define economics essay

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What Is Economics?

Introduction

Economics is about making choices. We make all kinds of choices every day. How much should I spend on gas? What’s the best route to work? Where should we go for dinner? Which job or career should I go for? What are the pros and cons of finishing college versus taking a job or inventing the next, best Internet startup? Which roommate should take care of washing the dishes? Can I get that dog as a pet? Should I get married, have children, and if so, when? Which politician should I vote for when they all claim they can improve the economy or make my life better? What is “the economy,” anyway? What if my personal or religious principles conflict with what people tell me is in my best economic interest?

Many people hear the word “economics” and think it is all about money. Economics is not just about money. It is about weighing different choices or alternatives. Some of those important choices involve money, but most do not. Most of your daily, monthly, or life choices have nothing to do with money, yet they are still the subject of economics. For example, your decisions about whether it should be you or your roommate who should be the one to clean up or do the dishes, whether you should spend an hour a week volunteering for a worthy charity or send them a little money via your cell phone, or whether you should take a job so you can help support your siblings or parents or save for your future are all economic decisions. In many cases, money is merely a helpful tool or just a veil, standing in for a partial way to evaluate some of the goals you really care about and how you make choices about those goals.

You might also think economics is all about “economizing” or being efficient–not making foolish or wasteful choices about how you spend or budget your time and money. That is certainly part of what economics is about. However, that’s just the tip of the iceberg. We all know that we can save money or time by being more efficient in our planning. A trip to the supermarket can be coordinated with a trip to take your child to school or to deposit a check at the bank across the street to save on gas. But we sometimes don’t choose the most efficient options. Why not? Economics is also about plumbing the depths of why we sometimes do and sometimes don’t make what seem like the most economizing or economical choices.

Is economics a science (like physics), or is it a social science, or even an art? What is the difference, and what do we know about what we can’t or don’t know for now? Can economic problems be solved by better government, more experts, bigger computers, more engineering, better education, less government, more dispersed knowledge, more markets? How can we make informed choices?

You’ve probably heard that economists disagree about a lot of things. Actually, what economists disagree about is politics or public policy, not economics. Exploring the interface between politics and economics is part of the fun.

On this page are some famous, standard definitions about what economics is all about.

Definitions and Basics

Economics is the study of given ends and scarce means. Lionel Robbins , biography, from the Concise Encyclopedia of Economics :

Robbins’ most famous book was An Essay on the Nature and Significance of Economic Science , one of the best-written prose pieces in economics. That book contains three main thoughts. First is Robbins’ famous all-encompassing definition of economics that is still used to define the subject today: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.”…

What is “political economy”? Chapter I, Principles of Economics , by Alfred Marshall.

Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man. For man’s character has been moulded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world’s history have been the religious and the economic. Here and there the ardour of the military or the artistic spirit has been for a while predominant: but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together. Religious motives are more intense than economic, but their direct action seldom extends over so large a part of life. For the business by which a person earns his livelihood generally fills his thoughts during by far the greater part of those hours in which his mind is at its best; during them his character is being formed by the way in which he uses his faculties in his work, by the thoughts and the feelings which it suggests, and by his relations to his associates in work, his employers or his employees.

Isn’t economics nicknamed the “dismal science” because it is all about running out of resources and the inevitable decline of life as we know it? Who coined the phrase “the dismal science”? The Secret History of the Dismal Science: Economics, Religion, and Race in the 19th Century , by David M. Levy and Sandra J. Peart. Econlib, January 22, 2001.

Everyone knows that economics is the dismal science. And almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus’s gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship. While this story is well-known, it is also wrong, so wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level, Carlyle’s target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor….

Economics on One Foot , a LearnLiberty video.

Prof. Art Carden, in memory of Ayn Rand’s philosophy on one foot, presents economics on one foot.

In the News and Examples

Diane Coyle on the Soulful Science , EconTalk podcast.

Diane Coyle talks with host Russ Roberts about the ideas in her new book, The Soulful Science: What Economists Really Do and Why it Matters. The discussions starts with the issue of growth–measurement issues and what economists have learned and have yet to learn about why some nations grow faster than others and some don’t grow at all. Subsequent topics include happiness research, the politics and economics of inequality, the role of math in economics, and policy areas where economics has made the greatest contribution….

Isn’t economics all about supply and demand? Richard McKenzie on Prices , EconTalk podcast. June 23, 2008.

Richard McKenzie of the University California, Irvine and the author of Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, talks with EconTalk host Russ Roberts about a wide range of pricing puzzles. They discuss why Southern California experiences frequent water crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the economics of price discrimination….

Isn’t economics all about Adam Smith and the invisible hand? Adam Smith: The Invisible Hand , a LearnLiberty video.

Prof. James Otteson, using the ideas of Adam Smith, explains how the division of labor is a necessary and crucial element of wealthy nations.

Don’t all economists disagree? Henderson on Disagreeable Economists . EconTalk podcast, July 30, 2007.

David Henderson, editor of the Concise Encyclopedia of Economics and a research fellow at Stanford’s Hoover Institution, talks with EconTalk host Russ Roberts about when and why economists disagree. Harry Truman longed for a one-armed economist, one willing to go out on a limb and take an unequivocal position without adding “on the other hand…”. Truman’s view is often reflected in the public’s view that economic knowledge is inherently ambiguous and that economists never agree on anything. Henderson claims that this view is wrong–that there is substantial agreement among economists on many scientific questions–while Roberts wonders whether this consensus is getting a bit frayed around the edges. The conversation highlights the challenges the everyday person faces in trying to know when and what to believe when economists take policy positions based on research. Is it biased or science?

Humorous essay. Zero-sum games like income redistribution are more exciting than economic fundamentals like the gains from trade. Why is Economics So Boring? , by Donald Cox. Econlib, November 7, 2005.

Stan: Ollie, you know the worst part about being an economist? You meet someone at a cocktail party, you tell them you teach economics. Ollie: …and they say “Oh, yeah, I took that in college. I hated it. It was sooo boring!”… … getting the credit for Equation 14 is a zero sum game. And we care about zero sum games. There’s drama. There’s tension. There’s a loser for every winner. It makes for good TV, doesn’t it? But it’s not very common in reality. What common in reality is both sides are better off. The buyer and the seller of the car in the ad. That’s reality. No violence, no theft. Boring balloons. Boring happy people. Economics is boring….

Is economics just a fuss about language? The Economy: Metaphors We (Shouldn’t) Live By , by Max Borders.

“Argument is war.” That’s what cognitive linguists George Lakoff and Mark Johnson write in the opening chapter of their influential 1980 Metaphors We Live By. In that seminal book, Lakoff and Johnson offer a number of powerful lessons about figurative language: Metaphor is more than mere literary window dressing; metaphor is a fundamental aspect of human thought and language; and metaphors help us navigate the real world with a degree of efficiency that literal language can’t offer. It can even–for better or worse–change our perceptions of things….

A Little History: Primary Sources and References

Economics is sometimes called catallarchy or catallactics, meaning the science of exchanges. Where did this term first come from? Lecture I, Introductory Lectures on Political Economy , by Richard Whately.

It is with a view to put you on your guard against prejudices thus created, (and you will meet probably with many instances of persons influenced by them,) that I have stated my objections to the name of Political-Economy. It is now, I conceive, too late to think of changing it. A. Smith, indeed, has designated his work a treatise on the “Wealth of Nations;” but this supplies a name only for the subject-matter, not for the science itself. The name I should have preferred as the most descriptive, and on the whole least objectionable, is that of CATALLACTICS, or the “Science of Exchanges.”…

Advanced Resources

Is Economics All About Scarcity? , by Arnold Kling. Blog discussion on EconLog, January 17, 2007.

… I am two-handed on this issue. On the one hand, just because food, say, has become more abundant does not mean that we can ignore scarcity. At any moment in time, for a given state of know-how, the conventional definition of economics as dealing with the allocation of scarce resources among competing ends applies. On the other hand, some of the most interesting economic observations concern relative abundance. Look at our standard of living compared to 100 years ago. Look at South Korea compared with North Korea. Robert Lucas famously said that “The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them it is hard to think of anything else.”…

Related Topics

Is Economics a Science? Wellbeing and Welfare Scarcity Incentives Efficiency Cost-Benefit Analysis Division of Labor and Specialization Money Management and Budgeting Productive Resources Property Rights

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What is “Economics”?

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Photo by Marylou Fortier on Unsplash  

What is “economics”.

“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses 1 .” This is how Lionel Robbins came to define economics in the early 1930s and there is a good chance that many of you heard a variant of this definition in your first Economics 101 lecture. Unfortunately, lecturers often stop there, but economists should have some awareness of the definition's roots and how it has impacted the subject – including in the policy arena. This short article will introduce a more critical discussion around the widely adopted definition of economics.

Robbins’ definition was not immediately accepted. It took around thirty years for the definition to be adopted by most economists. There were several other prominent ways of describing economics in the early 1930s, such as:

“The study of mankind in the ordinary business of life 2 ” – Alfred Marshall

“The study of the production and distribution of wealth” – Edwin Cannan (John Stuart Mill used similar variations 3 )

“The study of the business system”, common among American economists

Each of these defined economics by recognising a specific subject matter. Robbins' differed though, as he formalised economics by describing a facet of behaviour. This made it easy to justify the study of human behaviour in several different areas. Indeed, from the 1960s onwards, economists like Gary Becker applied economic analysis to diverse social problems, applying the rational individual agent assumption to areas such as education, discrimination, crime, and family.

A key implication of Robbins’ definition was the idea that economics was simply about ends (needs) and means (resources), whilst remaining neutral between ends. Robbins argued against economists explaining the relative valuation of goods, rather their value depended on the goods' scarcity. He did not believe that there were any agreed values for which economists could make welfare judgements.

Robbins’ LSE colleagues took this to mean that the contemporary dominant (Pigouvian) welfare economic thought did not fit in “economics” and set to create a new welfare economics that had no value judgements. They argued that any change that benefits everyone would be good for society. Realistically, such a change is very rare if not impossible to come by. As such, Kaldor and Hicks introduced the compensation test: a change would improve social welfare if those who gain from it could compensate the losers and remain better off. This ultimately laid the foundations for a new welfare economics which placed Pareto Efficiency at its core (value judgements were not completely dispensed).

This outcome may not have been intended by Robbins. Although he proposed value judgements should not be part of ‘economic science’, he did acknowledge that in a policy setting one would have to look outside economics for dealing with welfare issues. Also, Robbins did not directly criticise Pigou's welfare economics, instead, he was disapproving of those economists who went much further than Pigou in using ethical judgements in their theory.

Interestingly, Robbins was sceptical of the role of numbers. He believed economic generalisations could not be made from empirical relationships. Rather, economic propositions gained certainty after being derived from economics’ definition. The only role he saw for empirical analysis was in suggesting problems to be solved but he said “it is theory and theory alone which is capable of supplying the solution. Any attempt to reverse the relationship must lead inevitably to the nirvana of purposeless observation and record.”

Emphasising the role of theory over data turned out to be a significant factor in the definition’s acceptance. It was used by a growing number of mathematical economists to justify their work. In the late 1920s/early 1930s, the prevalence of mathematics in economic journals was limited and the few economics courses around did not require much maths. This is in stark contrast to the 1960s where advanced mathematics were routinely used and seen in both specialist and general economic journals. As Robbins suggested economic theory was derived from indisputable propositions, he had established a methodological justification for axiomatic reasoning (beginning with a set of axioms about economic activity and deducing assumptions which follow from them). Whether intentionally or not, Robbins' definition contributed to the growth and development of mathematical economics, essentially laying the foundation for the assumptions that allow mathematical economic models to thrive.

Economists in most settings, whether in academia or policy, do not begin “economic” analysis with the subject definition. Perhaps this explains why economics has been defined mostly the same way since the 1960s. Yet, there can be no doubt that Robbins’ formalisation of economics has impacted the theory and how it is applied, still to this day. This is a great example of how important it is for economists to maintain a degree of scepticism on ideas that have come to be taken for granted.

This article is based on Chapter 16, “Robbins’ Essay and the Definition of Economics” in The History of Economics by Roger E. Backhouse and Keith Tribe.

1  https://mises.org/library/essay-nature-and-significance-economic-science

2  https://www.aeaweb.org/articles?id=10.1257/jep.23.1.221

3  https://www.aeaweb.org/articles?id=10.1257/jep.23.1.221

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How to Write a Good Economics Essay

Last Updated: March 7, 2023 References

This article was co-authored by Emily Listmann, MA . Emily Listmann is a private tutor in San Carlos, California. She has worked as a Social Studies Teacher, Curriculum Coordinator, and an SAT Prep Teacher. She received her MA in Education from the Stanford Graduate School of Education in 2014. This article has been viewed 127,354 times.

A good economics essay requires a clear argument that is well-supported by appropriately referenced evidence. Research your topic thoroughly and then carefully plan out your essay. A good structure is essential, as is sticking closely to the main essay question. Be sure to proofread your essay and try to write in formal and precise prose.

Preparing to Write Your Essay

• For example a question such as “Discuss the macroeconomic consequences of rising house prices, alongside falling interest rates” could be divided into 2 parts: 1 part could be on the effects of rising prices, and 1 on the effects of falling interest rates.
• In this example you could begin by discussing each separately and then bringing the 2 together and analysing how they influence each other.
• Be sure to keep the question at the forefront of your mind and don’t veer off topic. [1] X Research source

• Be sure that you understand all the key terms that you are being asked about.
• Try to keep your reading focussed closely to the essay question.
• Don’t forget to look at any lecture or class notes you have made.
• 3 Come up with a thesis statement . A thesis statement is the main argument you will make in your essay. It should be 1-2 sentences long and respond to the essential question that’s being asked. The thesis will help you structure the body of your essay, and each point you make should relate back to the thesis.

• Once you have put together a list of key points, then try to add in some more detail that brings in elements from your research.
• When you come to write out your essay, you can develop a paragraph based on each point.

• All of the evidence and explanation will be in the main body of the essay.
• Order the key points in the body of your essay in such a way that they flow logically.
• If you are writing a longer essay, you can break the main body into different sections. [2] X Research source
• If you have a word limit, be sure to take this into account when you are planning.
• Allocate yourself a rough number of words per section.
• The introduction and conclusion can be just a paragraph each.

Writing the Essay

• What your essay is about.
• What material you will cover in the essay.
• What your argument is. [3] X Research source

• Having this stated clearly at the start can help you to stay focussed on the question as you work your way through the essay.
• Try writing out this one or two sentence statement and sticking it up in front of you as you write, so it’s stays at the forefront of your mind.

• Try to begin each paragraph with a sentence that outlines what the paragraph will cover.
• Look at the opening sentence of each paragraph and ask yourself if it is addressing the essay question. [5] X Research source

• Try to engage with arguments that run counter to yours, and use the evidence you have found to show the flaws.
• It might help to imagine someone reading the essay, and anticipating the objections that he might raise.
• Showing that you have thought about potential problems, and you can make an argument that overcomes them, is a hallmark of an excellent essay. [6] X Research source
• If there is conflicting evidence, discuss it openly and try to show where the weight of the evidence lies. [7] X Research source
• Don’t just ignore the evidence that runs counter to your argument.

• In the conclusion you can add a few sentences that show how your essay could be developed and taken further.
• Here you can assert why the question is important and make some tentative suggestions for further analysis.

Proofreading and Making Revisions

• As you read through it, think about how closely you stick to main overarching question.
• If you notice paragraphs that drift off into other areas, you need to be tough and cut them out.
• You have a limited number of words so it’s essential to make every one count by keeping tightly focussed on the main question.

• Think about how you use the evidence too. Do you critically engage with it, or do you merely quote it to support your point?
• A good analytical essay such discuss evidence critically at all times.
• Even if the evidence supports your argument, you need to show that you have thought about the value of this particular piece of data.
• Try to avoid making any assumptions, or writing as if something were beyond dispute. [10] X Research source

• Remember an academic essay should be written in a formal style, so avoid colloquialisms.
• Avoid contractions, such as “don’t”, or “won’t”.
• Try to avoid paragraphs that are more than ten or fifteen lines long.
• Think about how it looks on the page. [12] X Research source

• Always include a bibliography, but don’t include references to things you haven’t read or didn’t inform your argument. [13] X Research source
• Your teacher will know if you just add a load of titles into your bibliography that are not evidenced in the body of your essay.
• Always follow the bibliography format used by your department or class.

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• ↑ http://www.economicshelp.org/help/tips-economic-essays/
• ↑ http://www.writing.utoronto.ca/advice/planning-and-organizing/organizing
• ↑ http://carleton.ca/economics/courses/writing-preliminaries/academic-essay-writing/
• ↑ https://www.economicsnetwork.ac.uk/archive/lse_writing/page_11.htm
• ↑ http://homes.chass.utoronto.ca/~mcmillan/writing.pdf
• ↑ https://www.royalholloway.ac.uk/economics/documents/pdf/essaywriting-departmentofeconomics.pdf

About This Article

Before you begin writing your economics essay, make sure to carefully read the prompt so that you have a clear sense of the paper's purpose and scope. Once you have read the prompt, conduct research using your textbook and relevant articles. If you cannot find research materials, ask your instructor for recommendations. After your research is done, construct a 1-2 sentence thesis statement and begin outlining your main ideas so that your essay will have a clear structure. Make sure to leave time to write a draft and revise your work before it is due. If you want to learn more, like how to cite the sources you used for your essay, keep reading the article! Did this summary help you? Yes No

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Economics is the study of scarcity and its implications for the use of resources, production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society. 

