What is Economics?

 

Economics is a term for a variety of disciplines which are now so specialised that they could be separate subjects. At its core, it describes the systems and methods by which people choose to allocate resources, and the signals and incentives that they get to do so.

Economics would not therefore exist in the same way if we lived in a world of absolute abundance where every need and want was met and there was no cost to doing anything. It fails when there are abundant goods whose use does not stop anyone else using them. That is why it describes such goods as ‘non-economic.’

Instead, economics begins from the idea of choices based on opportunity cost. An opportunity cost is the cost of what was not done, of the ‘next best alternative’ to quote the textbooks. For example, if you had a choice of using your money and time for a birthday meal, or a walk, and you chose the walk, the meal would be the ‘alternative foregone.’ It would be the opportunity cost.

This is quite a narrow basis for economics, and illustrates that modern economists tend to think in terms of individual rather than social choices. They did not always do so. Most textbooks will tell you that the subject arose somewhere between the late western enlightenment in the middle of the 1700s and the 1920s. From this time, economists were aware that one could think in terms of individual choice, and free markets, or in terms of plans and commands from central government. The individualists won out.

However, the economy is a name for human social and political relationships. Academically—and perhaps temporarily—captured by calculus, it might be better understood in terms of biology, anthropology, or even geometry.  An economy is built on the hard work, capital accumulation investment, and savings, of previous and existing generations. There are therefore lots of people who are interested in ‘political economy,’ or who, in the twenty-first century, are talking about a new economics which is less narrowly based on the market and on individuals.

It is important to call the point above to mind before we start to look at economics, because it is easy to get lost in the idea that the subject is really some sort of phantom version of physics, with the sort of hard laws and rules that many physicists now question. It is not, really. Rather, economists uphold a series of often disputed understandings, some of which have more predictive and explanatory validity than others. They also seek to describe things with a degree of precision, even where those things are complex and are used in complicated ways.

For instance, individual choice is actually quite a complicated idea. Do individuals decide to buy things on the basis of the usefulness of one item for them—its utility? Or in relation to other items, in terms of how much it and they contribute to overall utility? Or do they act on the basis of behaviour, habit, and peer pressure?  The likelihood in real life is that there is no one clear and consistent motivation at all times.

However, economics is a social science and needs its models, which are based on clear, consistent, and measurable things. Do not let this divert you or cause you to dismiss the subject. Models can still be useful, and can give rise to insights and rules, even if they are simplified or at odds with the complexity of the real world. Understanding the difference is half the fun of being alive!

This course will proceed as a series of notes via transcript and spoken word, and I hope to cover most items in modern economics and political economy broadly. In doing so, all errors are mine and almost everything interesting is the fruit of teaching students for the past thirty years, to whom I am very grateful. It is possible to dip in and out of these notes, and to take subjects or separate chapters on their own. Should you have any comments or questions, I will welcome them at www.martinmeenagh.com