
   divided Smith and Hume from previous definitions which defined wealth
   as gold. Hume argued that gold without increased activity simply serves
   to raise prices

   John Stuart Mill defined economics as "The practical science of
   production and distribution of wealth"; this definition was adopted by
   the Concise Oxford English Dictionary even though it does not include
   the vital role of consumption. For Mill, wealth is defined as the stock
   of useful things.

   Definitions in terms of wealth emphasize production and consumption.
   The accounting measures usually used measure the pay received for work
   and the price paid for goods, and do not deal with the economic
   activities of those not significantly involved in buying and selling
   (for example, retired people, beggars, peasants). For economists of
   this period, they are considered non-productive, and non-productive
   activity is considered a kind of cost on society. This interpretation
   gave economics a narrow focus that was rejected by many as placing
   wealth in the forefront and man in the background; John Ruskin referred
   to political economy as a "Bastard science, the science of getting
   riches."

Welfare definition

   Later definitions evolved to include human activity, advocating a shift
   toward the modern view of economics as primarily a study of man and of
   human welfare, not of money. Alfred Marshall in his 1890 book
   Principles of Economics wrote, "Political Economy or Economics is a
   study of mankind in the ordinary business of Life; it examines the part
   of the individual and social action which is most closely connected
   with the attainment and with the use of material requisites of
   well-being."

   The welfare definition was still criticized as too narrowly
   materialistic. It ignores, for example, the non-material aspects of the
   services of a doctor or a dancer. A theory of wages which ignored all
   those sums paid for immaterial services was incomplete. Welfare could
   not be quantitatively measured, because the marginal significance of
   money differs from rich to the poor (that is, $100 is relatively more
   important to the well-being of a poor person than to that of a wealthy
   person). Moreover, the activities of production and distribution of
   goods such as alcohol and tobacco may not be conducive to human
   welfare, but these scarce goods do satisfy innate human wants and
   desires.

   Marxist economics still focuses on a welfare definition. In addition,
   several critiques of mainstream economics begin from the argument that
   current economic practice does not adequately measure welfare, but only
   monetized activity, which is an inadequate approximation of welfare.

Scarcity definition

   This definition allowed a potentially broader field of study, but it,
   too, has its critics. It is most amenable to those who consider
   economics a pure science, but others object that it reduces economics
   merely to a valuation theory. It ignores how values are fixed, prices
   are determined and national income is generated. It also ignores
   unemployment and other problems arising due to abundance. This
   definition cannot apply to such Keynesian concerns as cyclical
   instability, full employment, and economic growth.

   The focus on scarcity continues to dominate neoclassical economics,
   which, in turn, predominates in most academic economics departments. It
   has been criticized in recent years from a variety of quarters,
   including institutional economics and evolutionary economics and
   surplus economics.

Economic assumptions

Value

   It could be argued that beneath an economic theory is a theory of
   value. Value can be defined as the underlying activity which economics
   describes and measures. It is what is "really" happening.
   Representative money like this 1922 US $100 gold note could be
   exchanged by the bearer for its face value in gold.
   Enlarge
   Representative money like this 1922 US $100 gold note could be
   exchanged by the bearer for its face value in gold.

   Adam Smith defined "labor" as the underlying source of value, and "the
   labor theory of value" underlies the work of Karl Marx, David Ricardo
   and many other classical economists. The "labour theory of value"
   argues that a good or service is worth the labor that it takes to
   produce. For most, this value determines a commodity's price. This
   labour theory of price and the closely related cost-of-production
   theory of value dominates the work of most classical economists, but
   those theories are far from the only accepted basis for "value". For
   example, neoclassical economists and Austrian School economists prefer
   the marginal theory of value.

   "Market theory" argues that there is no "value" separate from price,
   that the market incorporates all available information into price, and
   that so long as markets are open, that price and the value are one and
   the same. This theory rests on the idea of the "rational economic
   actor". This was originally asserted by Mill.

   Another set of theories rests on the idea that there is a basic
   external scarcity, and that "value" represents the relationship to that
   basic scarcity (or lack thereof). These theories include those based on
   economics being limited by energy or based on a "gold standard".

   All of these value theories are used in current economic work with
   varying degrees of acceptance.