Economics is More than Numbers

Economics is a social science with stakes in many other fields, including political science, geography, mathematics, sociology, psychology, engineering, law, medicine and business. The central quest of economics is to determine the most logical and effective use of resources to meet private and social goals. Production and employment, investment and savings, health, money and the banking system, government policies on taxation and spending, international trade, industrial organization and regulation, urbanization, environmental issues and legal matters (such as the design and enforcement of property rights), are just a sampling of the concerns at the heart of the science of economics.

Economics is Personal (Microeconomics)

Microeconomics studies the implications of individual human action, and is key to a person's financial health. Personal resources are scarce, too! One can always use another dollar, hour of time, or new skill. Achieving the most satisfactory allocation of one’s resources is crucial, and studying allocation problems improves one’s ability to make both daily and life-long decisions. Some examples of common day-to-day economics questions include: Should I pay cash, borrow or sign a lease to get that new car? Should I take out a home-equity loan or invest in the stock market? Should I open a 401K plan now or wait until next year? Economists understand how to make these decisions in their own lives, and can advise others on a personal or professional level. 

Economics is Universal (Macroeconomics)

Macroeconomics studies how the economy behaves as a whole, including inflation, price levels, rate of growth, national income, gross domestic product and changes in employment rates. Some of the important questions American economists try to answer include: “In a nation as rich as the U.S., why are so many people under-employed?” and “Who determines how much money is circulating in the U.S.?” From politicians to educators to journalists to urban planners, a thorough understanding of macroeconomics has a strong impact on leadership skills, decision-making and the ability to plan for a flourishing social future. To meet this need, the Department of Economics has designed a multidisciplinary curriculum that prepares students to maneuver seamlessly from one area of focus to another.

Economics is for You

If you want to understand wealth, poverty, growth, trade, money, jobs, income, depression, recession, prices and monopolies, and study what makes the world work from day to day, you will be fascinated by the complex field of economics!

Economics Defined with Types, Indicators, and Systems

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What Is Economics?

Understanding economics, microeconomics, macroeconomics, what is the role of an economist, what are economic indicators, economic systems, schools of economic theory.

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The Bottom Line

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Economics is a social science that focuses on the production, distribution, and consumption of goods and services. The study of economics is primarily concerned with analyzing the choices that individuals, businesses, governments, and nations make to allocate limited resources. Economics has ramifications on a wide range of other fields, including politics, psychology, business, and law.

Key Takeaways

• Economics is the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectively.
• The field of economics is connected with and has ramifications on many others, such as politics, government, law, and business.
• The two branches of economics are microeconomics and macroeconomics.
• Economics focuses on efficiency in production and exchange.
• Gross Domestic Product (GDP) and the Consumer Price Index (CPI) are two of the most widely used economic indicators.

Zoe Hansen / Investopedia

Assuming humans have unlimited wants within a world of limited means, economists analyze how resources are allocated for production, distribution, and consumption.

The study of microeconomics focuses on the choices of individuals and businesses, and macroeconomics concentrates on the behavior of the economy on an aggregate level.

One of the earliest recorded economists was the 8th-century B.C. Greek farmer and poet Hesiod who wrote that labor, materials, and time needed to be allocated efficiently to overcome scarcity. The publication of Adam Smith's 1776 book An Inquiry Into the Nature and Causes of the Wealth of Nations sparked the beginning of the current Western contemporary economic theories.

Microeconomics studies how individual consumers and firms make decisions to allocate resources. Whether a single person, a household, or a business, economists may analyze how these entities respond to changes in price and why they demand what they do at particular price levels.

Microeconomics analyzes how and why goods are valued differently, how individuals make financial decisions, and how they trade, coordinate, and cooperate.

Within the dynamics of supply and demand, the costs of producing goods and services, and how labor is divided and allocated, microeconomics studies how businesses are organized and how individuals approach uncertainty and risk in their decision-making.

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. Its primary focus is recurrent economic cycles and broad economic growth and development.

It focuses on foreign trade, government fiscal and monetary policy, unemployment rates, the level of inflation, interest rates, the growth of total production output, and business cycles that result in expansions, booms, recessions, and depressions. 

Using aggregate indicators, economists use macroeconomic models to help formulate economic policies and strategies.

An economist studies the relationship between a society's resources and its production or output, and their opinions help shape economic policies related to interest rates, tax laws, employment programs, international trade agreements, and corporate strategies.

Economists analyze economic indicators such as gross domestic product and the consumer price index to identify potential trends or make economic forecasts.

According to the Bureau of Labor Statistics (BLS), 38% of all economists in the United States work for a federal or state agency. Economists are also employed as consultants, professors, by corporations, or as part of economic think tanks.

Economic indicators detail a country's economic performance. Published periodically by governmental agencies or private organizations, economic indicators often have a considerable effect on stocks, employment, and international markets. They may predict future economic conditions that will move markets and guide investment decisions.

Gross domestic product (GDP)

The gross domestic product (GDP) is considered the broadest measure of a country's economic performance. It calculates the total market value of all finished goods and services produced in a country in a given year. In the U.S., the Bureau of Economic Analysis (BEA) also issues a regular report during the latter part of each month. Many investors, analysts, and traders focus on the advance GDP report and the preliminary report, both issued before the final GDP figures because the GDP is considered a lagging indicator , meaning it can confirm a trend but can't predict a trend.

The GDPNow forecasting model, used by the Federal Reserve, provides a "nowcast" of the official estimate before its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.

Retail sales

Reported by the U.S. Department of Commerce (DOC) during the middle of each month, the retail sales report measures the total receipts, or dollar value, of all merchandise sold in stores. Sampling retailers across the country acts as a proxy of consumer spending levels. Consumer spending represents more than two-thirds of GDP, proving useful to gauge the economy's general direction.

Industrial production

The industrial production report, released monthly by the Federal Reserve, reports changes in the production of factories, mines, and utilities in the U.S. One measure included in this report is the capacity utilization rate , which estimates the portion of productive capacity that is being used rather than standing idle in the economy. Capacity utilization in the range of 82% to 85% is considered "tight" and can increase the likelihood of price increases or supply shortages in the near term. Levels below 80% are interpreted as showing "slack" in the economy, which may increase the likelihood of a recession .

Employment Data

The Bureau of Labor Statistics releases employment data in a report called the nonfarm payrolls on the first Friday of each month. Sharp increases in employment indicate prosperous economic growth and potential contractions may be imminent if significant decreases occur. These are generalizations, however, and it is important to consider the current position of the economy.

Consumer Price Index (CPI)

The Consumer Price Index (CPI), also issued by the BLS, measures the level of retail price changes, and the costs that consumers pay, and is the benchmark for measuring inflation . Using a basket that is representative of the goods and services in the economy, the CPI compares the price changes month after month and year after year. This report is an important economic indicator and its release can increase volatility in equity, fixed income, and forex markets. Greater-than-expected price increases are considered a sign of inflation, which will likely cause the underlying currency to depreciate.

Five economic systems illustrate historical practices used to allocate resources to meet the needs of the individual and society.

Primitivism

In primitive agrarian societies, individuals produced necessities from building dwellings, growing crops, and hunting game at the household or tribal level.

A political and economic system of Europe from the 9th to 15th century, feudalism was defined by the lords who held land and leased it to peasants for production, who received a promise of safety and security from the lord.

With the advent of the industrial revolution, capitalism emerged and is defined as a system of production where business owners organize resources including tools, workers, and raw materials to produce goods for market consumption and earn profits. Supply and demand set prices in markets in a way that can serve the best interests of society. 

Socialism is a form of a cooperative production economy. Economic socialism is a system of production in which there is limited or hybrid private ownership of the means of production. Prices, profits, and losses are not the determining factors used to establish who engages in the production, what to produce and how to produce it.

Communism holds that all economic activity is centralized through the coordination of state-sponsored central planners with common ownership of production and distribution.

Many economic theories have evolved as societies and markets have grown and changed. However, three disciplines of economics, neoclassical, Keynesian, and Marxian, have influenced modern society.

The principles of neoclassical economics are often used as a framework to illustrate the virtues of capitalism, including the tendency of market prices to reach equilibrium as the volume of supply and demand changes. The optimal valuation of resources emerges from the forces of individual desire and scarcity.

John Maynard Keynes developed the theory of Keynesian economics during the Great Depression. Arguing against neoclassical theory, Keynes showed that restrained markets and government intervention in markets create a stable and equitable economic system. He advocated for a monetary policy designed to boost demand and investor confidence during economic downturns.

Marxian economics is defined in Karl Marx's work Das Kapital . Marxian economics is a rejection of the   classical view of economics, arguing against the idea that the free market, an economic system determined by supply and demand with little or no government control, benefits society. He espoused that capitalism only benefits a select few and that the ruling class becomes richer by extracting value out of cheap labor provided by the working class.

What Is a Command Economy?

A command economy is an economy in which production, investment, prices, and incomes are determined centrally by a government. A communist society has a command economy.

What Is Behavioral Economics?

Behavioral economics combines psychology, judgment, decision-making, and economics to understand human behavior. Branches of economic thought continue to grow and change. One such example is the progressive branch of bioeconomics that models economic decisions in terms of managing resources.

Who Has Influenced the Study of Economics in the 21st Century?

Since 2000, several economists have won the Nobel Prize in economics, including David Card for his contributions to labor economics, Angus Deaton for his study of consumption, poverty, and welfare, and Paul Krugman for his analysis of trade patterns.

Economics is a branch of the social sciences focused on the production, distribution, and consumption of goods and services. Microeconomics is a type of economics that is concerned with the behavior of individual people and businesses, while macroeconomics considers broader trends affecting nations and larger economies. In the U.S., a number of key economic indicators, including GDP and CPI, are important tools for economists to measure trends and make forecasts .

Brandon Dupont. "The History of Economic Ideas: Economic Thought in Contemporary Context," Pages 12-13. Routledge, Taylor & Francis Group. 2017.

U.S. Bureau of Labor Statistics. " Economists ."

Bureau of Economic Analysis. " Gross Domestic Product ."

Atlanta Federal Reserve. " GDPNow ."

United States Census Bureau. " Monthly Retail Trade ."

John Locke Foundation. " Consumer Spending Slows Even as GDP Reverses Six-Month Trend ."

Federal Reserve. " Industrial Production and Capacity Utilization - G.17 ."

U.S. Bureau of Labor Statistics. " Economic News Releases ."

U.S. Bureau of Labor Statistics. " Consumer Price Index ."

Bureau of Labor Statistics. " Dueling Economies ."

• Economics Defined with Types, Indicators, and Systems 1 of 33
• Economy: What It Is, Types of Economies, Economic Indicators 2 of 33
• A Brief History of Economics 3 of 33
• Is Economics a Science? 4 of 33
• Finance vs. Economics: What's the Difference? 5 of 33
• Macroeconomics Definition, History, and Schools of Thought 6 of 33
• Microeconomics Definition, Uses, and Concepts 7 of 33
• 4 Economic Concepts Consumers Need To Know 8 of 33
• Law of Supply and Demand in Economics: How It Works 9 of 33
• Demand-Side Economics Definition, Examples of Policies 10 of 33
• Supply-Side Theory: Definition and Comparison to Demand-Side 11 of 33
• What Is a Market Economy and How Does It Work? 12 of 33
• Command Economy: Definition, How It Works, and Characteristics 13 of 33
• Economic Value: Definition, Examples, Ways To Estimate 14 of 33
• Keynesian Economics Theory: Definition and How It's Used 15 of 33
• What Is Social Economics, and How Does It Impact Society? 16 of 33
• Economic Indicator: Definition and How to Interpret 17 of 33
• Top 10 U.S. Economic Indicators 18 of 33
• Gross Domestic Product (GDP) Formula and How to Use It 19 of 33
• What Is GDP and Why Is It So Important to Economists and Investors? 20 of 33
• Consumer Spending: Definition, Measurement, and Importance 21 of 33
• Retail Sales: Definition, Measurement, and Use As an Economic Indicator 22 of 33
• Job Market: Definition, Measurement, Example 23 of 33
• The Top 25 Economies in the World 24 of 33
• What Are Some Examples of Free Market Economies? 25 of 33
• Is the United States a Market Economy or a Mixed Economy? 26 of 33
• Primary Drivers of the Chinese Economy 27 of 33
• Japan Inc.: What It is, How It Works, History 28 of 33
• The Fundamentals of How India Makes Its Money 29 of 33
• European Union (EU): What It Is, Countries, History, Purpose 30 of 33
• The German Economic Miracle Post WWII 31 of 33
• The Economy of the United Kingdom 32 of 33
• How the North Korean Economy Works 33 of 33

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How to Write an Economics Paper: A Step-by-Step Guide

Economics is often called “the dismal science,” and most students would agree that it never lives up to that moniker more than when they are writing an economics paper for a college, university, or MBA course. Economics essays can be challenging because they combine scientific accuracy and mathematical reasoning with the interpretive and theoretical approaches of the humanities, making them one of the most difficult types of essays to write. However, economics papers don’t have to create anxiety if you know the right way to approach an economics paper.

In this article, we’ll take a look at the right way to write an economics paper by examining the process from start to finish and offering some tips about the best way to approach each of the steps in writing an economics essay.

So, where should you begin to write an economics paper?

Read the Assignment

This might seem like a no-brainer, but the first step in writing any essay is to read the assignment and make sure that you understand exactly what the question is asking. Be sure that you are clear on each of the requirements of the assignment, and that means that you need to carefully review the question and find each of the pieces that require a response in the essay. Beyond this, you should consider whether any of the requirements are unclear. If there is anything you don’t understand, be sure to seek clarification before you start writing.

Develop a Research Question

Based on the assignment, try to develop one or two guiding questions that will help to direct your research when you start to create the assignment. What do you want to know more about? What would you need to know to address the assignment? Having sharp research questions will help to direct your research and point you in the right direction as you gather resources.

Gather Research Before You Write

Many students take the approach that the fastest way to write a paper is to start writing and grab research to support their points as they move through. However, this is an inefficient way to write. The most effective way to write an essay is to gather your research before you begin the writing process. By researching the question and evaluating resources early on, you will be in a better position to create a strong thesis statement and develop a powerful paper that will help you to address the assignment completely. One effective technique is to read each research source, pull out key quotes you might use in your paper, and produce a reference list entry for each source before you start writing. That way, you can pull from your bank of research without having to stop and research new material as you write.

Develop a Thesis Statement

Based on the research that you’ve done, you should develop a thesis statement explaining your unique perspective on the assignment and what you will demonstrate or prove during the course of the paper. A strong thesis statement is specific and sharp rather than vague and general. Your thesis should be original and not merely repeating something someone else has already done in a prior economics paper.

Outline Your Economics Paper

Many students skip this step because they think that it is a waste of time that they could be spending writing, but outlining can actually be a time-saver in the long run. Using your thesis statement, you should develop an outline that develops each part of the thesis into a paragraph or section of your outline. Each section of your outline should have supporting details, including resources, quotes, and evidence, that you will use to assemble your paper. The more detail that you put together in your outline, the easier it will be to write the final paper.

Write the Paper, Saving the Intro for Last

Your outline should make it easy to develop your paper. All you need to do at this point is to take the outline that you wrote, flesh it out by turning its points into complete sentences, drop in quotations and supporting information (with citations), and connect the dots with transitions. When you write the final paper, you should save the introduction for last. That way, you will be able to use the conclusion that you come to at the end of the paper to craft an introduction that will set up the paper. If you try doing the introduction first, you might feel tempted to tailor your conclusion to keep the introduction intact. This way, if your conclusion changes as you write, you won’t lose time or text.

Get Economics Essay Help If Needed

Writing economics papers can be hard, but these tips should make it easier. However, if you find yourself in need of additional help, it can be helpful to pay someone for writing help. When you hire an expert from an online service like WriteMyPaperHub.com , you can receive the kind of benefits that you can’t get anywhere else, including customized and personalized research and writing assistance from an expert writer with an advanced degree and years of experience producing papers for students just like you. Whether you need writing help because you are pressed for time or don’t know where to start, professional help can be the solution to help you solve your hardest essay challenges and to help you make the grade on your next economics paper.

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Published on: Jun 6, 2023

Last updated on: Jan 31, 2024

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Are you struggling to understand economics essays and how to write your own?

It can be challenging to grasp the complexities of economic concepts without practical examples.

But don’t worry! 

We’ve got the solution you've been looking for. Explore quality examples that bridge the gap between theory and real-world applications. In addition, get insightful tips for writing economics essays.

So, if you're a student aiming for academic success, this blog is your go-to resource for mastering economics essays.

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What is an Economics Essay?

An economics essay is a written piece that explores economic theories, concepts, and their real-world applications. It involves analyzing economic issues, presenting arguments, and providing evidence to support ideas. 

The goal of an economics essay is to demonstrate an understanding of economic principles and the ability to critically evaluate economic topics.

Why Write an Economics Essay?

Writing an economics essay serves multiple purposes:

• Demonstrate Understanding: Showcasing your comprehension of economic concepts and their practical applications.
• Develop Critical Thinking: Cultivating analytical skills to evaluate economic issues from different perspectives.
• Apply Theory to Real-World Contexts: Bridging the gap between economic theory and real-life scenarios.
• Enhance Research and Analysis Skills: Improving abilities to gather and interpret economic data.
• Prepare for Academic and Professional Pursuits: Building a foundation for success in future economics-related endeavors.

