Economics

Economics (from the Greek οίκος , 'house', and νομος , 'rule', hence "household management") is a social science that studies the production, distribution, trade and consumption of goods and services. Economics is said to be positive when it tries to objectively predict and explain consequences of choices, given a set of assumptions or a set of observations. The choice of which assumptions to make in building a model as well as which observations to highlight, however, is a normative choice. Economics is also said to be normative when it recommends one choice over another, or when a subjective value judgement is made.

Economics and other disciplines

There is some tension between economics and theories of ethics, historically a branch of philosophy, which emphasizes how people ought to conduct ourselves and balances of rights and duties. Modern economics deals with this tension explicitly: According to some thinkers, a theory of economics is also, or implies also, a theory of moral reasoning. One way economists deal with this is to qualify discussions of economic choice by noting the qualifier ceteris paribus ("all other things held constant...") referring to moral or social factors that are (for the sake of argument) held equivalent for all choices that one might make.

Related Topics:
Ethics - Rights - Duties - Moral reasoning - Economic choice - Ceteris paribus

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For exploration of this issue, see the moral purchasing article.

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Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources. For instance, when fuelling a fire, people are usually concerned with finding the wood, and not with finding the air to burn it with. Economics explicitly does not deal with free abundant inputs – one criticism is that it often conflicts with ecology's view of what affects what. Human beings are, according to ecologists, merely one species participating in a vast energy system on this planet – economy is a subset of ecology that deals with just one species' habits and wants.

Related Topics:
Ecology - Energy system

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See nature's services for the economic view of ecology and green economics for the view in which economics is a subset of ecology.

Related Topics:
Nature's services - Green economics

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A third premise is that economics suggests market forms and other means of distribution of scarce goods that affect not just "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is involuntary, certainly given the conditioning that people have to expect certain quality of life. This leads to one of the most hotly debated areas in economic policy: namely, the effect and efficacy of welfare policies. Libertarians, view this as a failure to respect economic reasoning. They argue that redistribution of wealth is morally and economically wrong. And socialists view it as a failure of economics to respect society. They argue that disparities of wealth should not have been allowed in the first place. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory.

Related Topics:
Market form - Conditioning - Quality of life - Libertarians - Socialists - 19th century - Labour economics - 20th century - Welfare economics - Human development theory

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The older term for economics, political economy, is still often used instead of economics, especially by certain economists such as Marxists. Use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (such as the University of Toronto and many in the United Kingdom) have a "political economy" department rather than an "economics" department.

Related Topics:
Political economy - Marxists - Normative - Positive - University of Toronto - United Kingdom

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Information theory has been applied to economics since the work of Ronald Coase in the 1930s. However, with Herbert Simon and John von Neumann in the 1950s, it gathered a more specific formalism as part of game theory. This emphasises that the decision-making process itself is costly.

Related Topics:
Information theory - Ronald Coase - Herbert Simon - John von Neumann - Formalism - Game theory

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Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the means of production is the basis for the allocation of resources among classes. Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the means of production.

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The question of the environment is viewed, in the traditional economic framework, as being related to the externalization of costs. That is, market economics assumes that underpriced goods are overconsumed. Externalization of cost, in this view, will be corrected by pricing the overconsumed resources at their true social marginal cost. See Pigovian tax.

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