economics

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Diagram illustrating the flow of money, goods, and services in a modern industrial economy.

Encyclopædia Britannica, Inc.

economics, social science that seeks to analyze and describe the production, distribution, and consumption of wealth. In the 19th century economics was the hobby of gentlemen of leisure and the vocation of a few academics; economists wrote about economic policy but were rarely consulted by legislators before decisions were made. Today there is hardly a government, international agency, or large commercial bank that does not have its own staff of economists. Many of the world’s economists devote their time to teaching economics in colleges and universities around the world, but most work in various research or advisory capacities, either for themselves (in economics consulting firms), in industry, or in government. Still others are employed in accounting, commerce, marketing, and business administration; although they are trained as economists, their occupational expertise falls within other fields. Indeed, this can be considered “the age of economists,” and the demand for their services seems insatiable. Supply responds to that demand, and in the United States alone some 400 institutions of higher learning grant about 900 new Ph.D.’s in economics each year.

(Read Milton Friedman’s Britannica entry on money.)

No one has ever succeeded in neatly defining the scope of economics. Many have agreed with Alfred Marshall, a leading 19th-century English economist, that economics is “a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment, and with the use of the material requisites of wellbeing”—ignoring the fact that sociologists, psychologists, and anthropologists frequently study exactly the same phenomena. In the 20th century, English economist Lionel Robbins defined economics as “the science which studies human behaviour as a relationship between (given) ends and scarce means which have alternative uses.” In other words, Robbins said that economics is the science of economizing. While his definition captures one of the striking characteristics of the economist’s way of thinking, it is at once too wide (because it would include in economics the game of chess) and too narrow (because it would exclude the study of the national income or the price level). Perhaps the only foolproof definition is that attributed to Canadian-born economist Jacob Viner: economics is what economists do.

Difficult as it may be to define economics, it is not difficult to indicate the sorts of questions that concern economists. Among other things, they seek to analyze the forces determining prices—not only the prices of goods and services but the prices of the resources used to produce them. This involves the discovery of two key elements: what governs the way in which human labour, machines, and land are combined in production and how buyers and sellers are brought together in a functioning market. Because prices of the various things must be interrelated, economists therefore ask how such a “price system” or “market mechanism” hangs together and what conditions are necessary for its survival.

These questions are representative of microeconomics, the part of economics that deals with the behaviour of individual entities such as consumers, business firms, traders, and farmers. The other major branch of economics is macroeconomics, which focuses attention on aggregates such as the level of income in the whole economy, the volume of total employment, the flow of total investment, and so forth. Here economists are concerned with the forces determining the income of a country or the level of total investment, and they seek to learn why full employment is so rarely attained and what public policies might help a country achieve higher employment or greater price stability.

But these examples still do not exhaust the range of problems that economists consider. There is also the important field of development economics, which examines the attitudes and institutions supporting the process of economic development in poor countries as well as those capable of self-sustained economic growth (for example, development economics was at the heart of the Marshall Plan). In this field the economist is concerned with the extent to which the factors affecting economic development can be manipulated by public policy.

Cutting across these major divisions in economics are the specialized fields of public finance, money and banking, international trade, labour economics, agricultural economics, industrial organization, and others. Economists are frequently consulted to assess the effects of governmental measures such as taxation, minimum-wage laws, rent controls, tariffs, changes in interest rates, changes in government budgets, and so on.

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Adam Smith, paste medallion by James Tassie, 1787; in the Scottish National Portrait Gallery, Edinburgh.

Courtesy of the Scottish National Portrait Gallery, Edinburgh

The effective birth of economics as a separate discipline may be traced to the year 1776, when the Scottish philosopher Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. There was, of course, economics before Smith: the Greeks made significant contributions, as did the medieval scholastics, and from the 15th to the 18th century an enormous amount of pamphlet literature discussed and developed the implications of economic nationalism (a body of thought now known as mercantilism). It was Smith, however, who wrote the first full-scale treatise on economics and, by his magisterial influence, founded what later generations were to call the “English school of classical political economy,” known today as classical economics.