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If you’re wondering, ‘how do I write an economics essay?’, consulting an example essay might be a good option for you. Here are some economics essay examples:

Short Essay About Economics

A Level Economics Essay Examples

Here is an essay on economics a level structure:

Band 6 Economics Essay Examples

Here are some downloadable economics essays:

Economics essay pdf

Economics essay introduction

Economics Extended Essay Examples

In an economics extended essay, students have the opportunity to delve into a specific economic topic of interest. They are required to conduct an in-depth analysis of this topic and compile a lengthy essay. 

Here are some potential economics extended essay question examples:

• How does foreign direct investment impact economic growth in developing countries?
• What are the factors influencing consumer behavior and their effects on market demand for sustainable products?
• To what extent does government intervention in the form of minimum wage policies affect employment levels and income inequality?
• What are the economic consequences of implementing a carbon tax to combat climate change?
• How does globalization influence income distribution and the wage gap in developed economies?

IB Economics Extended Essay Examples 

IB Economics Extended Essay Examples

Economics Extended Essay Topic Examples

Extended Essay Research Question Examples Economics

Tips for Writing an Economics Essay

Writing an economics essay requires specific expertise and skills. So, it's important to have some tips up your sleeve to make sure your essay is of high quality:

• Start with a Clear Thesis Statement: It defines your essay's focus and argument. This statement should be concise, to the point, and present the crux of your essay.
• Conduct Research and Gather Data: Collect facts and figures from reliable sources such as academic journals, government reports, and reputable news outlets. Use this data to support your arguments and analysis and compile a literature review.
• Use Economic Theories and Models: These help you to support your arguments and provide a framework for your analysis. Make sure to clearly explain these theories and models so that the reader can follow your reasoning.
• Analyze the Micro and Macro Aspects: Consider all angles of the topic. This means examining how the issue affects individuals, businesses, and the economy as a whole.
• Use Real-World Examples: Practical examples and case studies help to illustrate your points. This can make your arguments more relatable and understandable.
• Consider the Policy Implications: Take into account the impacts of your analysis. What are the potential solutions to the problem you're examining? How might different policies affect the outcomes you're discussing?
• Use Graphs and Charts: These help to illustrate your data and analysis. These visual aids can help make your arguments more compelling and easier to understand.
• Proofread and Edit: Make sure to proofread your essay carefully for grammar and spelling errors. In economics, precision and accuracy are essential, so errors can undermine the credibility of your analysis.

These tips can help make your essay writing journey a breeze. Tailor them to your topic to make sure you end with a well-researched and accurate economics essay.

To wrap it up , writing an economics essay requires a combination of solid research, analytical thinking, and effective communication. 

You can craft a compelling piece of work by taking our examples as a guide and following the tips.

However, if you are still questioning "how do I write an economics essay?", it's time to get professional help from the best essay writing service -  CollegeEssay.org.

Our economics essay writing service is always ready to help students like you. Our experienced economics essay writers are dedicated to delivering high-quality, custom-written essays that are 100% plagiarism free.

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Philosophy of Economics

“Philosophy of Economics” consists of inquiries concerning (a) rational choice, (b) the appraisal of economic outcomes, institutions and processes, and (c) the ontology of economic phenomena and the possibilities of acquiring knowledge of them. Although these inquiries overlap in many ways, it is useful to divide philosophy of economics in this way into three subject matters which can be regarded respectively as branches of action theory, ethics (or normative social and political philosophy), and philosophy of science. Economic theories of rationality, welfare, and social choice defend substantive philosophical theses often informed by relevant philosophical literature and of evident interest to those interested in action theory, philosophical psychology, and social and political philosophy. Economics is of particular interest to those interested in epistemology and philosophy of science both because of its detailed peculiarities and because it possesses many of the overt features of the natural sciences, while its object consists of social phenomena.

1.1 The emergence of economics and of economies

1.2 contemporary economics and its several schools, 2.1 positive versus normative economics, 2.2 reasons versus causes, 2.3 social scientific naturalism, 2.4 abstraction, idealization, and ceteris paribus clauses in economics, 2.5 causation in economics and econometrics, 2.6 structure and strategy of economics: paradigms and research programmes, 3.1 classical economics and the method a priori, 3.2 friedman and the defense of “unrealistic assumptions”, 4.1 popperian approaches, 4.2 the rhetoric of economics, 4.3 “realism” in economic methodology, 4.4 economic methodology and social studies of science, 4.5 case studies, 5.1 individual rationality, 5.2 collective rationality and social choice, 5.3 game theory, 6.1 welfare, 6.2 efficiency, 6.3 other directions in normative economics, 7. conclusions, economic methodology, ethics and economics, rationality, other works cited, related entries, 1. introduction: what is economics.

Both the definition and the precise domain of economics are subjects of controversy within philosophy of economics. At first glance, the difficulties in defining economics may not appear serious. Economics is, after all, concerned with aspects of the production, exchange, distribution, and consumption of commodities and services. But this claim and the terms it contains are vague; and it is arguable that economics is relevant to a great deal more. It helps to approach the question, “What is economics?” historically, before turning to comments on contemporary features of the discipline.

Philosophical reflection on economics is ancient, but the conception of the economy as a distinct object of study dates back only to the 18th century. Aristotle addresses some problems that most would recognize as pertaining to economics, mainly as problems concerning how to manage a household. Scholastic philosophers addressed ethical questions concerning economic behavior, and they condemned usury — that is, the taking of interest on money. With the increasing importance of trade and of nation-states in the early modern period, ‘mercantilist’ philosophers and pamphleteers were largely concerned with the balance of trade and the regulation of the currency. There was an increasing recognition of the complexities of the financial management of the state and of the possibility that the way that the state taxed and acted influenced the production of wealth.

In the early modern period, those who reflected on the sources of a country’s wealth recognized that the annual harvest, the quantities of goods manufactured, and the products of mines and fisheries depend on facts about nature, individual labor and enterprise, tools and what we would call “capital goods”, and state and social regulations. Trade also seemed advantageous, at least if the terms were good enough. It took no conceptual leap to recognize that manufacturing and farming could be improved and that some taxes and tariffs might be less harmful to productive activities than others. But to formulate the idea that there is such a thing as “the economy” with regularities that can be investigated requires a bold further step. In order for there to be an object of inquiry, there must be regularities in production and exchange; and for the inquiry to be non-trivial, these regularities must go beyond what is obvious to the producers, consumers, and exchangers themselves. Only in the eighteenth century, most clearly illustrated by the work of Cantillon, the physiocrats, David Hume , and especially Adam Smith (see the entry on Smith’s moral and political philosophy ), does one find the idea that there are laws to be discovered that govern the complex set of interactions that produce and distribute consumption goods and the resources and tools that produce them (Backhouse 2002).

Crucial to the possibility of a social object of scientific inquiry is the idea of tracing out the unintended consequences of the intentional actions of individuals. Thus, for example, Hume traces the rise in prices and the temporary increase in economic activity that follow an increase in currency to the perceptions and actions of individuals who first spend the additional currency (1752). In spending their additional gold imported from abroad, traders do not intend to increase the price level. But that is what they do nevertheless. Adam Smith expands and perfects this insight and offers a systematic Inquiry into the Nature and Causes of the Wealth of Nations . From his account of the demise of feudalism (1776, Book II, Ch. 4) to his famous discussion of the invisible hand, Smith emphasizes unintended consequences. “[H]e intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it” (1776, Book IV, Ch. 2). The existence of regularities, which are the unintended consequences of individual choices gives rise to an object of scientific investigation.

One can distinguish the domain of economics from the domain of other social scientific inquiries either by specifying some set of causal factors or by specifying some range of phenomena. The phenomena with which economists are concerned are production, consumption, distribution and exchange—particularly via markets. But since so many different causal factors are relevant to these, including the laws of thermodynamics, metallurgy, geography and social norms, even the laws governing digestion, economics cannot be distinguished from other inquiries only by the phenomena it studies. Some reference to a set of central causal factors is needed. Thus, for example, John Stuart Mill maintained that, “Political economy…[is concerned with] such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive, except those which may be regarded as perpetually antagonising principles to the desire of wealth, namely aversion to labour, and desire of the present enjoyment of costly indulgences.” (1843, Book VI, Chapter 9, Section 3) In Mill’s view, economics is mainly concerned with the consequences of individual pursuit of tangible wealth, though it takes some account of less significant motives such as aversion to labor.

Mill takes it for granted that individuals act rationally in their pursuit of wealth and luxury and avoidance of labor, rather than in a disjointed or erratic way, but he has no theory of consumption, or explicit theory of rational economic choice, and his theory of resource allocation is rather thin. These gaps were gradually filled during the so-called neoclassical or marginalist revolution, which linked choice of some object of consumption (and its price) not to its total utility but to its marginal utility. For example, water is obviously extremely useful, but in much of the world it is plentiful enough that another glass more or less matters little to an agent. So water is cheap. Early “neoclassical” economists such as William Stanley Jevons held that agents make consumption choices so as to maximize their own happiness (1871). This implies that they distribute their expenditures so that a dollar’s worth of water or porridge or upholstery makes the same contribution to their happiness. The “marginal utility” of a dollar’s worth of each good is the same.

In the Twentieth Century, economists stripped this theory of its hedonistic clothing (Pareto 1909, Hicks and Allen 1934). Rather than supposing that all consumption choices can be ranked by how much they promote an agent’s happiness, economists focused on the ranking itself. All that they suppose concerning evaluations is that agents are able consistently to rank the alternatives they face. This is equivalent to supposing first that rankings are complete — that is, for any two alternatives x and y that the agent considers, either the agent ranks x above y (prefers x to y ), or the agent prefers y to x , or the agent is indifferent. Second, economists suppose that agent’s rankings of alternatives (preferences) are transitive. To say that an agent’s preferences are transitive is to claim that if the agent prefers x to y and y to z , then the agent prefers x to z , with similar claims concerning indifference and combinations of indifference and preference. Though there are further technical conditions to extend the theory to infinite sets of alternatives and to capture further plausible rationality conditions concerning gambles, economists generally subscribe to a view of rational agents as at least possessing complete and transitive preferences and as choosing among the feasible alternatives whichever they most prefer. In the theory of revealed preference, economists have attempted unsuccessfully to eliminate all reference to subjective preference or to define preference in terms of choices (Samuelson 1947, Houtthaker 1950, Little 1957, Sen 1971, 1973, Hausman 2012, chapter 3).

In clarifying the view of rationality that characterizes economic agents, economists have for the most part continued to distinguish economics from other social inquiries by the content of the motives or preferences with which it is concerned. So even though people may seek happiness through asceticism, or they may rationally prefer to sacrifice all their worldly goods to a political cause, economists have supposed that such preferences are rare and unimportant to economics. Economists are concerned with the phenomena deriving from rationality coupled with a desire for wealth and for larger bundles of goods and services.

Economists have flirted with a less substantive characterization of individual motivation and with a more expansive view of the domain of economics. In his influential monograph, An Essay on the Nature and Significance of Economic Science , Lionel Robbins defined economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses” (1932, p. 15). According to Robbins, economics is not concerned with production, exchange, distribution, or consumption as such. It is instead concerned with an aspect of all human action. Robbins’ definition helps one to understand efforts to apply economic concepts, models, and techniques to other subject matters such as the analysis of voting behavior and legislation, even as economics maintains its connection to a traditional domain.

Contemporary economics is diverse. There are many schools and many branches. Even so-called “orthodox” or “mainstream” economics has many variants. Some mainstream economics is highly theoretical, though most of it is applied and relies on rudimentary theory. Theoretical and applied work can be distinguished as microeconomics or macroeconomics. There is also a third branch, econometrics which is devoted to the empirical estimation, elaboration, and to some extent testing of microeconomic and macroeconomic models (but see Summers 1991 and Hoover 1994).

Microeconomics focuses on relations among individuals (with firms and households frequently counting as honorary individuals and little said about the idiosyncrasies of the demand of particular individuals). Individuals have complete and transitive preferences that govern their choices. Consumers prefer more commodities to fewer and have “diminishing marginal rates of substitution” — i. e. they will pay less for units of a commodity when they already have lots of it than when they have little of it. Firms attempt to maximize profits in the face of diminishing returns: holding fixed all the inputs into production except one, output increases when there is more of the remaining input, but at a diminishing rate. Economists idealize and suppose that in competitive markets, firms and individuals cannot influence prices, but economists are also interested in strategic interactions, in which the rational choices of separate individuals are interdependent. Game theory, which is devoted to the study of strategic interactions, is of growing importance in economics. Economists model the outcome of the profit-maximizing activities of firms and the attempts of consumers optimally to satisfy their preferences as an equilibrium in which there is no excess demand on any market. What this means is that anyone who wants to buy anything at the going market price is able to do so. There is no excess demand, and unless a good is free, there is no excess supply.

Macroeconomics grapples with the relations among economic aggregates, such as relations between the money supply and the rate of interest or the rate of growth, focusing especially on problems concerning the business cycle and the influence of monetary and fiscal policy on economic outcomes. Many mainstream economists would like to unify macroeconomics and microeconomics, but few economists are satisfied with the attempts that have been made to do so, especially via so called “representative agents” (Kirman 1992, Hoover 2001a). Macroeconomics is immediately relevant to economic policy and hence (and unsurprisingly) subject to much more heated (and politically-charged) controversy than microeconomics or econometrics. Schools of macroeconomics include Keynesians (and “new-Keynesians”), monetarists, “new classical economics” (rational expectations theory — Begg 1982, Carter and Maddock 1984, Hoover 1988, Minford and Peel 1983), and “real business cycle” theories (Kydland and Prescott 1991, 1994; Sent 1998).

Branches of mainstream economics are also devoted to specific questions concerning growth, finance, employment, agriculture, housing, natural resources, international trade, and so forth. Within orthodox economics, there are also many different approaches, such as agency theory (Jensen and Meckling 1976, Fama 1980), the Chicago school (Becker 1976), or public choice theory (Brennan and Buchanan 1985, Buchanan 1975). These address questions concerning incentives within firms and families and the ways that institutions guide choices.

Although mainstream economics is dominant and demands the most attention, there are many other schools. Austrian economists accept orthodox views of choices and constraints, but they emphasize uncertainty and question whether one should regard outcomes as equilibria, and they are skeptical about the value of mathematical modeling (Buchanan and Vanberg 1989, Dolan 1976, Kirzner 1976, Mises 1949, 1978, 1981, Rothbard 1957, Wiseman 1983, Boettke 2010, Holcombe 2014, Nell 2014a, 2014b, 2017, Boettke and Coyne 2015, Hagedorn 2015, Horwitz 2015, Dekker 2016, Linsbichler 2017 ).

Traditional institutionalist economists question the value of abstract general theorizing and emphasize evolutionary concepts (Dugger 1979, Wilber and Harrison 1978, Wisman and Rozansky 1991, Hodgson 2000, 2013, 2016, Hodgson and Knudsen 2010, Delorme 2010, Richter 2015). They emphasize the importance of generalizations concerning norms and behavior within particular institutions. Applied work in institutional economics is sometimes very similar to applied orthodox economics. More recent work in economics, which is also called institutionalist, attempts to explain features of institutions by emphasizing the costs of transactions, the inevitable incompleteness of contracts, and the problems “principals” face in monitoring and directing their agents (Coase 1937; Williamson 1985; Mäki et al. 1993, North 1990; Brousseau and Glachant 2008).

Marxian and socialist economists traditionally articulated and developed Karl Marx’s economic theories, but recently many socialist economists have revised traditional Marxian concepts and themes with tools borrowed from orthodox economic theory (Morishima 1973, Roemer 1981, 1982, Bowles 2012, Piketty 2014, Lebowitz 2015, Auerbach 2016, Beckert 2016, Jacobs and Mazzucato 2016).

There are also socio-economists , who are concerned with the norms that govern choices (Etzioni 1988, 2018), behavioral economists , who study the nitty-gritty of choice behavior (Winter 1962, Thaler 1994, Ben Ner and Putterman 1998, Kahneman and Tversky 2000, Camerer 2003, Camerer and Loewenstein 2003, Camerer et al. 2003, Loewenstein 2008, Thaler and Sunstein 2008, Saint-Paul 2011, Oliver 2013), post-Keynesians , who look to Keynes’s work and especially his emphasis on demand (Dow 1985, Kregel 1976, Harcourt and Kriesler 2013 Rochon and Rossi 2017), evolutionary economists , who emphasize the importance of institutions (Witt 2008, Hodgson and Knudsen 2010, Vromen 2009, Hodgson 2013, 2016, Carsten 2013, Dopfer and Potts 2014, Wilson and Kirman 2016), neo-Ricardians , who emphasize relations among economic classes (Sraffa 1960, Pasinetti 1981, Roncaglia 1978), and even neuroeconomists , who study neurological concomitants of choice behavior (Camerer 2007, Camerer et al. 2005, Camerer et al. 2008, Glimcher et al. 2008, Loewenstein et al. 2008, Rusticinni 2005, 2008, Glimcher 2010). Economics is not one homogeneous enterprise.

