Economics is a broad subject that attempts to understand and explain the interactions of society with all aspects of the natural and man-made world. That’s why there are branches of economics covering everything from human behavior, to natural biological systems, to the global market. People have used economic concepts for thousands of years, dating back to the ancient Mesopotamian, Greek, and Arab civilizations. But the history and branches of economics have changed over time, with debate from different viewpoints still existing today.
What is Economics?
Economics is an important social science focusing mainly on the production, consumption, and distribution of goods and services. Economics studies how businesses, individuals, governments, and even nations make rational choices about allocating resources in order to satisfy their needs and wants, and strives to determine how all of these groups must coordinate and organize efforts to achieve the maximum output.
However, that is more of a traditional view. We can define economics in a number of different ways. It is the study of scarcity, and how individuals use resources as well as respond to various incentives. It can also be defined as the study of decision-making. But it’s not all about money, and can include other aspects of the economy that we might not always consider, like psychology or constraints of the natural environment. Through the various perspectives within economics we can better understand not just historical trends, but also interpret today’s headlines and make predictions about the future.
Applications in Society
Economic analysis can be applied throughout our society, in finance, business, health care, and government. It is often applied to very diverse subjects; education, crime, the family, politics, law, religion, war, social institutions, science, and the environment are all covered.
Today, you will not find a government, large commercial bank, or international agency that doesn’t have its own talented staff of economists. Many of the world’s economists also devote themselves to teaching economics in universities and colleges. Others work in various advisory or research capacities; either in industry, for themselves (in various economics consulting firms), or in government.
It is also worth mentioning that many other economists work in commerce, accounting, marketing, and business administration. Their training and experience allow their occupational skills and expertise to fall within various other fields. This can indeed be considered “the golden age of economists,” as the demand for their various services seems insatiable.
We inhabit a world with limited resources, and economists help us decide the best way to use the limited inputs in order to satisfy our unending list of needs and wants. This large and diverse field has a rich history which has been examined and explored by hundreds of influential individuals, ranging from politicians to philosophers.
History of Economics
Seeing how economics is so prevalent, the thought of where it came from has probably crossed your mind, even if only for a moment. While there is no exact time when economics began, many have found that it stems from various ancient civilizations thousands of years ago.
The theories began to arise as people tried to understand and optimize commerce and governments. All of these different abstracts of economic theories were greatly different from each other, yet still discussed the art of transactions and what factors affect economic integrity.
The Main Theories of the Past
First, two diverse groups of people set the landscape of the subject in Europe and paved the way for generations to come. These two groups, mercantilists and physiocrats, brought with them ideas of economic nationalism as well as modern capitalism.
Mercantilists followed the economic doctrine of mercantilism during the 16th through 18th century. They viewed a nation’s wealth depending on its accumulation of gold and silver, as you might expect of merchants. This meant countries without gold and silver mines were restricted to attempts at getting these items through trade. But this limited their imports to only gold and silver, and implied that they also needed to have other resources to export for the gold and silver. A country without its own wealth of ores or raw materials for manufacturing was just out of luck.
Physiocrats on the other hand arose in the 18th century in France. They saw the economy as a circular flow of input and output, where agriculture’s surplus over costs stood as the basis of all wealth. This theory was at odds with the mercantilists because mercantilism promotes trading other goods at the expense of agriculture. These views greatly changed the way people saw economics as a study.
In 1776, the history of economics took a distinct step forward thanks to what many consider a brilliant book by Adam Smith, The Wealth of Nations. Many believe it to be the birth of economics as a separate discipline, as it was the first to put emphasis on land, labor, and capital as the most important factors of production for any company. These ideas are even taught to this day.
Other important players in this school of thought include Jean-Baptists Say, Thomas Robert Malthus, John Stuart Mill, and David Ricardo. They all supported the idea of market economies as self-regulated systems, as described by Adam Smith’s “invisible hand” metaphor. Per this idea of self-regulation, supply and demand by individuals drives market productivity and optimization. Thus, regulation by governments and other entities is not necessary, and even detrimental.
After 1776 came the communist movement, and with it Marxism as a contributor to the study of economics. It’s important to note that political Marxism is independent of economic Marxism, where following one does not necessitate following the other. Even within Marxist economics there are multiple schools of thought that sometimes even conflict with one another.
In general, this area focuses on analyzing the failures of capitalism. This involves determining the role of distribution of surplus products and surplus value that capitalism neglects to account for. The communist manifesto Das Capital was the first publication by Karl Marx. In it, Marx went in-depth on the issue of exploitation of labor with the help of the labor theory of value.
