The Definition of Economics[1] The definition of economics is founded upon the concept of scarcity. What do economists mean by scarcity? Simply put, economists use the term scarcity to refer to the limited resources humanity has at its disposal. We live in a world of finite resources and infinite wants. Somehow, we must decide how, for what, and for whom these resources will be used. This is the economic problem, without which the field of economics would not exist. Indeed, when economists begin philosophizing about a world without scarcity, they cease to be economists and become philosophers. [2] Modern economic theory began with Adam Smith and gradually became disentangled from ethics. Economic theory is chiefly concerned with positive questions, as opposed to normative questions. Positive questions are those that can be addressed with empirical data, such as, "What is the unemployment rate?" Positive questions are concerned with facts. Normative questions, by contrast, deal with values and beliefs and cannot be answered by economic theory. These are questions like, "Isn't the unemployment rate too high?" [3] When we make decisions as a society about the allocation of scarce resources or "who gets what," economic theory in itself is not concerned with social justice. There is no single concept of "fairness" within the definition of economics. Economic theory is merely an attempt to find relationships between positive statements. [4] This is not to say that economists are not concerned with social justice. They are. Economists are perceived to be a quarrelsome lot precisely because they care so much that they often bicker with one another over the nature of a just society. [5] Economic theory begins once a society determines what its values are. Economic theory cannot tell us whether the present rates of unemployment and inflation represent a desirable state of affairs; it can, however, help us to understand the present and offer us insight into where we are headed. Most importantly, it can offer us practical suggestions of how to get where we want to be. [6] A simple, yet elegant definition of economics is that of economist and Nobel laureate Robert A. Mundell, who begins a book with the phrase, "Economics is the science of choice."1 Economics teaches us that nothing in life is free. Economists measure costs not by price tags and payments, but by the value of the next best alternative that is given up when a particular choice is made. The value of the next best alternative foregone is called the opportunity cost. [7] Why do economists measure costs this way? They do so to keep us honest about costs. Scarce resources have alternative uses, which means that once they are allocated for one purpose, they cannot be allocated for another. When costs are measured in terms of money, the full weight of what a decision truly means is lost in abstraction, creating the pleasant illusion of a "free lunch" that can be eaten again and again. [8] In their brief introduction to economics, economists James Gwartney, Richard L. Stroup, and Dwight R. Lee dispel any such illusion: Politicians often speak of "free education," "free medical care," or "free housing." This terminology is deceptive. These things are not free. Scarce resources are required to produce each of them. The buildings, labor, and other resources used to produce schooling could, instead, produce more food or recreation or environmental protection or medical care. The cost of the schooling is the value of those goods that must now be given up.2 [9] Thus, the best definition of economics remains that of British economist Lionel Robbins: "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."3 [10] This website offers a basic introduction to each of the three most important economic systems of our times: Capitalism vs Socialism Summary Capitalism vs Communism Summary Capitalism vs Socialism vs Capitalism Super Summary Further Reading and Resources[11] If you find economics a frightening subject and the thought of taking an introductory class scares you, don't despair! There are some excellent books, written in simple language, which explain the basics. Two books of particular interest are Dr. Thomas Sowell's Basic Economics , and the aforementioned Common Sense Economics by economists James Gwartney, Richard L. Stroup, and Dwight R. Lee.[12] There are a variety of syndicated columns published each week by well-respected economists. On the right, Dr. Sowell and Dr. Walter Williams routinely provide shrewd insight into politics from an economic perspective. On the left, Dr. Paul Krugman offers a very different, though equally economic perspective. Note that conservative and liberal economists agree about more than they disagree: They do not disagree that free markets, in most circumstances, are preferable to planning or authoritarian control. They do not deny that scarcity exists. Their differences are not about basic economic principles, but about normative issues. [13] Many additional resources can be found online. Dr. Williams has written Economics for the Citizen, a series of short lessons about the definition of economics and the applications of economics in the real world. The short story, I, Pencil, provides valuable insight into how markets work. Finally, the Encyclopedia of Economics provides a valuable reference guide and an introduction to specific topics. 2007
|