2. Six central methodological problems

Although the different branches and schools of economics raise a wide variety of epistemological and ontological issues concerning economics, six problems have been central to methodological reflection (in this philosophical sense) concerning economics:

Policy makers look to economics to guide policy, and it seems inevitable that even the most esoteric issues in theoretical economics may bear on some people’s material interests. The extent to which economics bears on and may be influenced by normative concerns raises methodological questions about the relationships between a positive science concerning “facts” and a normative inquiry into values and what ought to be. Most economists and methodologists believe that there is a reasonably clear distinction between facts and values, between what is and what ought to be, and they believe that most of economics should be regarded as a positive science that helps policy makers choose means to accomplish their ends, though it does not bear on the choice of ends itself.

This view is questionable for several reasons (Mongin 2006, Hausman, McPherson, and Satz 2017). First, economists have to interpret and articulate the incomplete specifications of goals and constraints provided by policy makers (Machlup 1969b). Second, economic “science” is a human activity, and like all human activities, it is governed by values. Those values need not be the same as the values that influence economic policy, but it is debatable whether the values that govern the activity of economists can be sharply distinguished from the values that govern policy makers. Third, much of economics is built around a normative theory of rationality. One can question whether the values implicit in such theories are sharply distinguishable from the values that govern policies. For example, it may be difficult to hold a maximizing view of individual rationality, while at the same time insisting that social policy should resist maximizing growth, wealth, or welfare in the name of freedom, rights, or equality. Fourth, people’s views of what is right and wrong are, as a matter of fact, influenced by their beliefs about how people in fact behave. There is evidence that studying theories that depict individuals as self-interested leads people to regard self-interested behavior more favorably and to become more self-interested (Marwell and Ames 1981, Frank et al . 1993). Finally, people’s judgments are clouded by their interests. Since economic theories bear so centrally on people’s interests, there are bound to be ideological biases at work in the discipline (Marx 1867, Preface). Positive and normative are especially interlinked within economics, because economists are not all researchers and teachers. In addition, economists work as commentators and as it were “hired guns” whose salaries depend on arriving at the conclusions their employers want. The bitter polemics concerning macroeconomic policy responses to the great recession beginning in 2008 testify to the influence of ideology.

Orthodox theoretical microeconomics is as much a theory of rational choices as it a theory that explains and predicts economic outcomes. Since virtually all economic theories that discuss individual choices take individuals as acting for reasons, and thus in some way rational, questions about the role that views of rationality and reasons should play in economics are of general importance. Economists are typically concerned with the aggregate results of individual choices rather than with the actions of particular individuals, but their theories in fact offer both causal explanations for why individuals choose as they do and accounts of the reasons for their choices. See also the entries on methodological individualism and reasons for action: justification, motivation, explanation .

Explanations in terms of reasons have several features that distinguish them from explanations in terms of causes. Reasons purport to justify the actions they explain, and indeed so called “external reasons” (Williams 1981) only justify action, without purporting to explain it. Reasons can be evaluated, and they are responsive to criticism. Reasons, unlike causes, must be intelligible to those for whom they are reasons. On grounds such as these, many philosophers have questioned whether explanations of human action can be causal explanations (von Wright 1971, Winch 1958). Yet merely giving a reason — even an extremely good reason — fails to explain an agent’s action, if the reason was not in fact “effective.” Someone might, for example, start attending church regularly and give as his reason a concern with salvation. But others might suspect that this agent is deceiving himself and that the minister’s attractive daughter is in fact responsible for his renewed interest in religion. Donald Davidson (1963) argued that what distinguishes the reasons that explain an action from the reasons that fail to explain it is that the former are also causes of the action. Although the account of rationality within economics differs in some ways from the folk psychology people tacitly invoke in everyday explanations of actions, many of the same questions carry over (Rosenberg 1976, ch. 5; 1980, Hausman 2012).

An additional difference between explanations in terms of reasons and explanations in terms of causes, which some economists have emphasized, is that the beliefs and preferences that explain actions may depend on mistakes and ignorance (Knight 1935). As a first approximation, economists can abstract from such difficulties caused by the intentionality of belief and desire. They thus often assume that people have perfect information about all the relevant facts. In that way theorists need not worry about what people’s beliefs are. (If people have perfect information, then they believe and expect whatever the facts are.) But once one goes beyond this first approximation, difficulties arise which have no parallel in the natural sciences. Choice depends on how things look “from the inside”, which may be very different from the actual state of affairs. Consider for example the stock market. The “true” value of a stock depends on the future profits of the company, which are of course uncertain. In 2006 house prices in the U.S. were extremely inflated. But whether they were “too high” depended at least in the short run, on what people believe. They were excellent investments if one could sell them to others who would be willing to pay even more for them. Economists disagree about how significant this subjectivity is. Members of the Austrian school argue that these differences are of great importance and sharply distinguish theorizing about economics from theorizing about any of the natural sciences (Buchanan and Vanberg 1989, von Mises 1981).

Of all the social sciences, economics most closely resembles the natural sciences. Economic theories have been axiomatized, and articles and books of economics are full of theorems. Of all the social sciences, only economics boasts an ersatz Nobel Prize. Economics is thus a test case for those concerned with the extent of the similarities between the natural and social sciences. Those who have wondered whether social sciences must differ fundamentally from the natural sciences seem to have been concerned mainly with three questions:

(i) Are there fundamental differences between the structure or concepts of theories and explanations in the natural and social sciences? Some of these issues were already mentioned in the discussion above of reasons versus causes.

(ii) Are there fundamental differences in goals? Philosophers and economists have argued that in addition to or instead of the predictive and explanatory goals of the natural sciences, the social sciences should aim at providing us with understanding . Weber and others have argued that the social sciences should provide us with an understanding “from the inside”, that we should be able to empathize with the reactions of the agents and to find what happens “understandable” (Weber 1904, Knight 1935, Machlup 1969a). This (and the closely related recognition that explanations cite reasons rather than just causes) seems to introduce an element of subjectivity into the social sciences that is not found in the natural sciences.

(iii) Owing to the importance of human choices (or perhaps free will), are social phenomena too irregular to be captured within a framework of laws and theories? Given human free will, perhaps human behavior is intrinsically unpredictable and not subject to any laws. But there are, in fact, many regularities in human action, and given the enormous causal complexity characterizing some natural systems, the natural sciences must cope with many irregularities, too.

Economics raises questions concerning the legitimacy of severe abstraction and idealization. For example, mainstream economic models often stipulate that everyone is perfectly rational and has perfect information or that commodities are infinitely divisible. Such claims are exaggerations, and they are clearly false. Other schools of economics may not employ idealizations that are this extreme, but there is no way to do economics if one is not willing to simplify drastically and abstract from many complications. How much simplification, idealization, abstraction or “isolation” (Mäki 2006) is legitimate?

In addition, because economists attempt to study economic phenomena as constituting a separate domain, influenced only by a small number of causal factors, the claims of economics are true only ceteris paribus — that is, they are true only if there are no interferences or disturbing causes. What are ceteris paribus clauses, and when if ever are they legitimate in science? Questions concerning ceteris paribus clauses are closely related to questions concerning simplifications and idealizations, since one way to simplify is to suppose that the various disturbing causes or interferences are inactive and to explore the consequences of some small number of causal factors. These issues and the related question of how well supported economics is by the evidence have been the central questions in economic methodology. They will be discussed further below mainly in Section 3 .

Many important generalizations in economics are causal claims. For example, the law of demand asserts that a price increase will ( ceteris paribus ) diminish the quantity demanded. (It does not merely assert an inverse relationship between price and demand. When demand increases for some other reason, such as a change in tastes, price increases .) Econometricians have also been deeply concerned with the possibilities of determining causal relations from statistical evidence and with the relevance of causal relations to the possibility of consistent estimation of parameter values. Since concerns about the consequences of alternative policies are so central to economics, causal inquiry is unavoidable.

Before the 1930s, economists were generally willing to use causal language explicitly and literally, despite some concerns that there might be a conflict between causal analysis of economic changes and “comparative statics” treatments of equilibrium states. Some economists were also worried that thinking in terms of causes was not compatible with recognizing the multiplicity and mutuality of determination in economic equilibrium. In the anti-metaphysical intellectual environment of the 1930s and 1940s (of which logical positivism was at least symptomatic), any mention of causation became suspicious, and economists commonly pretended to avoid causal concepts. The consequence was that they ceased to reflect carefully on the causal concepts that they continued implicitly to invoke (Hausman 1983, 1990, Helm 1984, Runde 1998). For example, rather than formulating the law of demand in terms of the causal consequences of price changes for quantity demanded, economists tried to confine themselves to discussing the mathematical function relating price and quantity demanded. There were important exceptions (Haavelmo 1944, Simon 1953, Wold 1954), and during the past generation, this state of affairs has changed dramatically.

For example, in his Causality in Macroeconomics (2001b) Kevin Hoover develops feasible methods for investigating large scale causal questions, such as whether changes in the money supply ( M ) cause changes in the rate of inflation P or accommodate changes in P that are otherwise caused. If changes in M cause changes in P , then the conditional distribution of P on M should remain stable with exogenous changes in M , but should change with exogenous changes in P . Hoover argues that historical investigation, backed by statistical inquiry, can justify the conclusion that some particular changes in M or P have been exogenous. One can then determine the causal direction by examining the stability of the conditional distributions. Econometricians have made vital contributions to the contemporary revival of philosophical interest in the notion of causation. In addition to Hoover’s work, see for example Geweke (1982), Granger (1969, 1980), Cartwright (1989), Sims (1977), Zellner and Aigner (1988), Pearl (2000), Spirtes, Glymour and Scheines (2001).

One relatively secure way to determine causal relations is via randomized controlled experiments. If the experimenters sort subjects randomly into experimental and control groups and vary just one factor, then, unless by bad luck the two groups differ in some unknown way, changes in the outcomes given the common features of the control and treatment groups should be due to the difference in the one factor. Indeed, in the case of quantitative variables, one can calculate average causal effects (Deaton 2010). This makes randomized controlled trials very attractive, though no panacea, since the treatment and control groups may not be representative of the population in which policy-makers hope to apply the causal conclusions, and the causal consequences of the intervention might differ across different subgroups within the control and treatment groups (Worrall 2007, Cartwright and Hardie 2013).

For both practical and ethical reasons, it is often hard to experiment in economics (though, as discussed in section 4.5, far from impossible). But with some ingenuity and with far greater enthusiasm for experimentation than had been the case previously, economists are experimenting much more frequently both in the laboratory and in the field. In addition, as a substitute for experimentation, or as a way of stretching the limits on experimentation, economists in recent years have become very enthusiastic about so-called “instrumental variable” techniques. For example, merely examining the correlation between economic growth and development aid, even controlling for other factors known to influence economic growth is unlikely to reveal the causal influence of aid on growth, because aid may reciprocally depend on growth and well as many factors that are hard to measure that also influence growth. These problems can be to some extent circumvented if economists can find an “instrumental” variable x upon which aid depends that influences growth (if at all) only by its influence on aid and which is probabilistically independent of all other determinants of growth. In that case, one can use the effect of x on growth to estimate the effect of aid on growth. Instrumental variable techniques, policy experimentation, and reliance on “natural experiments” have become widespread, though they bring with them new problems extrapolating experimental results to the target population (Deaton 2010; Cartwright and Hardie 2013).

In the wake of the work of Kuhn (1970) and Lakatos (1970), philosophers are much more aware of and interested in the larger theoretical structures that unify and guide research within particular research traditions. Since many theoretical projects or approaches in economics are systematically unified, they pose questions about what guides research, and many economists have applied the work of Kuhn or Lakatos in the attempt to shed light on the overall structure of economics (Baumberg 1977, Blaug 1976, de Marchi and Blaug 1991, Bronfenbrenner 1971, Coats 1969, Dillard 1978, Hands 1985b, Hausman 1992, ch. 6, Hutchison 1978, Latsis 1976, Jalladeau 1978, Kunin and Weaver 1971, Stanfield 1974, Weintraub 1985, Worland 1972). Whether these applications have been successful is controversial, but the comparison of the structure of economics to Kuhn’s and Lakatos’ schema served to highlight distinctive features of economics and may have contributed to some of the changes that economics has undergone. For example, asking what the “positive heuristic” of mainstream economics consists in permits one to see that mainstream theoretical models typically attempted to demonstrate that an economic equilibrium will obtain, and thus that mainstream models were unified in more than just their common assumptions. Since the success of research projects in economics is controversial, understanding their global structure and strategy helped to clarify their drawbacks as well as their advantages.

3. Inexactness, ceteris paribus clauses, tendencies, “unrealistic assumptions” and models

As mentioned in the previous section, the most important methodological issue concerning economics involves the very considerable simplification, idealization, and abstraction that characterizes economic theory and the consequent doubts these features of economics raise concerning whether economics is well supported. Claims such as, “Agents prefer larger commodity bundles to smaller commodity bundles,” raise serious questions, because if they are interpreted as universal generalizations, they are false; and philosophy of science has traditionally supposed that science is devoted to the discovery of genuine laws—that is, true universal generalizations. Even though it is false that everyone always prefers larger commodity bundles to smaller, the generalization seems informative and useful. Can a science rest on false generalizations? If these claims are not universal generalizations, then what is their logical form? And how can claims that appear in this way to be false or approximate be tested and confirmed or disconfirmed? These problems have bedeviled economists and economic methodologists from the first methodological reflections to the present day.

The first extended reflections on economic methodology appear in the work of Nassau Senior (1836) and John Stuart Mill (1836). Their essays must be understood against the background of both the economic theory and the philosophy of science of their times. Like Smith’s economics (to which it owed a great deal) and modern economics, the “classical” economics of the middle decades of the 19th century traced economic regularities to the choices of individuals facing social and natural constraints. But, as compared to Smith, more reliance was placed on severely simplified models. David Ricardo’s Principles of Political Economy (1817), draws a portrait in which wages above the subsistence level lead to increases in the population, which in turn require more intensive agriculture or cultivation of inferior land. The extension of cultivation leads to lower profits and higher rents; and the whole tale of economic development leads to a gloomy stationary state in which profits are too low to command any net investment, wages slide back to subsistence levels, and only the landlords are affluent.

Fortunately for the world, but unfortunately for economic theorists of the mid 19th century, the data consistently contradicted the trends the theory predicted (de Marchi 1970). Yet the theory continued to hold sway for more than half a century, and the consistently unfavorable data were explained away as due to various “disturbing causes.” It is consequently not surprising that Senior’s and Mill’s accounts of the method of economics emphasize the relative autonomy of theory.

Mill distinguishes between two main kinds of inductive methods. The method a posteriori is a method of direct experience. In his view, it is only suitable for phenomena in which few causal factors are operating or in which experimental controls are possible. Mill’s famous methods of induction provide an articulation of the method a posteriori . In his method of difference, for example, one holds fixed every causal factor except one and checks to see whether the effect ceases to obtain when that one factor is removed. The goal is to identify exceptionless causal laws.

Mill maintains that direct inductive methods cannot be used to study phenomena in which many causal factors are in play. If, for example, one attempts to investigate whether tariffs enhance or impede prosperity by comparing the prosperity of nations with high tariffs and nations without high tariffs, the results will be uninformative, because prosperity depends on so many other causal factors. So, Mill argues, one needs instead to employ the method a priori . Despite its name, this too is an inductive method. However, unlike the method a posteriori , the method a priori is an indirect inductive method. Scientists first determine the laws governing individual causal factors in domains in which Mill’s methods of induction are applicable. Having then determined the laws of the individual causes, they investigate their combined consequences deductively. Finally, there is a role for “verification” of the combined consequences, but owing to the causal complications, this testing has comparatively little weight. The testing of the conclusions serves only as a check on the scientist’s deductions and as an indicator of whether there are significant disturbing causes that scientists have not yet accounted for.

Mill gives the example of the science of the tides. Physicists determined the law of gravitation by studying planetary motion, in which gravity is the only significant causal factor. Then physicists develop the theory of tides deductively from that law and information concerning the positions and motions of the moon and sun. The implications of the theory will be inexact and sometimes badly mistaken, because many subsidiary causal factors influence tides. Testing theories of tides can uncover mistakes in the deductions physicists made, and it may uncover evidence concerning the role of the subsidiary factors. But because of the causal complexity, such testing does little to confirm or disconfirm the law of gravitation, which has already been established. Although Mill does not often use the language of “ ceteris paribus ”, his view that the principles or “laws” of economics hold in the absence of “interferences” or “disturbing causes” provides an account of how the principles of economics can be true ceteris paribus (Hausman 1992, ch. 8, 12).

Because economic theory includes only the most important causes and necessarily ignores minor causes, its claims, like claims concerning tides, are inexact. Its predictions will be imprecise, and sometimes far off. Mill maintains that it is nevertheless possible to develop and confirm economic theory by studying in simpler domains the laws governing the major causal factors and then deducing their consequences in more complicated circumstances. For example, the statistical data are ambiguous concerning the relationship between minimum wages and unemployment of unskilled workers; and since the minimum wage has never been extremely high, there are no data about what unemployment would be in those circumstances. On the other hand, everyday experience teaches economists that firms can choose among more or less labor-intensive processes and that a high minimum wage will make more labor-intensive processes more expensive. On the assumption that firms try to keep their costs down, economists have good (though not conclusive) reason to believe that a high minimum wage will increase unemployment.

