Definition of Economics

Is the existence of different wages a problem for societies, and if so, how can it be remedied?

Adam Smith, and Karl Marx, both believed that labour value lies at the heart of all economic value. Commodities, goods, and services arise from the interaction of land, labour, and capital. Since Land is fixed until new land is cleared or built by workers, and since capital enhances labour and is invented by people, they both thought that the only people who added value in economic transactions were workers. This theory of labour value was qualified in the second half of the twentieth century by the elevation of entrepreneurialism as a factor of production. The enterprising businesspeople who took on risks, brought factors together, and who were rewarded with profit having been prepared to make losses, were elevated to a ‘fourth factor.’ This idea makes some sense, but also serves to undermine the idea that labour value on its own creates economic value. If labour has value, some argue that the value of time taken from a life to work should be viewed equally. This means t...

Inequality, Part One: the greatest market failure?

Income inequality arises when different consumers have different incomes, and different people have different talents. It could also arise because of the source of income or the value of the talents. For instance, employees might have different incomes from each other because of different marginal labour products, different factor returns to their labour, or different elasticities of labour. People might have different skills for which there is a greater or lesser need and employers, or the purchasers of labour might have different demands. Equally, entrepreneurs often take greater risks than others, and thereby expect and receive greater rewards than those who do not take risks. There might be different factor returns to capital or land, which result in various levels of profit, dividend, or rent, for those who do not live by the return to their labour value. A functional market would bring all these diverse groups together as suppliers and consumers and would matc...

Is a market economy the best way to allocate resources?

1. The market economy relies on the price mechanism at heart. This is the original idea now associated with Adam Smith that an automatic allocation of goods and services will happen in each market when demand and supply are allowed to find their own equilibrium. The price mechanism is held to indicate, or signal, to producers and consumers which market is ‘up’ or ‘down.’ In the system, consumers are believed to seek to maximise their utility, and suppliers are expected to maximise their profits. The price is their incentive to do so, and their decisions inform the allocation of resources by producers. This system has been held to rest on the ideas of consumer and producer surplus (which are different from the idea of transfer earnings and economic rent, though they could explain it too.) Firms are assumed to seek maximum profit, which is the greatest gap between total costs and total revenue. Since in competitive markets firms have very little to no control over prices a...

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