Supply and demand

   The supply and demand model describes how prices vary as a result of a
   balance between product availability and demand. The graph depicts a
   right-shift in demand from D1 to D2 along with the consequent increase
   in price and quantity required to reach a new equilibrium point on the
   supply curve (S).
   Enlarge
   The supply and demand model describes how prices vary as a result of a
   balance between product availability and demand. The graph depicts a
   right-shift in demand from D[1] to D[2] along with the consequent
   increase in price and quantity required to reach a new equilibrium
   point on the supply curve (S).

   In microeconomic theory supply and demand attempts to describe,
   explain, and predict the price and quantity of goods sold in perfectly
   competitive markets. It is one of the most fundamental economic models,
   ubiquitously used as a basic building block in a wide range of more
   detailed economic models and theories.

   To define, demand is the quantity of a product that a consumer or buyer
   would be willing and able to buy at any given price in a given period
   of time. Demand is often represented as a table or a graph relating
   price and quantity demanded. Most economic models assume that consumers
   make rational choices about how much to buy in order to maximize their
   utility - they spend their income on the products that will give them
   the most happiness at the least cost. The law of demand states that, in
   general, price and quantity demanded are inversely related. In other
   words, the higher the price of a product, the less of it consumers will
   buy.

   Supply is the quantity of goods that a producer or a supplier is
   willing to bring into the market for the purpose of sale at any given
   price in a given period of time. Supply is often represented as a table
   or a graph relating price and quantity supplied. Like consumers,
   producers are assumed to be utility-maximizing, attempting to produce
   the amount of goods that will bring them the greatest possible profit.
   The law of supply states that price and quantity supplied are directly
   proportional. In other words, the higher the price of a product, the
   more of it producers will create.

   The theory of supply and demand is crucial to explaining the market
   economy in that it explains the mechanisms by which prices and levels
   of production are set.

Price

   In order to measure the ebb and flow of supply and demand, a measurable
   value is needed. The oldest and most commonly used is price, or the
   going rate of exchange between buyers and sellers in a market. Price
   theory, therefore, charts the movement of measurable quantities over
   time, and the relationship between price and other measurable
   variables. In Adam Smith's Wealth of Nations, this was the trade-off
   between price and convenience. A great deal of economic theory is based
   around prices and the theory of supply and demand. In economic theory,
   the most efficient form of communication comes about when changes to an
   economy occur through price, such as when an increase in supply leads
   to a lower price, or an increase in demand leads to a higher price.
   Exchange rates are determined by the relative supply and demand of
   different currencies — an important issue in international trade.
   Enlarge
   Exchange rates are determined by the relative supply and demand of
   different currencies — an important issue in international trade.

   In many practical economic models, some form of "price stickiness" is
   incorporated to model the fact that prices do not move fluidly in many
   markets. Economic policy often revolves around arguments about the
   cause of "economic friction", or price stickiness, and which is,
   therefore, preventing the supply and demand from reaching equilibrium.

   Another area of economic controversy is about whether price measures
   the value of a good correctly. In mainstream market economics, where
   there are significant scarcities not factored into price, there is said
   to be an externalization, which is a cost or benefit to actors other
   than the buyer and seller, of which many examples exist, including
   pollution (a cost to others) and education (a benefit to others).
   Market economics predicts that scarce goods which are under-priced
   because of externalities are over-consumed (See social cost), and that
   scarce goods that are over-priced are under-consumed. This leads into
   public goods theory. Governments often tax and otherwise restrict the
   sale of goods that have negative externalities and subsidize or
   otherwise promote the purchase of goods that have positive
   externalities in an effort to correct the distortion in price caused by
   these externalities.

Scarcity

   Neoclassical economics is characterised by maximization (leisure time,
   wealth, health, happiness - all commonly reduced to the concept of
   utility) subject to constraints. These constraints - or scarcity -
   inevitably define a trade-off. For example, one can have more money by
   working harder, but less time (there are only so many hours in a day,
   so time is scarce). One can have more radishes only at the expense of,
   for example, fewer carrots (you only have so much land on which to grow
   food - land is scarce).

   All economies in the world face scarcity.

   Scarcity is defined as: when the price is zero, the quantity demanded
   exceeds the quantity supplied. Price is a measure of relative scarcity.
   If all other market variables are held constant; When the price is
   rising, this indicates the commodity is becoming relatively more
   scarce. When the price is falling, this indicates the commodity is
   becoming relatively less scarce.

   Adam Smith considered, for example, the trade-off between time, or
   convenience, and money. He discussed how a person could live near town,
   and pay more for rent of his home, or live farther away and pay less,
   "paying the difference out of his convenience".