In defending a view of economics as in this way inexact and employing the method a priori, Mill thought he was able to reconcile his empiricism and his commitment to Ricardo’s economics. Although Mill’s views on economic methodology were challenged later in the nineteenth century by economists who believed that theory was too remote from the contingencies of policy and history (Roscher 1874, Schmoller 1888, 1898), Mill’s methodological views dominated the mainstream of economic theory for a century (for example, Cairnes 1875). Mill’s vision survived the so-called neoclassical revolution in economics beginning in the 1870s and is clearly discernible in the most important methodological treatises concerning neoclassical economics, such as John Neville Keynes’ The Scope and Method of Political Economy (1891) or Lionel Robbins’ An Essay on the Nature and Significance of Economic Science (1932). Hausman (1992) argues that current methodological practice closely resembles Mill’s methodology, despite the fact that few economists explicitly defend it.

Although this way of interpreting Mill and the methodology of economics is coherent and conforms to an old-fashioned empiricist philosophy of science that finds the nomological force of generalizations in their universality, it is not faithful to the way in which economists see their theories. Rather than regarding generalizations such as acquisitiveness as universal laws carrying implicit ceteris paribus qualifications in their antecedents, economists are much more likely to regard these generalizations as “tendencies” that continue to operate even when defeated by interferences and that need to be studied separately (Woodward 2003). Even Mill speaks of tendencies, though without reconciling his talk of tendencies with his empiricism. If one sets aside metaphysical qualms about tendencies and counterfactuals, the most natural way to see economic theorizing is as the counterfactual investigation of combinations of tendencies. As the discussion below of models confirms, such views are congenial to economists and puzzling to philosophers with empiricist scruples.

Conceptualizing of economic inquiry as the study of models and tendencies, seems to shift the terms of the problems posed by inexactness rather than to offer a solution. Julian Reiss has, in effect, rediscovered the problem in an influential essay, “The Explanation Paradox.” (2013), where he argues that the following three propositions are inconsistent: (1) Economic models are false. (2) Economic models are explanatory. (3) Explanation requires truth.The formulation is a bit obscure, since models are not single sentences or propositions that can be true or false, but it should be clear that Reiss’s putative paradox is a reformulation of the problem posed by the inexactness of economic theories or models.

Although some contemporary philosophers have argued that Mill’s method a priori is largely defensible (Bhaskar 1975, Cartwright 1989, and Hausman 1992), by the middle of the Twentieth Century Mill’s views appeared to many economists out of step with their understanding of contemporary philosophy of science. Without studying Mill’s text carefully, it was easy for economists to misunderstand his terminology and to regard his method a priori as opposed to empiricism. Others took seriously Mill’s view that the basic principles of economics should be empirically established and found evidence to cast doubt on some of the basic principles, particularly the view that firms attempt to maximize profits (Hall and Hitch 1938, Lester 1946, 1947). Methodologists who were well-informed about contemporary developments in philosophy of science, such as Terence Hutchison (1938), denounced “pure theory” in economics as unscientific.

Philosophically reflective economists proposed several ways to replace the old-fashioned Millian view with a more up-to-date methodology that would continue to justify much of current practice (see particularly Machlup 1955, 1960 and Koopmans 1957). By far the most influential of these efforts was Milton Friedman’s 1953 essay, “The Methodology of Positive Economics.” This essay has had an enormous influence, far more than any other work on methodology.

Friedman begins his essay by distinguishing in a conventional way between positive and normative economics and conjecturing that policy disputes are typically really disputes about the consequences of alternatives and can thus be resolved by progress in positive economics. Turning to positive economics, Friedman asserts (without argument) that correct prediction concerning phenomena not yet observed is the ultimate goal of all positive sciences. He holds a practical view of science and finds the value of science in predictions that will guide policy.

Since it is difficult and often impossible to carry out experiments and since the uncontrolled phenomena economists observe are difficult to interpret (owing to the same causal complexity that bothered Mill), it is hard to judge whether a particular theory is a good basis for predictions or not. Tendencies are not universal laws. A claim such as “firms attempt to maximize profits” will be “unrealistic” in the sense that it is not a true universal generalization. Although not in these terms, Friedman objects to criticisms of tendencies that in effect complain that they are merely tendencies, rather than universal laws. If his criticism stopped there, it would be sensible, although it would avoid the problems of understanding and appraising claims about tendencies.

But Friedman draws a much more radical conclusion. In his terminology, the mistake economists make who criticize claims such as “firms attempt to maximize profits” lies in the attempt to test theories by the “realism” of their “assumptions” rather than by the accuracy of their predictions. He maintains that the realism of a theory’s assumptions is irrelevant to its predictive value. It does not matter whether the assumption that firms maximize profits is realistic. Theories should be appraised exclusively in terms of the accuracy of their predictions. What matters is exclusively whether the theory of the firm makes correct and significant predictions.

As critics have pointed out (and almost all commentators have been critical), Friedman refers to several different things as “assumptions” of a theory and means several different things by speaking of assumptions as “unrealistic” (Brunner 1969). Since Friedman aims his criticism to those who investigate empirically whether firms in fact attempt to maximize profits, he must take “assumptions” to include central economic generalizations, such as “Firms attempt to maximize profits,” and by “unrealistic,” he must mean, among other things, “false.” In arguing that it is a mistake to appraise theories in terms of the realism of assumptions, Friedman is arguing at least that it is a mistake to appraise theories by investigating whether their central generalizations are true or false.

It would seem that this interpretation would render Friedman’s views inconsistent, because in testing whether firms attempt to maximize profits, one is checking whether predictions of theory concerning the behavior of firms are true or false. An “assumption” such as “firms maximize profits” is itself a prediction. But there is a further wrinkle. Friedman is not concerned with every prediction of economic theories. In Friedman’s view, “theory is to be judged by its predictive power exclusively for the class of phenomena which it is intended to explain” (1953, p. 8 [italics added]). Economists are interested in only some of the implications of economic theories. Other predictions, such as those concerning the results of surveys of managers, are irrelevant to policy. What matters is whether economic theories are successful at predicting the phenomena that economists are interested in. In other words, Friedman believes that economic theories should be appraised in terms of their predictions concerning prices and quantities exchanged on markets. In his view, what matters is “narrow predictive success” (Hausman 2008a), not overall predictive adequacy.

So Friedman permits economists to ignore the disquieting findings of surveys, or the fact that people do not always prefer larger bundles of commodities to smaller bundles of commodities. Nor do economists need to be concerned about whether there is a tendency to prefer more commodities to fewer. They need not be troubled that some of their models suppose extravagantly that all agents know the prices of all present and future commodities in all markets. All that matters is whether the predictions concerning market phenomena turn out to be correct. And since anomalous market outcomes could be due to any number of uncontrolled causal factors, while experiments are difficult to carry out, it turns out that economists need not worry about ever encountering evidence that would strongly disconfirm fundamental theory. Detailed models may be confirmed or disconfirmed, but fundamental theory is safe. In this way one can understand how Friedman’s methodology, which appears to justify the eclectic and pragmatic view that economists should use any model that appears to “work” regardless of how absurd or unreasonable its assumptions might appear, has been deployed in service of a rigid theoretical orthodoxy. For other discussions of Friedman’s essay, see Bear and Orr 1969, Boland 1979, Hammond 1992, Hirsch and de Marchi 1990, Mäki 1990a, Melitz 1963, Rotwein 1959, and Samuelson 1963.

Over the last two decades there has been a surge of experimentation in economics, and Friedman’s methodological views probably do not command the same near unanimity that they used to. But they are still enormously influential, and they still serve as a way of avoiding awkward questions concerning simplifications, idealizations, and abstraction in economics rather than responding to them.

A century ago economists talked of their work in terms of “principles,” “laws,”, and “theories.” That language has not disappeared altogether: economists still talk of “game theory”, “consumer choice theory”, or the “law of demand”. But nowadays the standard intellectual tool or form in economics is a “model.” Econometricians speak of models and structures. Economists are more comfortable describing the axioms concerning rational choice as constituting a model of rational choice than as delineating a theory of rational choice. Many of the most distinguished commentators on models regard them as fictional worlds, whose study informs our understanding of actual phenomena (Frigg, 2010). “Creating models is ‘world-making.’” (Morgan 2012, pp. 95, 405). In their view, economists are able to investigate how causal factors would operate in the absence of interferences by constructing models —that is fictional economies—in which the interferences are absent. Uskali Mäki maintains that “Models are experiments. Experiments are models.” (2005). Dani Rodrik (2015) argues that economics consists of a collection of models, and that doing economics consists in selecting or customizing a model from this collection. Is the ubiquity of talk of models just a change in terminological fashion, or does the concern with models (which is by no means unique to economics) signal a methodological shift? What are models? These questions have been discussed by Cartwright 1989, 1999, Godfrey Smith 2006, Grüne-Yanoff 2009, Hausman 1992, 2015a, Kuorikoski and Lehtinen 2009, Mäki, ed. 1991, Mäki 2005, 2009a, 2009b, Morgan 2001, 2004, 2012, Morgan and Morrison 1999, Rappaport 1998, Sugden 2000, 2009, Weisberg 2007, and Lehtinen, Kuorikoski and Ylikoski 2012.

The view of models to which economists are most attracted is philosophically problematic, because it is apparently committed to the existence of fictional entities whose properties and causal propensities economists can investigate. In experiments, whether carried out in a laboratory or in the field, experimenters interact causally with flesh and blood experimental subjects, and the outcome may contradict the economist’s predictions. In investigating a model, in contrast, the economist “interacts” with fictional entities, which are arguably nothing other than his or her own thoughts, and the logical implications of the axioms that define the model are never disappointed. This is not to say that the logical investigation of models never results in surprises. Humans are not logically omniscient, and discovering the implications of a set of axioms may be an arduous task. But it is a different task than carrying out an experiment in the laboratory or the field, and ontology of the “worlds” that economists allegedly “create” and then study is deeply puzzling. Although less faithful to economic practice, it is far more intelligible philosophically to regard models as predicates or as definitions of predicates (Hausman 1992). For example, when economists write down a model of a firm with a single output and just two inputs, they are defining a concept that they can use to describe actual firms.

4. Influential approaches to economic methodology

The past half century has witnessed the emergence of a large literature devoted to economic methodology. That literature explores many methodological approaches and applies its conclusions to many schools and branches of economics. Much of the literature has focused on the fundamental theory of mainstream economics — the theory of the equilibria resulting from constrained rational individual choice — but the tremendous importance of macroeconomics in determining the proper responses to the great recession beginning in 2008, coupled with the rapidly increasing role of empirical and experimental inquiries in the day-to-day work of economists have seen echoes in methodological inquiries (Backhouse 2010). Since 1985, there has been a journal Economics and Philosophy devoted specifically to philosophy of economics, and since 1994 there has also been a Journal of Economic Methodology . This section will sample some of the methodological approaches of the past two decades.

Karl Popper ’s philosophy of science has been influential among economists, as among other scientists. Popper defends what he calls a falsificationist methodology (1968, 1969). Scientists should formulate theories that are “logically falsifiable” — that is, inconsistent with some possible observation reports. “All crows are black” is logically falsifiable; it is inconsistent with (and would be falsified by) an observation report of a red crow. (Probabilistic claims are obviously not in this sense falsifiable.) Popper insists on falsifiability on the grounds that unfalsifiable claims that rule out no observations are uninformative. They provide no guidance concerning what to expect, and there is nothing to be learned from testing them. Second, Popper maintains that scientists should subject theories to harsh test and should be willing to reject them when they fail the tests. Third, scientists should regard theories as at best interesting conjectures. Passing a test does not confirm a theory or provide scientists with reason to believe it. It only justifies on the one hand continuing to employ the hypothesis (since it has not yet been falsified) and, on the other hand, devoting increased efforts to attempting to falsify it (since it has thus far survived testing). Popper has defended what he calls “situational logic” (which is basically rational choice theory) as the correct method for the social sciences (1967, 1976). There appear to be serious tensions between Popper’s falsificationism and his defense of situational logic, and his discussion of situational logic has not been as influential as his falsificationism. For discussion of how situational logic applies to economics, see Hands (1985a).

Given Popper’s falsificationism, there seems little hope of understanding how extreme simplifications can be legitimate or how current economic practice could be scientifically reputable. Economic theories and models are almost all unfalsifiable, and if they were, the widespread acceptance of Friedman’s methodological views would insure that they are not subjected to serious test. When models apparently fail tests, they are rarely repudiated. Economists conclude instead merely that they chose the wrong model for the task, or that there were disturbing causes. Economic models, which have not been well tested, are often taken to be well-established guides to policy, rather than merely conjectures. Critics of neoclassical economics have made these criticisms (Eichner 1983), but most of those who have espoused Popper’s philosophy of science have not repudiated mainstream economics and have not been harshly critical of its practitioners.

Mark Blaug (1992) and Terence Hutchison (1938, 1977, 1978, 2000), who are the most prominent Popperian methodologists, criticize particular features of economics, and they both call for more testing and a more critical attitude. For example, Blaug praises Gary Becker (1976) for his refusal to explain differences in choices by differences in preferences, but criticizes him for failing to go on and test his theories severely (1980a, chapter 14). However, both Blaug and Hutchison understate the radicalism of Popper’s views and take his message to be little more than that scientists should be critical and concerned to test their theories.

Blaug’s and Hutchison’s criticisms have sometimes been challenged on the grounds that economic theories cannot be tested, because of their ceteris paribus clauses and the many subsidiary assumptions required to derive testable implications (Caldwell 1984). But this response ignores Popper’s insistence that testing requires methodological decisions not to attribute failures of predictions to mistakes in subsidiary assumptions or to “interferences.” For views of Popper’s philosophy and its applicability to economics, see de Marchi (1988), Caldwell (1991), Boland (1982, 1989, 1992, 1997), and Boylan and O’Gorman (2007), Backhouse (2009), and Thomas (2017).

Applying Popper’s views on falsification literally would be destructive. Not only neoclassical economics, but all significant economic theories would be condemned as unscientific, and there would be no way to discriminate among economic theories. One major problem with a naive reading of Popper’s views is that one cannot derive testable implications from theories by themselves. To derive testable implications, one also needs subsidiary assumptions concerning probability distributions, measurement devices, proxies for unmeasured variables, the absence of interferences, and so forth. This is the so-called “Duhem-Quine problem” (Duhem 1906, Quine 1953, Cross 1982). These problems arise generally, and Popper proposes that they be solved by a methodological decision to regard a failure of the deduced testable implication to be a failure of the theory. But in economics the subsidiary assumptions are dubious and in many cases known to be false. Making the methodological decision that Popper requires is unreasonable and would lead one to reject all economic theories.

Imre Lakatos (1970), who was for most of his philosophical career a follower of Popper, offers a broadly Popperian solution to this problem. Lakatos insists that testing is always comparative. When theories face empirical difficulties, as they always do, one attempts to modify them. Scientifically acceptable (in Lakatos’ terminology “theoretically progressive”) modifications must always have some additional testable implications; otherwise they are purely ad hoc . If some of the new predictions are confirmed, then the modification is “empirically progressive,” and one has reason to reject the unmodified theory and to employ the new theory, regardless of how unsuccessful in general either theory may be. Though progress may be hard to come by, Lakatos’ views do not have the same destructive implications as Popper’s. Lakatos appears to solve the problem of how to appraise mainstream economic theory by arguing that what matters is empirical progress or retrogression rather than empirical success or failure. Lakatos’ views have thus been more attractive to economic methodologists than Popper’s.

Developing Thomas Kuhn’s notion of a “paradigm” (1970) and some hints from Popper, Lakatos also presented a view of the global theory structure of whole theoretical enterprises, which he called “scientific research programmes.” Lakatos emphasized that there is a “hard core” of basic theoretical propositions that define a research programme and that are not to be questioned within the research programme. In addition members of a research programme accept a common body of heuristics that guide them in the articulation and modification of specific theories. These views have also been attractive to economic methodologists, since theory development in economics is sharply constrained and since economics appears at first glance to have a “hard core.” The fact that economists do not give up basic theoretical postulates that appear to be false might be explained and justified by regarding them as part of the “hard core” of the “neoclassical research programme”.

Yet Lakatos’ views do not provide a satisfactory account of how economics can be a reputable science despite its reliance on extreme simplifications. For it is questionable whether the development of neoclassical economic theory has demonstrated empirical progress. For example, the replacement of “cardinal” utility theory by “ordinal” utility theory (see below Section 5.1 ) in the 1930s, which is generally regarded as a major step forward, involved the replacement of one theory by another that had no additional empirical content. Furthermore, despite his emphasis on heuristics as guiding theory modification, Lakatos still emphasizes testing. Science is for Lakatos more empirically driven than mainstream economics has been (Hands 1992). It is also doubtful whether research enterprises in economics have “hard cores” (Hoover 1991, Hausman 1992, ch. 6). For attempts to apply Lakatos’ views to economics see Latsis (1976), and Weintraub (1985). As is apparent in de Marchi and Blaug (1991), writers on economic methodology have in recent years become increasingly disenchanted with Lakatos’ philosophy (Backhouse 2009).

There is a second major problem with Popper’s philosophy of science, which plagues Lakatos’ views as well. Both maintain that there is no such thing as empirical confirmation (for some late qualms, see Lakatos 1974). Popper and Lakatos maintain that evidence never provides reason to believe that scientific claims are true, and both also deny that results of tests can justify relying on statements in practical endeavours or in theoretical inquiry. There is no better evidence for one unfalsified proposition than for another. On this view, someone who questions whether there is enough evidence for some proposition to justify relying on it in theoretical studies or for policy purposes would be making the methodological “error” of supposing that there can be evidence in support of hypotheses. With the notable exception of Watkins (1984), few philosophers within the Popperian tradition have faced up to this challenging consequence.

