What is Economics?

Wednesday sees our major option catfight choice day, where 2nd years meet faculty, discuss various programmes, and in the end, choose economics. Because it is the bestest. Oh yes.

I made a slideshow for the major option day some time ago and, looking through it in preparation for Wednesday's inevitable choice of economics event, it occurs to me that I'm not really answering what economics is. The slideshow is more about what we do as economists. Which is not the same thing, really. The first thing is that economics is not, and never will be, a science. We do look at the real world, after a fashion, using statistical tools and causal models built to try and explain aggregate behaviours we observe over time, usually. In the slideshow I call this 'econometrics', which ties in with the modules you'll take, but really there's a lot more going on under that particular hood than a simple description might permit.

The slideshow talks about 'microeconomics', but really this should be called 'price' theory. Price theory is a lovely theory with a rather narrow domain of applicability. A microeconomic perspective strongly implies that anything of importance can be expressed in terms of price. It is also oriented towards an imaginary world in which everything is a commodity, usually privately owned, so there is certainly an ideological basis in the type of theory studied. The 'macroeconomics' part should just, today, be called 'disequilibrium theory', and not really enforce a 'big/small' partition between parts of the economy. The reason for this is simple: Oil prices, bond markets, the wages of 100,000 health service workers, and pork bellies are hugely important in a macroeconomic sense, but are described using the tools of microeconomics. Similarly, sometimes the behaviour of households is what you'd like to explain in watching fluctuations in national income, not just the workings of large sectors of the economy.

But all of that is just really semantics. The big thing that is missing is what economics is. And here's what I think economics is: it's the study of how people try to achieve their goals, specifically through production, resource allocation and socially-defined forms of exchange. These people are operating within a physical context that includes ecology and technology. Psychology ultimately plays a large role in the determination of each person's goals, and our psychologies are moulded by a myriad of influences: cultural, historical, and institutional.

So economics is the study of these goals. It's a broad and brilliant field, and not at all intellectually null, as some have recently claimed. No, the last few years have not been kind to the discipline, but they shouldn't have been, because economists largely failed the key test of our profession-providing guidance on how to stabilise a disequilibrium system. That problem hasn't gone away, far from it, so the people looking to solve the problem, people who call themselves economists, will keep on truckin' too. What do you think economics is?

5 Replies to “What is Economics?”

  1. Hi Stephen,

    I think Lionel Robbins definition fairly hits the nail on the head:-

    "Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses."

    Derek Madden.

  2. Hi Derek,

    You're right, but Robbins' definition focuses on the mechanical aspects of production a little too much in my view. The economy is more than the set of alternative choices, it's also the computation of the uses of those choices, and perhaps even something more subtle, the economy as a part of society. Markets aren't independent of the rulesets they are embedded in.

  3. Hi Stephen,

    Re: "the computation of those choices" - could you elaborate on that a bit please? I would have assumed (perhaps incorrectly) that the "computation" of these choices - i.e. how an individual decides upon the means to use, is unknowable? Is this perhaps slightly venturing into the area of psychology?

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