Economics

The word ‘economics’ is derived from the Greek phrase ‘management of a household’. It  is a social science that is focused on the study of goods and services and that they are efficiently coordinated according to human wants and needs. While economics was initially based on individuals and households, today it is also concerned with the economy of whole nations as well as with the complexity of international trade. Economics can be centrally broken down into four ares:

  1. What to produce
  2. How much to produce
  3. How to produce it
  4. For whom to produce it

Those four areas form the backbone of economics and are fundamental to understanding how best to manage economies and the efficient flow of trade. Answering those four questions helps us understand why prices rise and fall, why employment patterns change, and why some countries are rich while others are poor. Economists accept that as humans, we have unlimited wants, however, due to the limited resources available to us, it is necessary to have a system in place to effectively manage those resources and maximize their utility.

Economics is a broad area that includes the distribution of income, the environment, labor relations, as well as the overall welfare of citizens1. As markets and economies become more complex, the dependence on economics to set forth the rules the operations on a micro and macro level become more pertinent. Due to the different parameters between micro and macro level market behaviors, economists have branched economics into two primary branches: Microeconomics and Macroeconomics.

Microeconomics

This branch of economics deals with choices and needs on an individual level. For example, microeconomics deals with issues related to supply and demand, consumer satisfaction or utility, monopolies, and the interaction of buyers and sellers. 

Macroeconomics

This branch of economics deals with general economic holistic factors, such as nations and international markets. It is focused on large-scale market processes, and relies on parameters related to areas such as national incomes, central banks’ interest rates, inflation, unemployment, and a nation’s gross domestic product (GDP).  

Adam Smith is widely accepted as the founding father of modern economics. In 1776, he set forth the concept of self-interest and advocated the idea that markets, if left to their own volition, will self-regulate and ensure maximum efficiency. Hence, governments would not need to control the various aspects of an economy, but rather, it is the buyers’ and sellers’ interactions that will create the necessary framework for supply and demand. A good example of this is if a car manufacturer produces a car that is deemed too expensive by potential buyers, they will be ‘forced’ to try to lower the cost of producing the car. If they are unable to do so, another car manufacturer will step in and try to fill the gap. Therefore, if there is demand for a certain product or service, there will always be someone who is willing to provide it. The concept of profit plays a very significant role in the principles presented by Smith. His ideas and theories are known as Classical economic theory, and have set the foundation for the principles of capitalism as we know it today.  

Like many theories, capitalism does not escape being challenged by other theorists and economists. One of the biggest contrasts to capitalism proposed has been Marxism (Communism). Developed by Karl Marx, the concept of Marxism is that capitalism allows the rich to exploit the poor, leading to significant inequalities in economic wealth. Such exploitation, theorized Marx, will eventually lead to class conflict and social unrest, which could be avoided if nations made sure resources were controlled by the central government, which would in turn equally distribute those resources. Capitalists argue, that while such an approach is more ‘fair’, it would lead to inefficiency and increased corruption. More importantly, as profit has been removed from the market economy, the incentive for individuals to work, innovate, and progress, has been muted. This was reflected in the former Soviet Union and the primary reasons why it eventually collapsed. Due to inefficiencies and a lack of progressive economic development, it become unsustainable.

The strengths and weakness of each theory still stand today. Despite its weaknesses, capitalism seems to be one the most successful economic models developed. It is important to note that while countries could be fundamentally capitalist, it is almost impossible to be 100% capitalist. Governments in capitalist nations still interfere and regulate markets. A recent example of this has been the United States government providing equity to private corporations with the aim of mitigating its economic crisis. Such an approach is usually referred to as the Keynesian School.  

It is possible to see the power and importance of economics in regulating the world economies. While it is natural for economic principles to change and evolve and conditions around the world change, its importance in being a focal point of wealth distribution and market development is unlikely to ever diminish.

 

Sources: 

1. The Economist

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