What Is Economics?
Economics is a social science subject that studies how a society uses its resources. If we have limited assets, how should we act to make it as good as possible? What do we choose? What decisions do we make? This type of question can be asked in many different contexts, which has led to the development of different branches of economics, such as the environment, health and labor market economics.
Because the subject contains so many and different issues, some advocate that economics should be defined in terms of the method used to tackle social science problems rather than of the specific issues being studied.
Micro and macro
Economics can, on an overall level, be divided into two main departments: macroeconomics and microeconomics.
In macroeconomics, you study the economy as a whole, such as unemployment, interest rates, and inflation.
Microeconomics is about how different actors make their decisions to achieve the best possible results.
Here, it is analyzed, among other things, how consumers and producers meet in a market and how demand and supply lead to an equilibrium being reached in the market.
An important part of the economic method is the mathematical models. Some people perceive them as unnecessarily complicated, but it is actually the opposite.
The task of the models is to simplify and refine the world so that we can analyze it. If we instead try to include all the factors that may affect an issue, we will come up with a staggering number.
Trying to analyze a societal issue without simplifying the situation with the help of a model thus becomes virtually impossible.
Traditional economic analysis has assumed that the individual is always profit-maximizing and rational in his choices and in his actions.
This type of stylized individual is often referred to as “the economic man” or “Homo Economicus”.
Nowadays, economics often tries to take in perspectives and perspectives from other related fields, such as psychology, which, among other things, has led to the development of the research area of behavioral economics.
The difference between economics and business economics
Business economics focuses on how the individual company should act in different situations.
Economics instead looks for general connections and analyzes how different groups of actors act under different conditions.
Although the subject is called economics, it is not just about how countries act but also parts of society, such as consumers and producers.
The various research areas of economics:
1. Development economics
Development economics studies differences in countries’ economic growth and tries to find reasons why countries develop differently and how best to help developing countries catch up in their economic growth.
It can be about everything from geographical differences to the design of institutions (norms, traditions, cultures, laws).
This can also be seen on the stock market in the form of countries with very high growth often being able to provide a better return on the stock market, but also more volatile returns with greater risks.
2. Health economics
In the health economy, health and healthcare are analyzed to try to find out how best to distribute the health resources we have.
It can be about which treatment methods are most effective and which vaccines should be implemented and subsidized on the market.
This is often a very sensitive subject when trying to put a value on human life in order to be able to determine how to get as much health as possible for the money.
Who are we going to save? A healthy population benefits society not only because we are happy and well, but we also become more efficient in the labor market and thus benefit economic growth.
Health finances can thus also be used within companies to increase the health of their employees and thus make them more efficient in their work and have less sick leave.
3. Behavioral economics
Behavioral economics is an area that largely combines psychology and microeconomics. Here they try to analyze people’s behavior and why we act as we do in economic decisions.
For example, we tend not to always make the decisions that are best for ourselves and behavioral economics can then try to find why, and how to help people make better decisions.
Behavioral economics is also common in marketing.
For example, it can be about healthy choices about food. We may prefer to buy chicken instead of red meat both from a health perspective and from an environmental perspective.
But once we are in the grocery store, we still choose to buy red meat, either out of sheer habit or because it is, for example, easily accessible in the store.
Another common example is that we tend to take more food when we have a larger plate, and sometimes so much that we even throw away food.
These are examples of behaviors that behavioral economics tries to influence by, for example, making chicken more available in the store or reducing the size of the plates on the breakfast buffet.
4. Financial economy
In financial economics, the focus is primarily on the individual’s opportunities to distribute their consumption over time.
They try to understand the function and task of financial markets in society and how you can maximize your consumption by saving or borrowing over time.
Here they study financial instruments, such as shares and bonds, and try to calculate its correct price, among other things.
5. Labor market economics
The labor market economy studies, among other things, unemployment, wage formation and trade unions.
This can, for example, mean what determines the willingness to work, ie what the motivation is to look for work and go to work every day instead of living on benefits.
Excessive taxes and low wages can make it unprofitable for the individual to work and thus create incentives to leave the labor market.
Social insurance, education systems and pensions also have an impact.
You can also look at the opposite pole, namely the employer’s incentive to employ people and how this can be affected by, for example, minimum wages and technical development.
6. Industrial economics
Industrial economics focuses on companies’ strategic behaviors and market competition.
It can be about when companies choose to enter the market or leave the market and how they compete with each other.
Companies may not act in any way on the market and may not, for example, cooperate by forming cartels.
7. Environmental economics
In environmental economics, attempts are made to deal with environmental problems through economic instruments.
For example, costs are compared with the benefits of various measures in order to, for example, reduce greenhouse gas emissions in order to find the most effective alternative.