One radical reaction to the difficulties of justifying the reliance on severe simplifications is to deny that economics passes methodological muster. Alexander Rosenberg (1992) maintains that economics can only make imprecise generic predictions, and it cannot make progress, because it is built around folk psychology, which is a mediocre theory of human behavior and which (owing to the irreducibility of intentional notions) cannot be improved. Complex economic theories are scientifically valuable only as applied mathematics, not as empirical theory. Since economics does not show the same consistent progress as the natural sciences, one cannot dismiss Rosenberg’s suggestion that economics is an empirical dead end. But his view that it has made no progress and that it does not permit quantitative predictions is hard to accept. For example, contemporary economists are much better at pricing stock options or designing auctions than economists were even a generation ago.

An equally radical but opposite reaction is Deirdre McCloskey’s, who denies that there are any non-trivial methodological standards that economics must meet (1985, 1992, 1994, 2000, McCloskey and Ziliak 2003, Ziliak and McCloskey 2008). In her view, the only relevant and significant criteria for assessing the practices and products of a discipline are those accepted by the practitioners. Apart from a few general standards such as honesty and a willingness to listen to criticisms, the only justifiable criteria for any conversation are those of the participants. Economists can thus dismiss the arrogant pretensions of philosophers to judge economic discourse. Whatever a group of respected economists takes to be good economics is automatically good economics. Philosophical standards of empirical success are just so much hot air. Those who are interested in understanding the character of economics and in contributing to its improvement should eschew methodology and study instead the “rhetoric” of economics — that is, the means of argument and persuasion that succeed among economists.

McCloskey’s studies of the rhetoric of economics have been valuable and influential (1985, esp. ch. 5–7, McCloskey and Ziliak 2003, Ziliak and McCloskey 2008), but a great deal of her work during the 1980s and 1990s consists of philosophical critiques of economic methodology rather than studies of the rhetoric of economics. Her philosophical critiques are problematic, because the position sketched in the previous paragraph is hard to defend and potentially self-defeating. It is hard to defend, because epistemological standards have already influenced the conversation of economists. The standards of predictive success which lead one to have qualms about economics are already standards that many economists accept. The only way to escape these doubts is to surrender the standards that gave rise to them. But McCloskey’s position undermines any principled argument for a change in standards. Furthermore, as Rosenberg has argued (1988), it seems that economists would doom themselves to irrelevance if they were to surrender standards of predictive success, for it is upon such standards that policy decisions are made.

McCloskey does not, in fact, want to preclude the possibiity that economists are sometimes persuaded when they should not be or are not persuaded when they should be. For she herself criticizes the bad habit some economists have of conflating statistical significance with economic importance (1985, ch. 9, McCloskey and Ziliak 2003, Ziliak and McCloskey 2008). McCloskey typically characterizes rhetoric descriptively as the study of what in fact persuades, but sometimes she instead characterizes it normatively as the study of what ought to persuade (1985, ch. 2). And if rhetoric is the study of what ought rationally to persuade, then it is methodology, not an alternative to methodology. Questions about whether economics is a successful empirical science cannot be conjured away.

Economic methodologist have paid little attention to debates within philosophy of science between realists and anti-realists (van Fraassen 1980, Boyd 1984, Psillos 1999, Niniluoto 2002, Chakravarty 2010, Dicken 2016), because economic theories rarely postulate the existence of unobservable entities or properties, apart from variants of “everyday unobservables,” such as beliefs and desires. Methodologists have, on the other hand, vigorously debated the goals of economics, but those who argue that the ultimate goals are predictive (such as Milton Friedman) do so because of their interest in policy, not because they seek to avoid or resolve epistemological and semantic puzzles concerning references to unobservables.

Nevertheless there are two important recent realist programs in economic methodology. The first, developed mainly by Uskali Mäki, is devoted to exploring the varieties of realism implicit in the methodological statements and theoretical enterprises of economists (see Mäki 1990a, b, c, 2007, and Lehtinen, Kuorikoski and Ylikoski 2012). The second, which is espoused by Tony Lawson and his co-workers, mainly at Cambridge University, derives from the work of Roy Bhaskar (1975) (see Lawson 1997, 2015, Bhaskar et al. 1998, Fleetwood 1999, Brown and Fleetwood 2003, Ackroyd and Fleetwood 2004, Edwards, Mahoney, and Vincent 2014). In Lawson’s view, one can trace many of the inadequacies of mainstream economics (of which he is a critic) to an insufficient concern with ontology. In attempting to identify regularities on the surface of the phenomena, mainstream economists are doomed to failure. Economic phenomena are in fact influenced by a large number of different causal factors, and one can achieve scientific knowledge only of the underlying mechanisms and tendencies, whose operation can be glimpsed intermittently and obscurely in observable relations. Mäki’s and Lawson’s programs have little to do with one another, though Mäki (like Mill, Cartwright, and Hausman) shares Lawson’s and Bhaskar’s concern with underlying causal mechanisms. See also the entry on scientific realism .

Throughout its history, economics has been the subject of sociological as well as methodological scrutiny. Many sociological discussions of economics, like Marx’s critique of classical political economy, have been concerned to identify ideological distortions and thereby to criticize particular aspects of economic theory and economic policy. Since every political program finds economists who testify to its economic virtues, there is a never-ending source of material for such critiques. For example, in the wake of the near collapse of the international financial system in 2008, American economists who argued for austerity were mostly Republicans, while those who defended efforts to increase aggregate demand were mostly Democrats.

The influence of contemporary sociology of science and social studies of science, coupled with the difficulties methodologists have had making sense of and rationalizing the conduct of economics, have led to efforts at fusing economics and sociology (Granovetter 1985, Swedberg 1990, 2007) as well as to a sociological turn within methodological reflection itself. Rather than showing that there is good evidence supporting developments in economic theory or that those developments have other broadly epistemic virtues, methodologists and historians such as D. Wade Hands (2001); Hands and Mirowski 1998), Philip Mirowski (1990, 2002, 2004, 2013), and E. Roy Weintraub (1991) have argued that these changes reflect a wide variety of non-rational factors, from changes in funding for theoretical economics, political commitments, personal rivalries, attachments to metaphors, or mathematical interests.

Furthermore, many of the same methodologists and historians have argued that economics is not only an object of social inquiry, but that it can be a tool of social inquiry into science. By studying the incentive structure of scientific disciplines and the implicit or explicit market forces impinging on research (including of course research in economics), it should be possible to write the economics of science and the economics of economics itself (Hands 1995, Hull 1988, Leonard 2002, Mirowski and Sent 2002).

Exactly how, if at all, this work is supposed to bear on questions concerning how well supported are the claims economists make is not clear. Though eschewing traditional methodology, Mirowski’s monograph on the role of physical analogy in economics (1990) is often very critical of mainstream economics. In his Reflection without Rules (2001) D. W. Hands maintains that general methodological rules are of little use. He defends a naturalistic view of methodology and is skeptical of prescriptions that are not based on detailed knowledge. But he does not argue that no rules apply.

The above survey of approaches to the fundamental problems of appraising economic theory is far from complete. For example, there have been substantial efforts to apply structuralist views of scientific theories (Sneed 1971, Stegmüller 1976, 1979) to economics (Stegmüller et al. 1981, Hamminga 1983, Hands 1985c, Balzer and Hamminga 1989). The above discussion documents the diversity and disagreements concerning how to interpret and appraise economic theories. It is not surprising that there is no consensus among those writing on economic methodology concerning the overall empirical appraisal of specific approaches in economics, including mainstream microeconomics, macroeconomics, and econometrics. When practitioners cannot agree, it is questionable whether those who know more philosophy but less economics will be able to settle the matter. Since the debates continue, those who reflect on economic methodology should have a continuing part to play.

Meanwhile, there are many other more specific methodological questions to address, and it is a sign of the maturity of the subdiscipline that a large and increasing percentage of work on economic methodology addresses more specific questions. There is plethora of work, as a perusal of any recent issue of the Journal of Economic Methodology or Economics and Philosophy will confirm. Some of the range of issues currently under discussion were mentioned above in Section 2. Here is a list of three of the many areas of current interest:

1. Although more concerned with the content of economics than with its methodology, the recent explosion of work on feminist economics is shot through with methodological and sociological self-reflection. The fact that a considerably larger percentage of economists are men than is true of any of the other social sciences and indeed than most of the natural sciences raises questions about whether there is something particularly masculine about the discipline. Important texts are Ferber and Nelson (1993, 2003), Nelson (1995, 1996, 2001), Barker and Kuiper (2003). Since 1995, there has been a journal, Feminist Economics , which pulls together much of this work.

2. During the past decades, laboratory experimentation in economics has expanded rapidly. Laboratory experimentation has many different objectives (see Roth 1988) and apparently holds out the prospect of bridging the gulf between fundamental economic theory and empirical evidence. Some of it casts light on the way in which methodological commitments influence the extent to which economists heed empirical evidence. A good deal of laboratory experimentation in contemporary economics is in the service of behavioral economics, which prides itself on heeding experimental evidence concerning the structure and determinants of individual choices. Although behavioral economics has secured a foothold within mainstream economics, it remains controversial substantively and methodologically, and its implications for normative economics, discussed below in section 6, are controversial.

For example, in the case of preference reversals, discussed briefly below in Section 5.1, economists devoted considerable attention to the experimental findings and conceded that they disconfirmed central principles of economics. But economists have been generally unwilling to pay serious attention to the theories proposed by psychologists that predicted the phenomena before they were observed. The reason seems to be that these psychological theories do not have the same wide scope as the basic principles of mainstream economics (Hausman 1992, chapter 13). Hesitation concerning neuroeconomics (Camerer et al. 2005, Camerer 2009, Marchionni and Vromen 2014, Rustichini 2005, 2009, Glimcher and Fehr 2013, Reuter and Montag 2016, Vromen and Marchionni 2018) is also common. In an extremely influential essay, “The Case for Mindless Economics.” Gul and Pesandorfer (2008) argue that the findings of behavioral economics (and neuroeconomics) are irrelevant to economics. They are at most of heuristic value. They maintain that the findings of behavioral economics are irrelevant to economics, because they do not concern market choices and their consequences, which are the only germane data. Sometimes Gul and Pesandorfer appear to identify economic theory with the empirical consequences economists are concerned with, while at other points they echo Milton Friedman (see section 3.2) and deny that the “realism” of the “assumptions” of economic models matters. They do not address sophisticated defenses of realism concerning mental states like Dietrich and List (2016). It seems to me that theoretical resistance to engaging with behavioral economists like that one finds in Gul and Pesandorfer’s essay is weakening. But it is clear that the methodological commitments governing theoretical economics are much more complex and more specific to economics than the general rules proposed by philosophers such as Popper and Lakatos.

The relevance of laboratory experimentation remains controversial. Behavioral economists are enthusiastic, while more traditional theorists question whether experimental findings can be generalized to non-experimental contexts and, more generally, concerning the possibilities of learning from experiments (Caplin and Schotter 2008). For discussions of experimental economics, see Guala (2000a, b, 2005), Hey (1991), Kagel and Roth (1995, 2016), Plott (1991), Smith (1991), Starmer (1999), Camerer (2003), Bardsley and Cubitt 2009, Durlauf and Blume (2009), Branas-Garza and Cabrales (2015), Fréchette and Schotter (2015), Jacquemet and L’Haridon (2018), and the June, 2005 special issue of the Journal of Economic Methodology . Al Roth’s Game Theory, Experimental Economics, and Market Design Page (http://kuznets.fas.harvard.edu/~aroth/alroth.html) is a useful source. For recent work on behavioral economics see the Journal of Behavioral Economics , the Review of Behavioral Economics , and Behavioural Public Policy.

3. During the past generation, there has been a radical transformation in the attitudes of economists toward empirical causal inquiry, especially in the form of field experiments and natural experiments, often employing instrumental variables. For example, about two-thirds of the articles in the February, 2018 American Economic Review are based on empirical studies. The titles of the first four entries in the table of contents are: “The Effects of Pretrial Detention on Conviction, Future Crime, and Employment: Evidence from Randomly Assigned Judges,” “Implications of US Tax Policy for House Prices, Rents, and Homeownership,” “The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security,” “The Economic Consequences of Hospital Admissions.” If one goes back twenty-five years, only about one-eighth of the first issue of the 1993 American Economic Review appear to rely on any empirical studies. The first four entries are: “Today’s Task for Economists,” “Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity,” “Economic Policy, Economic Performance, and Elections,” “The Macroeconomics of Dr. Strangelove.” A Rip Van Winkle who had gone to sleep in 1983 reading the principal economics journals would be staggered when he awoke in 2018.

Field experiments have been especially important in development economics where the results of various foreign aid projects have too often provided meagre benefits. One can find good introductions to this work in Carpenter et al. (2005), Duflo and Banerjee (2011, 2017), Gugerty and Karlan (2018), Karlan and Appel (2011, 2016), Kremer and Glennerster (2011), List and Samek (2018), and Mullainathan and Shafir (2013). See also the Poverty Action Lab . Although field experiments appear to be hard-nosed inquiries that establish what works and what does not work, matters are not so simple (Deaton 2010, Cartwright and Hardie 2013). Without knowledge of the mechanisms, it is all too easy for an intervention that works splendidly at a specific time and place to fail abysmally when tried elsewhere. Atheoretical inquiry, even when methodologically sophisticated, has severe limits as a tactic of knowledge acquisition.

The empirical turn in economics has also had the effect of increasing the importance of economic history. With some ingenuity, especially in identifying possible instrumental variables, history is full of “natural experiments.” For example (J. Hausman 2016), in 1936, the American Congress voted to pay pensions to veterans of World War I eight years before they were due to be paid. Because the percentages of veterans differed across states, Hausman can use the differing economic performances of states to estimate the effects of the economic stimulus the pensions provided. Although less decisive than randomized controlled trials (which are often impossible to carry out), examination of historical episodes such as this one provide significant evidence concerning economic hypotheses.

5. Rational choice theory

Insofar as economics explains and predicts phenomena as consequences of individual choices, which are themselves explained in terms of alleged reasons, it must depict agents as to some extent rational. Rationality, like reasons, involves evaluation, and just as one can assess the rationality of individual choices, so one can assess the rationality of social choices and examine how they are and ought to be related to the preferences and judgments of individuals. In addition, there are intricate questions concerning rationality in strategic situations in which outcomes depend on the choices of multiple individuals. Since rationality is a central concept in branches of philosophy such as action theory, epistemology, ethics, and philosophy of mind, studies of rationality frequently cross the boundaries between economics and philosophy.

The barebones theory of rationality discussed above in Section 1.1 takes an agent’s preferences (rankings of states of affairs) to be rational if they are complete and transitive, and it takes the agent’s choice to be rational if the agent does not prefer any feasible alternative to the one he or she chooses. Such a theory of rationality is clearly too weak, because it says nothing about belief or what rationality implies when agents do not know (with certainty) everything relevant to their choices. But it may also be too strong, since, as Isaac Levi in particular has argued (1986), there is nothing irrational about having incomplete preferences in situations involving uncertainty. Sometimes it is rational to suspend judgment and to refuse to rank alternatives that are not well understood. On the other hand, transitivity is a plausible condition, and the so-called “money pump” argument demonstrates that if one’s preferences are intransitive and one is willing to make exchanges, then one can be exploited. (Suppose an agent A prefers X to Y , Y to Z and Z to X , and that A will pay some small amount of money $ P to exchange Y for X , Z for Y , and X for Z . That means that, starting with Z , A will pay $ P for Y , then $ P again for X , then $ P again for Z and so on. Agents are not this stupid. They will instead refuse to trade or adjust their preferences to eliminate the intransitivity (but see Schick 1986).

On the other hand, there is considerable experimental evidence that people’s preferences are not in fact transitive. Such evidence does not establish that transitivity is not a requirement of rationality. It may show instead that people are sometimes irrational. In the case of so-called “preference reversals,” for example, it seems plausible that people in fact make irrational choices (Lichtenstein and Slovic 1971, Tversky and Thaler 1990). Evidence of persistent violations of transitivity is disquieting, since standards of rationality should not be impossibly high.

A further difficulty with the barebones theory of rationality concerns the individuation of the objects of preference or choice. Consider, for example, data from multistage ultimatum games. Suppose A can propose any division of $10 between A and B . B can accept or reject A ’s proposal. If B rejects the proposal, then the amount of money drops to $5, and B gets to offer a division of the $5 which A can accept or reject. If A rejects B ’s offer, then both players get nothing. Suppose that A proposes to divide the money with $7 for A and $3 for B . B declines and offers to split the $5 evenly, with $2.50 for each. Behavior such as this is, in fact, common (Ochs and Roth 1989, p. 362). Assuming that B prefers more money to less, these choices appear to be a violation of transitivity. B prefers $3 to $2.50, yet declines $3 for certain for $2.50 (with some slight chance of A declining and B getting nothing). But the objects of choice are not just quantities of money. B is turning down $3 as part of “a raw deal” in favor of $2.50 as part of a fair arrangement. If the objects of choice are defined in this way, there is no failure of transitivity.

