Economics

The term economics refers both to an intellectual discipline and to a profession.

The intellectual discipline of economics is an attempt to gain an understanding of the processes that govern the production, distribution and consumption of wealth, and to use that understanding to assist in the prediction of the consequences of economic activities. It uses the methodology of science and can be considered to be a science insofar as it produces testable propositions (see economics as a science), although some branches of the subject are widely considered to be normative (see normative economics). Like other sciences, it is subject to a continuing process of revision.

The profession of economics includes academics who construct, develop and teach economic theory, and practitioners who use economic theory to make forecasts or to advise upon political, commercial and regulatory decisions. Its most influential application is to the management of the economy. Mistaken decisions in that context can do more damage than in most others.

Economic Theory

The methodology of economics

The traditional methodology of economics has been first to formulate a theory, and then to examine how far it provides operationally useful conclusions. Its pioneers have often adopted an instrumentalist approach: basing a theory on arbitrary axioms - such as consistently rational human behaviour - and then advocating its acceptance solely on the grounds that it had provided operationally useful results. That methodology has proved to be vulnerable to changing conditions, however, and there has recently been a tendency to move away from an exclusively axiom-based approach towards a greater recognition of observed behaviour. Among the techniques that have been coming into use for that purpose are those of behavioural economics and neuroeconomics.

Economists' tools

Economists normally combine the use of a range of tautological concepts - such as utility, equilibrium, supply and demand, and opportunity cost - with quantitative observations including economic statistics and other survey-based data, using the techniques of statistical inference, applied mathematics and econometrics. Since the use of that combination of tools does not provide an explanation of some observed occurrences such as herding, asset price bubbles, risk aversion or banking panics, it has recently been augmented by experiments on human behaviour in contrived situations, including those of behavioural economics, neuroeconomics and prospect theory.

The categories of economic theory

The techniques of economics have been applied to many different activities, leading to the development of a wide range of sub-disciplines. However, the principal categories of economics that are of interest to the general reader are microeconomics, macroeconomics, welfare economics, financial economics, and international economics.

• Microeconomics is about the use of the resources of land, capital and labour, their allocation to the production of particular goods and services, their relative prices, and how they are distributed among consumers. It examines those issues by considering transactions between consumers and producers, acting singly or in groups. Many of its theorems were developed by deductive inference in the late nineteenth and early twentieth centuries and most of them are now considered by economists to be uncontroversial.

• Welfare economics is about the impact of decisions upon the economic well-being of those affected. It provides the theoretical basis for the practice of cost-benefit analysis. Its methodology is derived from that of microeconomics, using formally-defined axioms that are often remote from observed circumstances.

• Macroeconomics is about such economy-wide quantities as national income, inflation and unemployment. It examines the behaviour of the economy as a unified system of interacting activities. It is a twentieth-century development that has had a major influence upon fiscal policy, and monetary policy. Many of its theorems are considered to be controversial, and the subject is still under development.

• Financial economics treats the financial system as an complex interactive system dealing both in claims upon future goods and services, and in the allocation of the risks that are associated with such claims. It is concerned with the decisions made by individuals, corporations, financial institutions, and with the regulation of those institutions. The practical usefulness of some of its theorems has been questioned following the Great Recession and previously accepted regulatory policies are under review.

• International economics is about such matters as tariffs, exchange rates and international capital flows and the effects of trade policy. Its methodology was initially derived in the nineteenth century from the methodology of microeconomics, but it now has much in common with that of macroeconomics. Its principal theorems are widely accepted among professional economists but have been hotly contested by others.

The uses of economics

Economics makes its own contribution to the sum of scientific knowledge and it makes particular contributions to the understanding of the subjects of history, geography, and politics. Its findings are essential to the practice of business management, financial management, accounting and commercial law. In fact the value of economics to the community arises from its practice rather than its theory. As the eminent economist, Ben Bernanke has put it "... although it has its own esoterica known only to initiates, it is at bottom a craft whose value lies primarily in its practical application".

Unlike most other sciences, economics is often the subject of strongly-held opinions by laymen, and one of the functions of economists is to counter damaging, popular fallacies .

The practice of economics

The services provided by practitioners of economics include economic forecasting, advice to company executives concerning the consequences for sales and profits of alternative courses of action, advice to investors concerning the performance of particular markets, advice to regulatory authorities concerning the impact of regulations upon the economy, and advice to governments concerning the effects of alternative policy actions upon economic efficiency, prices, output and economic stability

The economics articles

Subject groups

There are articles in seven main subject groups:

• Economic methodology; including the philosophy of economics, the history of economic thought, neuroeconomics, experimental economics, economic model and econometrics;

• Economic theory; including financial economics, international economics, microeconomics, macroeconomics, welfare economics;

• Economic theories; including Capital Asset Pricing Model, Diamond-Dybvig model, Keynesianism, IS-LM model, monetarism,

• Economic concepts; including agency problem, arbitrage, asset price bubble, balance of payments, balance of trade, capital, competition, deflation, discount rate, discounted cash flow, efficiency, elasticity, employment, equilibrium, exchange rate, factors of production, Gross Domestic Product, Human Development Index, inflation, interest, labour, land, market, money supply, moral hazard, multiplier effect, national debt, net present value, opportunity cost, production function, price index, public goods, recession, social capital, supply and demand, terms of trade, unemployment, utility

• Economics-related policies, techniques and institutions; including antitrust, applied statistics, bank failures and rescues, banking, Bank for International Settlements, bond, central bank, competition policy, cost-benefit analysis, credit rating agency, EU competition policy, Euro, Federal Reserve System, Financial regulation, Financial Stability Forum, financial system, fiscal policy, gold standard, International Monetary Fund, monetary policy, National Recovery Administration, option, public expenditure, taxation, World Bank,

• Economic events; including bank failures and rescues, crash of 1929, crash of 2008, G20 summit, Great Depression, Great Depression in the United States, Great Recession, New Deal, Paulson Plan, recession of 2009, sovereign default, subprime mortgage crisis,

• Economists, including William Beveridge, Irving Fisher, Milton Friedman, Alvin Hansen, Friedrich Hayek, John Maynard Keynes, (Thomas) Robert Malthus, Alfred Marshall, Harry Markowitz, Elinor Ostrom, Vilfredo Pareto, David Ricardo, Paul Samuelson, Adam Smith, Joseph E. Stiglitz, Thorstein Veblen,

Article format

Articles are in up to five parts.

• The main article, which is intended to be accessible to readers with no training in economics and no familiarity with mathematics, and consequently contains no equations or charts, and in which technical terms are shown in italics, indicating that definitions are available on the related articles subpage.
• The related articles subpage, which contains a link to the index of topics; lists of parent articles, subtopics and related topics; and a glossary of the terms shown in italics on the main page.
• A tutorials subpage (for some articles) containing mathematical equations and charts and material suitable for reference by economists and students of economics.
• A timelines subpage (for some articles) listing events in chronological order, the main purpose of which is to provide links to contemporary news reports.
• An addendum subpage (for some articles) containing material that is more detailed than is considered appropriate to the main article.

Index

The economics index provides a link to every individual concept or topic that is referred to in the economics articles.

Timelines

A list of the timelines appearing as subpages to economics articles is on the timelines subpage of this article.

Glossaries

The economics glossary contains definitions of terms that are in general use by economists, and more specialised terms are included in the finance glossary and the banking glossary.