Examples of economic instruments are carbon dioxide tax and emission rights.
8. Public economy
In the public finances, issues concerning income, income distribution, social insurance, welfare, education and taxation are analyzed.
It is mainly about government issues and how to allocate public resources to achieve the highest welfare.
Here one is often faced with the choice to prioritize so-called “justice” or efficiency. Should income be distributed from those who earn a lot to those who earn a little to have an equal society?
Or would it mean that those who have talent and are efficient choose not to make a little effort as they still lose the extra money you earn?
When a decision involves a choice between several alternatives, and the advantages and disadvantages must be weighed against each other, the situation can be analyzed using economic methods.
The analysis can be applied both to problems related to markets and price formation and such phenomena that can not be related to money.
Prize in economic science in memory of Alfred Nobel has e.g. awarded to researchers who have studied political processes (James Buchanan) and sociological phenomena around family formation and fertility (Gary Becker) with an economics method.
Economic analysis can also be applied to the management of natural resources.
Economists use mathematical and statistical methods
Science is characterized more by its toolbox (analytical instruments) than by the areas in which these are applied.
Economists are increasingly using mathematical and statistical methods developed in other sciences.
Until the 1940s, the analysis was mainly verbal, but since economics is increasingly studying very complex systems, where many households, companies and other organizations interact in a large number of markets, mathematics is often the only way to handle the analysis.
Using a mathematically formulated model, the conclusions that follow from the assumptions can be calculated.
Whether the conclusions then give a good picture of reality depends on how reasonable the assumptions are.
These consist partly of a stylized picture of the studied phenomenon, and partly of certain assumptions about the behavior of individuals and organizations.
Economics: The meaning of rationality
This is where the basic postulate about rationality comes in. The meaning of rationality is that the behavior is consciously or unconsciously goal-oriented.
When economists describe a company’s behavior, they assume that companies strive to maximize a goal function (eg profit).
The exact assumptions made about the goal function depend on the assumptions in general (eg whether the owners have a decisive influence or whether the company management is relatively independent of the owners).
Economics: Empirial facts
The model is confronted in the next step with empirical facts. The theory and empiricism interact because the theoretical analysis often does not give rise to unambiguous conclusions.
When this is the case, the statistical surveys can clarify which of the various possible theoretical effects is considered.
The History of Economics
Economical thinking already existed in antiquity, but the systematic development of the theory began in the 16th and 17th centuries.
This means that the national economy was first developed to answer questions concerning the economic foundations of the state and the financing of state activities.
The mercantilists initially assumed that the economy needed to be governed in various respects in order to achieve the best result.
A basic idea in the opposition that eventually emerged towards the mercantilist ideas was that the markets have self-regulatory properties that mean that the state does not have to intervene in the functioning of the economy.
Adam Smith: The father of economics
These ideas were systematized by Adam Smith in the “Wealth of Nations” from 1776, in which he developed the theory that all the different decisions made by households, companies and other organizations are coordinated through price formation in the markets.
The economic phenomena that Smith analyzed are still relevant in microeconomic theory, which was also applied early on to the theory of international trade.
In addition to Smith himself, David Ricardo and John Stuart Mill made important contributions in this area.
These three are also the top names in the classical school.
The neoclassical school
The neoclassical school – initiated by W. Stanley Jevons, Carl Menger and Léon Walras – had its breakthrough in the 1870s.
The school’s most important efforts were a more systematic description of the behavior of companies and households based on assumptions about profit and benefit maximization, the development of capital theory and the analysis of general equilibrium and welfare theory.
However, the analysis of market price formation did not prove to be sufficient to explain the determination of the general price level.
Monetary theory and Macroeconomic theory
For this purpose, monetary theory was developed with e.g. quantity theory, which predicts a positive relationship between money supply and price level.
The scientific breakthrough for phenomena such as economic fluctuations and unemployment came in the 1930s.
John Maynard Keynes’ The General Theory of Employment, Interest and Money from 1936 led economists to study situations in which the coordination of economic decisions works poorly.
Thus was also born macroeconomic theory.
Micro-theory and Macro-theory
In the decades after World War II, micro-theory and Keynesian macro-theory came to be considered complementary.
If the state, through its economic policy, ensured that the large units were in equilibrium, price formation in the individual markets would in turn create equilibrium at the micro level.
In the late 1960s, this view of the relationship between micro and macro theory came to be increasingly criticized by economists.
One reason was that the Keynesian macro theory could not explain the contemporary increase in inflation and unemployment around 1970, another was that the macro theory was not systematically supported by micro theory.
Much of recent years’ research has been intended to provide answers to these questions and to provide a better micro-theoretical basis for macro-theory.
Other research areas have included the public sector economy (including the effects of the tax system) and the analysis of the significance of expectations for corporate and household action.