Neoclassical Economics entered the scene in the 18th and 19th centuries. It hinged on the findings and the beliefs of a single man by the name of Jean-Baptise Say. In his book, he discussed in great length production, distribution, and consumption of wealth and how they are the pillars that hold economics together.
The three central assumptions of neoclassical economics are: people have rational, identifiable, and predictable preferences; individuals maximize utility while firms maximize profits; and individuals act independently based on fully available and relevant information. These assumptions are common in many schools of economic thought. However, they are also recognized to be approximations which often do not hold true in the real world.
Keynesian economics was the standard economic model for developed nations in the mid-1900s. Now, parts of it and neoclassical economics together dominate current mainstream economic ideas. This area holds various theories focusing on macroeconomic principles, especially during the short run. The ideas behind the theory are results of the time Keynes, the founder, lived in. The Great Depression and World Wars had an obvious and understandable effect on his economic ideas.
This set of economic ideas explains recessions as results of low demand, and inflation as due to high demand. The solutions to these short-term problems laid out by Keynesian economics include monetary policy actions by central banks and fiscal policies by governments. Thus, Keynesian economics promotes an active role for government during recessions and depressions.
Various other schools of thought have existed in the history of economics, although they are less popular. The Chicago School of economics advocates for the free market and monetarist ideas. Monetarism emphasizes the role of the government in controlling the amount of money in circulation, thus keeping the economy in check. Keynesian economics also has multiple offspring such as Post-Keynesian economics or neo-Keynesian economics. Others include new classical, supply-side, and ecological economics, with many more in the woodwork.
Branches of Economics
The main branches of economics are two very different and diverse areas; macroeconomics and microeconomics. As the name implies, microeconomics focuses on a fairly small scale; individual markets and smaller aspects of the economy. On the other hand, macroeconomics focuses on larger aspects of an economy, such as inflation, trade, and economic growth. While these two are the largest branches of economics, there is always some overlap between them. There are also various other smaller branches which generally fit within one of these two main branches to some extent.
Microeconomics is the science of the small-scale decisions people make. Those decisions add up to form the economy as a whole, but each one acts independently. Neo-classical, development, environmental, behavioral, and labor economics are generally considered microeconomic branches. Overall, it is more of an exact, or at least understood, science than macroeconomics.
This is because individual decisions and actions are easier to test than the web of interconnected actions of an entire society. Prices, interest rates, and supply and demand for certain resources can be easily measured and tracked. With this information, microeconomic theories can predict what to expect from people when market conditions change.
Macroeconomics on the other hand looks at the bigger picture of the economy as a whole. This means looking at inflation, rates of growth, national income and GDP, and unemployment levels. Classical, Keynesian, Marxist, and Mercantilist economics are generally considered branches of macroeconomics.
Rather than looking at decisions, macroeconomics evaluates how these aggregate indicators interact with one another over time. If one changes, how do the others change at the same time? Information gathered by watching these indicators helps government entities figure out how to create effective economic policies.
Other Important Branches
Behavioral economics takes the assumptions made by main economic theories and turns them on their heads. In this branch of economics, people are no longer rational beings making optimal decisions based off full information. Rather, they are emotional people making inconsistent decisions and mistakes dependent on a variety of factors.
This branch looks at how to improve the unique economic situation of developing countries. These countries need to improve many aspects of their economies and general ways of life. This includes aspects such as literacy, mortality rates, levels of violence, manufacturing processes, methods of government, and trade. Through development economics, the path of development can be smoother and lead to improvement in quality of life.
In light of climate change, one of the most pressing concerns to emerge has been that of the environment. A growing concern in recent years places more emphasis on the external costs and benefits of a business or economic system. This area also questions if economic growth is necessary at all, especially if it is at the expense of the environment.
Financial economics looks at exchanges and decisions where money appears on both sides. Time, uncertainty, and variations in information availability are important factors in evaluating these types of monetary activities. This branch of economics is especially important in determining how to take actions with regards to stocks, portfolios, and markets in general.
Labor economics is possibly one of the most important branches of economics as it mainly focuses on labor, one of the main factors of production. It also includes other non-monetary factors such as motivation and labor imperfections. This allows for greater understanding of the interactions between workers and employers, and the resulting patterns in employment and wages.
Urban areas have their own unique characteristics which differentiate them from rural and less densely populated areas. The primary focuses of urban economics are housing, crime, resource use, and public service provisions for dense populations. Using proper urban economics, cities can develop stronger infrastructure and improved standards of living.
Ultimately, economics is an attempt to approximate how different members of society interact with one another. However, society is a complicated web of many of interactions happening every moment, so that any given approximation always lacks some portion of the bigger picture. And the ever-changing nature of society means the history and branches of economics will continue to change as the years go on as well.