This plausible observation gives rise to a serious problem. Unless there are constraints on how the objects of choice are individuated, conditions of rationality such as transitivity are empty. A ’s choice of X over Y , Y over Z and Z over X does not violate transitivity if “ X when the alternative is Y ” is not the same object of choice as “ X when the alternative is Z ”. John Broome (1991) argues that further substantive principles of rationality are required to limit how alternatives are individuated or to require that agents be indifferent between alternatives such as “ X when the alternative is Y ” and “ X when the alternative is Z .”

To extend the theory of rationality to circumstances involving risk (where the objects of choice are lotteries with known probabilities) and uncertainty (where agents do not know the probabilities or even all the possible outcomes of their choices) requires further principles of rationality, as well as controversial technical simplifications. Subjective Bayesians suppose that individuals in circumstances of uncertainty have well-defined subjective probabilities (degrees of belief) over all the payoffs and thus that the objects of choice can be modeled as lotteries, just as in circumstances involving risk, though with subjective probabilities in place of objective probabilities. See the entries on Bayes’ theorem and Bayesian epistemology . The most important of the axioms needed for the theory of rational choice under conditions of risk and uncertainty is the independence condition. It says roughly that the preferences of rational agent between two lotteries that differ in only one outcome should match their preferences between the differing outcomes. Although initially plausible, the independence condition is very controversial. See Allais and Hagen (1979) and McClennen (1983, 1990).

A considerable part of rational choice theory is concerned with formalizations of conditions of rationality and investigation of their implications. When an agent’s preferences are complete and transitive and satisfy a further continuity condition, then they can be represented by a so-called ordinal utility function. What this means is that it is possible to define a function that represents an agent’s preferences so that U ( X ) > U ( Y ) if and only if the agent prefers X to Y , and U ( X ) = U ( Y ) if and only if the agent is indifferent between X and Y . This function merely represents the preference ranking. It contains no information beyond the ranking. Any order-preserving transformation of “ U ” would represent the agent’s preferences just as well.

When an agent’s preferences in addition satisfy the independence condition and some other technical conditions, then they can be represented by an expected utility function (Harsanyi 1977b, ch. 4, Hernstein and Milnor 1953, Ramsey 1926, and Savage 1972). Such a function has two important properties. First, the expected utility of a lottery is equal to the sum of the (expected) utilities of its prizes weighted by their probabilities. Second, expected utility functions are unique up to a positive affine transformation. What this means is that if U and V are both expected utility functions representing the preferences of an agent, then for all objects of preference, X , V ( X ) must be equal to a U ( X ) + b , where a and b are real numbers and a is positive. In addition, the axioms of rationality imply that the agent’s degrees of belief will satisfy the axioms of the probability calculus.

A great deal of controversy surrounds the theory of rationality, and there have been many formal investigations into weakened or amended theories of rationality. For further discussion, see Allais and Hagen 1979, Barberà, Hammond and Seidl 1999, Kahneman and Tversky 1979, Loomes and Sugden 1982, Luce and Raiffa 1957, Machina 1987, and Gilboa and Schmeidler 2001.

Although societies are very different from individuals, they have mechanisms to evaluate alternatives and make choices, and their evaluations and choices may be rational or irrational. It is not, however, obvious, what principles of rationality should govern the choices and evaluations of society. Transitivity is one plausible condition. It seems that a society that chooses X when faced with the alternatives X or Y , Y when faced with the alternatives Y or Z and Z when faced with the alternatives X or Z either has had a change of heart or is choosing irrationally. Yet, purported irrationalities such as these can easily arise from standard mechanisms that aim to link social choices and individual preferences. Suppose there are three individuals in the society. Individual One ranks the alternatives X , Y , Z . Individual Two ranks them Y , Z , X . Individual Three ranks them Z , X , Y . If decisions are made by pairwise majority voting, X will be chosen from the pair ( X , Y ), Y will be chosen from ( Y , Z ), and Z will be chosen from ( X , Z ). Clearly this is unsettling, but are possible cycles in social choices irrational ?

Similar problems affect what one might call the logical coherence of social judgments (List and Pettit 2002). Suppose society consists of three individuals who make the following judgments concerning the truth or falsity of the propositions P and Q and that social judgment follows the majority.

The judgments of each of the individuals are consistent with the principles of logic, while social judgments violate them. How important is it that social judgments be consistent with the principles of logic?

Although social choice theory in this way bears on questions of social rationality, most work in social choice theory explores the consequences of principles of rationality coupled with explicitly ethical constraints. The seminal contribution is Kenneth Arrow’s impossibility theorem (1963, 1967). Arrow assumes that both individual preferences and social preferences are complete and transitive and that the method of forming social preferences (or making social choices) issues in some social preference ranking or social choice for any possible profile of individual preferences. In addition, Arrow imposes a weak unanimity condition: if everybody prefers X to Y , then Y must not be socially preferred. Third, he requires that there be no dictator whose preferences determine social preferences or choices irrespective of the preferences of anybody else. Lastly, he imposes the condition that the social preference between X and Y should depend on how individuals rank X and Y and on nothing else. Arrow then proved the surprising result that no method of relating social and individual preferences can satisfy all these conditions!

In the sixty years since Arrow wrote, there has been a plethora of work in social choice theory, a good deal of which is arguably of great importance to ethics. For example, John Harsanyi proved that if individual preferences and social evaluations both satisfy the axioms of expected utility theory (with shared or objective probabilities) and that social preferences conform to unanimous individual preferences, then social evaluations are determined by a weighted sum of individual utilities (1955, 1977a). Matthew Adler (2012) has extended an approach like Harsanyi’s to demonstrate that a form of weighted utilitarianism, which prioritizes the interests of those who are worse off, uniquely satisfies a longer list of rational and ethical constraints. When there are instead disagreements in probability assignments, there is an impossibility result: the unanimity condition implies that for some profiles of individual preferences, social evaluations will not satisfy the axioms of expected utility theory (Hammond 1983, Seidenfeld, et al . 1989, Mongin 1995). For further discussion of social choice theory and the relevance of utility theory to social evaluation, see the entry on social choice theory , Sen (1970) and for recent reappraisals Fleurbaey (2007) and Adler (2012).

When outcomes depend on what several agents do, one agent’s best choice may depend on what other agents choose. Although the principles of rationality governing individual choice still apply, arguably there are further principles of rationality governing expectations of the actions of others (and of their expectations concerning your actions and expectations, and so forth). Game theory occupies an increasingly important role within economics, and it is also relevant both to inquiries concerning rationality and inquiries concerning ethics. For further discussion see the entries on game theory , game theory and ethics , and evolutionary game theory .

6. Economics and ethics

As discussed above in Section 2.1 most economists distinguish between positive and normative economics, and most would argue that economics is relevant to policy mainly because of the (positive) information it provides concerning the consequences of policy. Yet the same economists also offer their advice concerning how to fix the economy, and there is a whole field of normative economics.

Economic outcomes, institutions, and processes may be better or worse in several different ways. Some outcomes may make people better off. Other outcomes may be less unequal. Others may restrict individual freedom more severely. Economists typically evaluate outcomes exclusively in terms of welfare. This does not imply that they believe that only welfare is of moral importance. They focus on welfare, because they believe that economics provides an excellent set of tools to address questions of welfare and because they hope that questions about welfare can be separated from questions about equality, freedom, or justice. As sketched below, economists have had some things to say about other dimensions of moral appraisal, but welfare takes center stage. Indeed normative economics is standardly called “welfare economics.”

One central question of moral philosophy has been to determine what things are intrinsically good for human beings. This is a central question, because all plausible moral views assign an important place to individual welfare or well-being . This is obviously true of utilitarianism (which holds that what is right maximizes total or average welfare), but even non-utilitarian views are concerned with welfare, if they recognize the virtue of benevolence, or if they are concerned with the interests of individuals or with avoiding harm to individuals.

There are many ways to think about well-being, and the prevailing view among economists has shifted from hedonism (which takes the good to be a mental state such as pleasure or happiness) to the view that welfare should be measured by the satisfaction of preferences. A number of prominent economists are currently arguing for a return to hedonism, but they remain a minority. (See Bavetta et al. 2014. Clark Flèche 2018, Dolan and Kahneman 2014, Frey 2010, 2018, Frey and Stutzer 2001, Kahneman 1999, 2000a, 2000b, Kahneman and Krueger 2006, Kahneman and Sugden 2005, Kahneman and Thaler 2006, Layard 2006, Ormerod 2008, Radcliff 2013, Weimann and Knabe 2015 and for criticism Davies 2015, Etzioni 2018, and Hausman 2010.) Unlike hedonism, taking welfare to be preference satisfaction specifies how to find out what is good for a person rather than committing itself to any substantive view of a person’s good. Note that equating welfare with the satisfaction of preferences is not equating welfare with any feeling of satisfaction. If welfare can be measured by the satisfaction of preferences, then a person is better off if what he or she prefers comes to pass, regardless of whether that occurrence makes the agent feel satisfied.

Since mainstream economics attributes a consistent preference ordering to all agents, and since more specific models typically take agents to be well-informed and self-interested, it is easy for economists to accept the view that an individual agent A will prefer X to Y if and only if X is in fact better for A than Y is. This is one place where positive theory bleeds into normative theory. In addition, the identification of welfare with the satisfaction of preferences is attractive to economists, because it prevents questions about the justification of paternalism (to which most economists are strongly opposed) from even arising.

Welfare and the satisfaction of preferences may coincide because the satisfaction of preferences constitutes welfare or because people are self-interested and good judges of their own interests and hence prefer what is good for them. There are many obvious objections to the view that the satisfaction of preferences constitutes welfare. Preferences may be based on mistaken beliefs. People may prefer to sacrifice their own well-being for some purpose they value more highly. Preferences may reflect past manipulation or distorting psychological influences (Elster 1983). In addition, if preference satisfaction constitutes welfare, then policy makers can make people better off by molding their wants rather than by improving conditions. Furthermore, it seems unreasonable that social policy should attend to extravagant preferences. Rather than responding to these objections and attempting to defend the view that preference satisfaction constitutes well-being, economists can blunt these objections by taking preferences in circumstances where people are self-interested and good judges of their interests to be merely good evidence of what will promote welfare (Hausman and McPherson 2009, Hausman 2012). There are some exceptions, most notably Amartya Sen (1987a,b,c, 1992), but most economists take welfare to coincide with the satisfaction of preference.

Because the identification of welfare with preference satisfaction makes it questionable whether one can make interpersonal welfare comparisons, few economists defend a utilitarian view of policy as maximizing total or average welfare. (Harsanyi is one exception, for another see Ng 1983). Economists have instead explored the possibility of making welfare assessments of economic processes, institutions, outcomes, and policies without making interpersonal comparisons. Consider two economic outcomes S and R , and suppose that some people prefer S to R and that nobody prefers R to S . In that case S is “Pareto superior” to R , or S is a “Pareto improvement” over R . Without making any interpersonal comparisons, one can conclude that people’s preferences are better satisfied in S than in R . If there is no state of affairs that is Pareto superior to S , then economists say that S is “Pareto optimal” or “Pareto efficient.” Efficiency here is efficiency with respect to satisfying preferences rather than minimizing the number of inputs needed to produce a unit of output or some other technical notion (Le Grand 1991). If a state of affairs is not Pareto efficient, then society is missing an opportunity costlessly to satisfy some people’s preferences better. A Pareto efficient state of affairs avoids this failure, but it has no other obvious virtues. For example, suppose nobody is satiated and people care only about how much food they get. Consider two distributions of food. In the first, millions are starving but no food is wasted. In the second, nobody is starving, but some food is wasted. The first is Pareto efficient, while the second is not.

The notions of Pareto improvements and Pareto efficiency might seem useless, because economic policies almost always have both winners and losers. Mainstream economists have nevertheless found these concepts useful in two ways. First, they have proved two theorems concerning properties of perfectly competitive equilibria (Arrow 1968). The first theorem says that equilibria in perfectly competitive markets are Pareto optimal, and the second says that any Pareto optimal allocation, with whatever distribution of income policy makers might prefer, can be achieved as a perfectly competitive market equilibrium, provided that one begins with just the right distribution of endowments among economic agents. The first theorem has been regarded as underwriting Adam Smith’s view of the invisible hand (Arrow and Hahn 1971, preface; Hahn 1973). This interpretation is problematic, because no economy has ever been or will ever be in perfectly competitive equilibrium. The second theorem provides some justification for the normative division of labor economists prefer, with economists concerned about efficiency and others concerned about justice. The thought is that the second theorem shows that theories of just distribution are compatible with reliance on competitive markets. The two fundamental theorems of welfare economics go some way toward explaining why mainstream economists, whether they support laissez-faire policies or government intervention to remedy market imperfections, think of perfectly competitive equilibria as ideals. But the significance of the theorems is debatable, since actual markets differ significantly from perfectly competitive markets and, when there are multiple market imperfections, the “theory of the second best” shows that fixing some of the imperfections may lead the society away from a perfectly competitive equilibrium (and diminish efficiency and welfare) rather than toward one (Lipsey and Lancaster 1956–7).

The other way that economists have found to extend the Pareto efficiency notions leads to cost-benefit analysis, which is a practical tool for policy analysis (Mishan 1971; Sugden and Williams 1978; Adler and Posner 2000, 2006; Broadman et al. 2010; Boadway 2016). Suppose that S is not a Pareto improvement over R . Some members of the society would be losers in a shift from R to S . Those losers prefer R to S , but there are enough winners — enough people who prefer S to R — that the winners could compensate the losers and make the preference for S ′ ( S with compensation paid) over R unanimous. S is a “potential Pareto improvement” over R . In other terms, the amount of money the winners would be willing to pay to bring about the change is larger than the amount of money the losers would have to be compensated so as not to object to the change. (Economists are skeptical about what one learns from asking people how much they would be willing to pay, and they attempt instead to infer how much individuals are willing to pay indirectly from market phenomena.) When S is a potential Pareto improvement over R , there is said to be a “net benefit” to the policy of bringing about S . According to cost-benefit analysis, among eligible policies (which satisfy legal and moral constraints), one should, other things being equal, employ the one with the largest net benefit. Note that the compensation is entirely hypothetical. Potential Pareto improvements result in winners and losers, the justice or injustice of which is irrelevant to cost-benefit analysis. Justice or beneficence may require that the society do something to mitigate distributional imbalances. Because there is a larger “pie” of goods and services to satisfy preferences (since compensation could be paid and everybody’s preferences better satisfied), selecting policies with the greatest net benefit serves economic efficiency (Hicks 1939, Kaldor 1939).

Despite the practical importance of cost-benefit analysis, the technique and the justification for it sketched in the previous paragraph are problematic. One technical difficulty is that it is possible for S to be a potential Pareto improvement over R and for R to be a potential Pareto improvement over S (Scitovsky 1941, Samuelson 1950)! That means that the fact that S is a potential Pareto improvement over R does not imply that there is a larger economic “pie” in S than in R , because there cannot, of course, be a larger economic pie in S than in R and a larger economic pie in R than in S . A second problem is that willingness to pay for some policy and the amount one would require in compensation if one opposes the policy depend on how much wealth one has as well as on one’s attitude to the policy. Cost-benefit analysis weights the preferences of the rich more than the preferences of the poor (Baker 1975). It is possible to compensate roughly for the effects of income and wealth (Harburger 1978, Fankhauser et al. 1997), but it is bothersome to do so, and cost-benefit analysis is commonly employed without any adjustment for wealth or income.

A further serious difficulty for traditional welfare economics, which has been as it were hiding in plain sight, is the fact that choices are imperfect indicators of preferences, which are in turn imperfect indicators of what enhances well-being. The same facts that show that preference satisfaction does not constitute well-being (false beliefs, lack of information, other-directed and non-rational preferences) show that choices and preferences are sometimes misleading indicators of well-being. Moreover, once one recognizes that preferences are good indicators of welfare only if agents are good judges of what will benefit them, one is bound to recognize that agents are not always good judges of what will benefit themselves, even when they have all the information they need. In some contexts, these problems may be minor. For example, people’s preferences among new automobiles are largely self-interested, thoughtful, and well-informed. In other contexts, such as environmental protection, preferences for ignoring the problems are often badly informed, while preferences to take action are typically not self-interested. Either way, popular preferences among policies to address environmental problems are unlikely to be a good guide to welfare.

Ignoring these problems has been a great convenience to normative economics. If what people choose reveals their preferences, which in turn indicate what is good for them, then, as noted before, government action to steer someone’s choices can never make that person better off, and so questions about whether to endorse paternalistic policies cannot arise. But whether or not it is advisable, successful paternalism is not impossible; and recent work by behavioral economists, which document a wide variety of systematic deliberative foibles, has put questions concerning paternalism back on the table (Ariely 2009, Kahneman 2011). Some economists have searched for ways to identify an agent’s “true” preferences (as described by Infante et al. 2016). Others have argued that policy makers must respect the preferences of agents among their ends or objectives, while overruling preferences among means when these are distorted by bad judgment or false beliefs (Thaler and Sunstein 2008, Le Grand and New 2015). Moreover, Thaler and Sunstein’s proposal that government explore non-coercive methods of influencing people to make better choices (“nudges”) has been popular among policy makers and has arguably shifted philosophical discussion of paternalism away from Mill’s (1859) focus on avoiding coercion (Shiffrin 2000, Hausman and Welch 2010, Le Grand and New 2015).