Marginalism

   In marginalist economic theory, the price level is determined by the
   marginal cost and marginal utility. The price of all goods will be the
   cost of making the last one that people will purchase, and the price of
   all the employees in a company will be the cost of hiring the last one
   the business needs. Marginalism looks at decisions based on "the
   margins", what the cost to produce the next unit is, versus how much it
   is expected to return in profit. When the marginal return of an action
   reaches zero, the action stops. Marginal utility is how much more
   happiness or use a person receives from a purchase in contrast with
   buying less. Marginal rewards are often subject to diminishing returns:
   Less reward is obtained from more production or consumption. For
   example, the 10th bar of chocolate that a person consumes does not
   taste as good as the first, and so brings less marginal utility.

   Marginalism became increasingly important in economic theory in the
   late 19th century, and is a tool which is used to analyze how economic
   systems will react. Marginal cost of production divides costs into
   "fixed" costs which must be paid regardless of how many of a commodity
   are produced, and "variable costs". The marginal cost is the variable
   cost of the last unit. Marginalism states that when the profit from the
   next unit will be zero, that unit will not be produced. This is often
   termed the marginal revolution in economic thought.

   The marginalist theory of price level runs counter to the classical
   theory of price being determined by the amount of labour congealed in a
   commodity.

Development of economic thought

   Adam Smith, generally regarded as the Father of Economics, author of An
   Inquiry into the Nature and Causes of the Wealth of Nations, commonly
   known as The Wealth of Nations.
   Enlarge
   Adam Smith, generally regarded as the Father of Economics, author of An
   Inquiry into the Nature and Causes of the Wealth of Nations, commonly
   known as The Wealth of Nations.

   The term economics was coined around 1870 and popularized by
   influential "neoclassical" economists such as Alfred Marshall ( Welfare
   definition), as a substitute for the earlier term political economy,
   which referred to "the economy of polities" – competing states. The
   term political economy was used through the 18th and 19th centuries,
   with Adam Smith, David Ricardo and Karl Marx as its main thinkers and
   which today is frequently referred to as the "classical" economic
   theory. Both "economy" and "economics" are derived from the Greek
   oikos- for "house" or "settlement", and nomos for "laws" or "norms".

   Actually, etymological sources indicate that the source of "economy"
   and "economics" is indeed oikos- for "house" or "settlement", but that
   the second bit is from -nomos meaning "managing," from nemein "manage".

   Economic thought may be roughly divided into three phases: Premodern
   (Greek, Roman, Arab), Early modern ( mercantilist, physiocrats) and
   Modern (since Adam Smith in the late 18th century). Systematic economic
   theory has been developed mainly since the birth of the modern era.
   Joseph Schumpeter specifically credits the development of the
   scientific study of economics to the Late Scholastics, particularly
   those of 15th and 16th century Spain (see his History of Economic
   Analysis).

   There have been different and competing schools of economic thought
   pertaining to capitalism from the late 18th century to the present day.
   Important schools of thought are Mercantilism, Kameralism, Physiocracy,
   Classical economics, Manchester school, Austrian School, Marxian
   economics, Chicago School.

   Within macroeconomics there is, in general order of their appearance in
   the literature; Classical economics, Keynesian economics, Neo Classical
   synthesis, Post-Keynesian economics, Monetarism, New classical
   economics Supply-side economics and New Keynesian Economics. New
   alternative developments include The political macroeconomy,
   Evolutionary economics, Dependency theory, World systems theory and
   Associative Economics.

Criticism and contrarian perspectives

Is economics a science?

   One of the marks of a science is the use of the scientific method and
   the ability to establish hypothesis and make predictions which can then
   be tested with data. Unlike natural scientists and in a way similar to
   what happens in other social sciences, economists are generally unable
   to test their theories due to its impracticality. Unlike the natural
   sciences, economics yields no natural laws or universal constants, so
   this has led some critics to argue economics is not a science, or at
   best, is just a soft science. However, the renowned philosopher of
   science Karl Popper, has argued that any system of theories which
   allows itself to be disproven is indeed scientific. It is also argued
   by many, that difficulty in proving many hypotheses can occur in the
   natural sciences too, not only in the social sciences. In general,
   economists reply that while this aspect presents serious difficulties,
   they do in fact test their hypotheses using statistical methods such as
   econometrics and data generated in the real world. Some have argued
   that difficulty in this estimation implies economics is not a soft
   science, the field simply lacks the controllability of other sciences,
   and thus has greater difficulty in gathering and establishing evidence.
   The field of experimental economics has seen efforts to test at least
   some predictions of economic theories in a simulated laboratory setting
   – an endeavour which earned Vernon Smith the Bank of Sweden Prize in
   Economic Sciences in Memory of Alfred Nobel in 2002.

Criticisms of economic theory and practice

   Economics has been persistently criticized for its heavy reliance on
   unrealistic, unobservable, or unverifiable assumptions. Some people
   reply to this criticism by saying that the unrealistic assumptions of
   economics result from abstraction from unimportant details, and
   abstraction is necessary for knowledge of a complex real world. So, far
   from unrealistic assumptions detracting from the epistemic worth of
   economics, such assumptions are essential for economic knowledge.
   Denominating this explanation the abstractionist defence, and after
   clarifying abstraction, unrealistic assumptions and kindred notions, at
   least one study has shown that this abstractionist defence does not
   successfully rebut the position of those who criticize economics for
   its unrealistic assumptions. However, it is important to note that
   while one school does have a majority in the field, there is far from a
   consensus on all economic issues and multiple alternative fields claim
   to have more empirically justified insights.

   Economics is a field of study with various schools and currents of
   thought. As a result, as in many other fields, there exists a
   considerable distribution of opinions, approaches and theories. Some of
   these reach opposite conclusions or, due to the differences in
   underlying assumptions, contradict each other.

   Criticism on several topics in economics can be found elsewhere, in
   both general and specialized literature (for example, General
   equilibrium, Pareto efficiency, Marginalism, Behavioural finance,
   Behavioural economics, Feminist economics, Keynesian economics,
   Monetarism, Endogenous growth theory, Comparative advantage, Kuznets
   curve, Laffer curve et al.).

McCloskey critique

   Although the conventional way of connecting an economic model with the
   world is through econometric analysis, Professor Deirdre McCloskey
   cites many examples in which professors of econometrics were able to
   use the same data to both prove and disprove the applicability of a
   model's conclusions. She argues the vast efforts expended by economists
   on analytical equations is essentially wasted effort.

Ethics and economics

   The relationship between economics and ethics is complex. Many
   economists consider normative choices and value judgements, like what
   needs or wants, or what is good for society, to be political or
   personal questions outside the scope of economics. Once a person or
   government has established a set of goals, however, economics can
   provide insight as to how they might best be achieved.

   Others see the influence of economic ideas, such as those underlying
   modern capitalism, to promote a certain system of values with which
   they may or may not agree. (See, for example consumerism and Buy
   Nothing Day.) According to some thinkers such as John Syko, a theory of
   economics is also, or implies also, a theory of moral reasoning.

   The premise of ethical consumerism is that one should take into account
   ethical and environmental concerns, in addition to financial and
   traditional economic considerations, when making buying decisions.

Effect on society

   Some would say that market forms and other means of distribution of
   scarce goods suggested by economics affect what people consider to be
   not just their "desires and wants" but also "needs" and "habits". Much
   of so-called economic "choice" is involuntary, certainly given the
   conditioning that people have to expect a certain quality of life. This
   leads to one of the most hotly debated areas in economic policy:
   namely, the effect and efficacy of welfare policies. Libertarians view
   this as a failure to respect economic reasoning. They argue that
   redistribution of wealth is morally and economically wrong. And
   socialists view it as a failure of economics to respect society. They
   argue that disparities of wealth should not have been allowed in the
   first place. This led to both 19th century labour economics and 20th
   century welfare economics before being subsumed into human development
   theory.

   The older term for economics, political economy, is still often used
   instead of economics, especially by certain economists such as
   Marxists. Use of this term often signals a basic disagreement with the
   terminology or paradigm of market economics. Political economy
   explicitly brings political considerations into economic analysis and
   is therefore openly normative, although this can be said of many
   economic recommendations as well, despite claims to being positive.
   Some mainstream universities (such as the University of Toronto and
   many in the United Kingdom) have a "political economy" department
   rather than an "economics" department.

   Marxist economics generally denies the trade-off of time for money. In
   the Marxist view, concentrated control over the means of production is
   the basis for the allocation of resources among classes. Scarcity of
   any particular physical resource is subsidiary to the central question
   of power relationships embedded in the means of production.

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