Although welfare economics and concerns about efficiency dominate normative economics, they do not exhaust the subject, and in collaboration with philosophers, economists have made important contributions to contemporary work in ethics and normative social and political philosophy. Section 5.2 and Section 5.3 gave some hint of the contributions of social choice theory and game theory. In addition economists and philosophers have worked on the problem of providing a formal characterization of freedom so as to bring tools of economic analysis to bear (Pattanaik and Xu 1990, Sen 1988, 1990, 1991, Carter 1999, Sugden 2018). Others have developed formal characterizations of social welfare functions that prioritize the interests of those who are less well off or that favor equality of resources, opportunity, and outcomes and that separate individual and social responsibility for inequalities (Pazner and Schmeidler 1974, Varian 1974, 1975, Roemer 1986b, 1987, Fleurbaey 1995, 2008, Fleurbaey and Maniquet 2014, Greaves 2015, McCarthy 2015, 2017). John Roemer has put contemporary economic modeling to work to offer precise characterizations of exploitation (1982). Amartya Sen and Martha Nussbaum have not only developed novel interpretations of the proper concerns of normative economics in terms of capabilities (Sen 1992, Nussbaum and Sen 1993, Nussbaum 2000), which Sen has linked to characterizations of egalitarianism and to operational measures of deprivation (1999). There are many lively interactions between normative economics and moral philosophy. See also the entries on libertarianism , paternalism , egalitarianism , and economics [normative] and economic justice .

The frontiers between economics and philosophy concerned with methodology, rationality, ethics and normative social and political philosophy are buzzing with activity. This activity is diverse and concerned with very different questions. Although many of these are related, philosophy of economics is not a single unified enterprise. It is a collection of separate inquiries linked to one another by connections among the questions and by the dominating influence of mainstream economic models and techniques.

The following bibliography is not comprehensive. It generally avoids separate citations for methodological essays in collections. It does not list separately the essays on economic methodology from special issues on philosophy and economics. A large number of essays on philosophy of economics can be found in the journals, Economics and Philosophy , The Journal of Economic Methodology and the annual series Research in the History of Economic Thought and Methodology .

Readers may want to consult the Journal of Economic Methodology , Vol. 8, No. 1, March 2001 Millennium symposium on “The Past, Present and Future of Economic Methodology” the and Binder et al. 2016. For an encyclopedic overview of economic methodology, see the Handbook of Economic Methodology edited by Davis, Hands, and Mäki. For a comprehensive bibliography of works on economic methodology through 1988, see Redman 1989. Essays from economics journals are indexed in The Journal of Economic Literature , and the Index of Economic Articles in Journal and Collective Volumes also indexes collections. Since 1991, works on methodology can be found under the number B4. Works on ethics and economics can be found under the numbers A13, D6, and I3. Discussions of rationality and game theory can be found under A1, C7, D00, D7, D8, and D9.

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There are now a large number of blogs by prominent economists. Though not predominantly concerned with methodology and typically not exclusively concerned with economics, these blogs show economists arguing with one another, responding to current events, and formulating and reformulating their views. The following are of particular interest, but there are many more:

• Brad DeLong Grasping Reality with Both Invisible Hands: Fair, Balanced, and Reality-Based: A Semi-Daily Journal
• Paul Krugman, The Conscience of a Liberal
• Marginal Revolution: Small Steps Toward a Much Better World (Tyler Cowen and Alex Tabbarok)
• Mainly Macro: Comment on Macroeconomic Issues (Simon Wren-Lewis)
• The Grumpy Economist (John Cochrane’s Blog)
• Dani Rodrik’s Weblog: Unconventional thoughts on economic development and globalization
• Beat the Press (Dean Baker)
• The Becker-Posner Blog (Gary Becker and Richard Posner) , terminated in 2014, but still available online.

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The New Palgrave Dictionary of Economics pp 1–5 Cite as

Economics, Definition of

• Roger E. Backhouse 2 &
• Steven Medema 2  
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• First Online: 27 November 2016

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Economics is difficult to define unambiguously, many definitions having been proposed as the subject has evolved. Definitions are ex post constructions, even rationalizations, but they can nonetheless influence what economist do and how they set about doing it. This article considers the main definitions from the late 18th century to the present, pointing out some of the ways in which changing views reflect and have influenced changes in the subject.

This chapter was originally published in The New Palgrave Dictionary of Economics , 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume

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Bibliography

Backhouse, R.E., and, S.G. Medema. 2007. Defining economics: Robbins’s definition in theory and practice. SSRN working paper. Abstract online. Available at http://ssrn.com/abstract=969994 . Accessed 19 May 2007.

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1.3 How Economists Use Theories and Models to Understand Economic Issues

Learning objectives.

By the end of this section, you will be able to:

• Interpret a circular flow diagram
• Explain the importance of economic theories and models
• Describe goods and services markets and labor markets

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking. Keynes ( Figure 1.6 ) famously wrote in the introduction to a fellow economist’s book: “[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” In other words, economics teaches you how to think, not what to think.

Watch this video about John Maynard Keynes and his influence on economics.

Economists see the world through a different lens than anthropologists, biologists, classicists, or practitioners of any other discipline. They analyze issues and problems using economic theories that are based on particular assumptions about human behavior. These assumptions tend to be different than the assumptions an anthropologist or psychologist might use. A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying.

Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. We use models to test theories, but for this course we will use the terms interchangeably.

For example, an architect who is planning a major office building will often build a physical model that sits on a tabletop to show how the entire city block will look after the new building is constructed. Companies often build models of their new products, which are more rough and unfinished than the final product, but can still demonstrate how the new product will work.

A good model to start with in economics is the circular flow diagram ( Figure 1.7 ). It pictures the economy as consisting of two groups—households and firms—that interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees.

Firms produce and sell goods and services to households in the market for goods and services (or product market). Arrow “A” indicates this. Households pay for goods and services, which becomes the revenues to firms. Arrow “B” indicates this. Arrows A and B represent the two sides of the product market. Where do households obtain the income to buy goods and services? They provide the labor and other resources (e.g., land, capital, raw materials) firms need to produce goods and services in the market for inputs (or factors of production). Arrow “C” indicates this. In return, firms pay for the inputs (or resources) they use in the form of wages and other factor payments. Arrow “D” indicates this. Arrows “C” and “D” represent the two sides of the factor market.

Of course, in the real world, there are many different markets for goods and services and markets for many different types of labor. The circular flow diagram simplifies this to make the picture easier to grasp. In the diagram, firms produce goods and services, which they sell to households in return for revenues. The outer circle shows this, and represents the two sides of the product market (for example, the market for goods and services) in which households demand and firms supply. Households sell their labor as workers to firms in return for wages, salaries, and benefits. The inner circle shows this and represents the two sides of the labor market in which households supply and firms demand.

This version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and labor markets work in the economy. We could easily add details to this basic model if we wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports).

Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. Economists express theories as diagrams, graphs, or even as mathematical equations. (Do not worry. In this course, we will mostly use graphs.) Economists do not figure out the answer to the problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help them figure out the answer. Although at the introductory level, you can sometimes figure out the right answer without applying a model, if you keep studying economics, before too long you will run into issues and problems that you will need to graph to solve. We explain both micro and macroeconomics in terms of theories and models. The most well-known theories are probably those of supply and demand, but you will learn a number of others.

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What is Economics? Essay

Many people think that economics is about money. Well, to some extent this is true. Economics has a lot to do with money: with how much money people are paid; how much they spend: what it costs to buy various items; how much money firms earn; how much money there is in total in the economy. But despite the large number of areas in which our lives are concerned with money, economics is more than just the study of money. It is concerned with: · The production of goods and services: how much the economy produces; what particular combination of goods and services; how much each firm produces; what techniques of production they use; how many people they employ. · The consumption of goods and services: how much the population as a …show more content…

There are three types of resources: · Human resources: labour The labour force is limited both in number and in skills. · Natural resources: land and raw materials The world’s land area is limited, as are its raw materials. · Manufactures resources: capital All inputs into production that have themselves been produced: e.g. factories, machines and tools. One must bear in mind that our wants are virtually unlimited, while the resources available to satisfy these wants are limited. In other words when society demands more of a product than can actually be produced to fulfil those wants we have a problem of scarcity . An example of this would be the OPEC oil price shocks between 1973 and 1980. Yes, it is true that the price of oil rose and some individuals used substitutes but the economies of oil importing countries like Germany and Japan fell because OPEC now had more buying power since they had the control over a scarce resource. We can therefore think of oil as having become scarcer in economic terms when its price rose. Earlier I stated that economics is concerned with consumption and production. We can look at it in the terms of demand and supply. It is simply the quantity of a good buyers wish to purchase at each conceivable price. Three factors determine demand: · Desire · Willingness to pay · Ability to pay Whilst supply is the quantity of good sellers wish to sell at each conceivable price. Supply is

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Economic Theories: Supply And Demand

The economic theory of supply and demand explains the interaction between the supply of a resource and the demand for that same resource. If the product has high demand, it is typically more expensive. In sum, if there is a low supply and high demand then the price will be high. If there is an abundant supply and a low demand, the price will be low. This principle is the basis of all economic understanding. It is a global phenomenon that can be seen across the planet. From the lemonade stand you set up as a kid, to the corporations that own the oil and gas industry, every business is affected by supply and demand. It can be found in a wide range from pure command to pure capitalism (McEachern).

Relationship Between Employment, Health Coverage And Costs, And Access For Care And Health Outcomes

In the United States, the economy is set up to explain the complex relationship between employment, health coverage and costs, and access to care and health outcomes. Economics a social science that explains how a society uses its resources and makes decisions. Economics analyzes the priority of certain choices in order to use the resources efficiently. In society there is cooperative decision-making done by consumers and suppliers focusing solely on price theories. For example, consumers and suppliers decide their exchange based on the price they pay or the price they will gain. So the decision for either group is solely based on price. A consumer will naturally buy more if the price is lower and if the consumer is buying more the

The Mystery Of Capital By Richard Mcgregor

Economics is something that most people don’t understand such as; what is so important about it? One major portion of economics is the fact that if we did not have this one word we most likely not be able to have a free market as well as prosperous nations all around the world. Yet Hernando DeSoto author of The Mystery of Capital conveys the idea that the markets in other countries around the world are different because of the system that each set country has. For example a country with a government that keeps “their peoples and nations in hopeless poverty” and nothing can help unless they change the way the run the country. Richard McGregor author of The Party: the Secret World of Chinas Communist Rulers speaks more in depth of what

Australia Is Not The Only One Of Its Lodging Moderateness Emergency

The fundamental monetary issue that emerges on the grounds that individuals have boundless needs yet assets are restricted. On account of lack, various economic decisions must be made to allocate resources efficiently.

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1. Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?

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Economics is the study of- C. How people, institutions, and society make choices under conditions of scarcity.

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In a layman term Economics can also be termed as subject of studying financial matters. Economics is a sociology that investigates a whole scope of issues that impact money related choices. Financial aspects take into consideration how people and associations use, deliver, devour, and convey the world 's products and administrations. Thinking about cash is insufficient: avenues like human science, law, psychology, legislative issues, geography,

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According to Colander (2008), “Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.” (p. 4) Will anyone in the

An Economist's Approach to Alcohol Abuse

According to Garrod and Willis (2007), in economics, the law of supply and demand is regard as one of the fundamental principles running an economy. It is illustrated as the situation where as supply raises the price will likely drop or vice versa. As demand raises the price will likely increase or vice versa. Essentially this is a standard that nearly all people intuitively understand concerning the relationship of services and goods against the demand for those services and goods. According to Lipsey and Courant (2011), when demand and supply are

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As the concept of supply and demand play a big role in microeconomics, aggregate demand and aggregate supply are of much relevance to economics on the larger scale. In order to truly understand aggregate demand and aggregate supply, we have to uncover what they mean and their effect on the economy.

Demand and Supply Analysis

1. Demand indicates how much of a good consumers are willing and able to buy at each possible price during a given time period, other things constant.

Related Topics

• 1973 oil crisis

Up: Home : Study Guidance > Effective Writing and Referencing > Writing the Economics Essay

• Writing the Economics Essay

An academic rhetoric (or organisation) is important to convince a reader that you understand the topic well – poor organisation can signal muddled thinking.

Thesis – Justification – Support

This is the rhetoric used by Bray et al.

Thesis – the main concept or idea that you are proposing

Justification – the reasons why your thesis is valid

Support – evidence that backs up your justification

Essay structure – your introduction, main body, and conclusion

Box: An example

The Thesis – Justification – Support rhetoric can be applied to an individual paragraph of an essay, or on an entire essay. For example, take the essay question:

‘The accumulation of capital is sufficient for ensuring sustainable growth in per capita living standards’. Discuss.

One possible answer would be:

Thesis: if we define capital as physical capital, the accumulation of capital will lead to diminishing returns

Justification: Demonstration of the Solow model : capital accumulation can result in higher levels of income but after a certain level not higher levels of consumption per capita (due to diminishing marginal returns).

Support: examples, such as India’s heavy investment drive in the 1950s, 1960s which was associated with low levels of ‘Hindu growth’; or econometric evidence, such as that from Mankiw, Romer and Weil (1992), which supports some of the conclusions of the Solow model (but also suggests improvements, see below).

The next section of the essay would play with the assumptions of the Solow model – for example by expanding our definition of capital to include human capital (and, if you’re really trying to impress, social capital and ‘natural’ capital as well).

You might also want to discuss if technological progress (the source of per capita income growth in the Solow model) is related to capital accumulation, for example through ‘ learning by doing ‘ (Arrow, 1962)

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How to Write Economics Essay: Your Ultimate Guide

Did you know that the global economic crisis of 2008, triggered by the collapse of Lehman Brothers, led to a profound reevaluation of economic policies worldwide? This crisis demonstrated the enormous influence that economics wields, and the critical role it plays in shaping our lives. Whether it's analyzing the causes and consequences of financial meltdowns, evaluating market trends, or understanding the impact of government decisions on our wallets, writing an essay on economics is the gateway to exploring these complexities.

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1. Crafting an Engaging Introduction: The introduction is your chance to captivate your audience. You can start with an interesting fact or statistic related to your topic. For example, if your essay is about the economic impact of automation, you might begin with a startling statistic about job displacement due to automation in recent years.

2. Formulating a Strong Thesis Statement: Your thesis statement should be concise and crystal clear. It should convey the main argument or point you'll be making in your essay. Using the economics essay examples on automation, your thesis statement might be: 'Automation, while boosting productivity, presents significant challenges in the labor market, requiring innovative approaches to address unemployment and skill gaps.'

3. Hooking the Reader: In addition to your introduction, consider using a hook—a thought-provoking question or a compelling anecdote related to your topic. This can further engage your readers and draw them into the essay. For instance, after your initial statistic, you could pose a question like, 'But how will society adapt to this technological revolution?'

Structuring the Main Body of Your Essay

The main body of your economics essay is where the substance of your arguments and further analysis resides. Proper structuring is essential to ensure that your points are conveyed in such a way that they flow logically and persuasively. Here's how to effectively craft the main body of your economics essay:

1. Organizing Your Ideas Logically: Ensure that the sequence of ideas in your essay flows logically. Start with the main idea, such as the most important or fundamental concepts, and then progress to more complex or detailed points. For example, if your essay discusses the impact of government taxation policies on economic growth, begin with an overview of taxation principles before delving into specific policies.

2. Using Clear Headings and Subheadings: Break down your main body into sections with clear headings and subheadings. Each section should address a distinct aspect of your topic. These headings serve as signposts for your readers, making it easier for them to navigate through your essay. In the taxation essay, you might have sections like 'Taxation Principles,' 'Historical Tax Policies,' and 'Effects on Economic Growth.'

3. Providing Evidence to Support Your Arguments: Every point you make in your essay should be supported by evidence. Use data, statistics, academic research, or real-world examples to back up your claims. For example, when discussing the effects of taxation policies on economic growth, you can include data showing the correlation between changes in tax rates and fluctuations in GDP growth.

4. Addressing Counter Arguments: Acknowledging and addressing counter arguments demonstrates a nuanced understanding of the topic. Anticipate potential objections to your thesis and provide reasoned responses. If critics argue that lower taxes always lead to higher economic growth, for instance, you can present evidence that suggests otherwise.

Writing a Compelling Conclusion

The conclusion of your economics essay serves as the final opportunity to leave a lasting impression on your readers. A well-crafted conclusion should tie all the elements of your essay together and provide a sense of closure. Here's how to write a compelling conclusion:

1. Summarizing Key Points: Begin your conclusion by summarizing the key points and arguments you've presented in the main body of your essay. This recap reinforces the main takeaways for your readers.

2. Restating the Thesis Statement: Reiterate your thesis statement, but do so in a way that emphasizes the significance of your argument. This reinforces the central point of your essay.

3. Offering Insights or Implications: Take your essay a step further by offering insights or implications based on your analysis. Consider the broader significance of your findings. In the case of an essay on taxation policies and economic growth, you might discuss the potential policy changes that could promote economic growth while maintaining revenue.

4. Encouraging Further Thought: Conclude your essay by encouraging further thought or research on the topic. Suggest potential areas for future exploration or highlight any lingering questions. This not only demonstrates your depth of understanding but also leaves room for ongoing dialogue.

The Importance of Revision

Revision is a critical, often underestimated, phase in the process of writing a good economics essay. It's during this stage that your essay transforms from a rough draft into a polished, cohesive, and well-organized piece. Here's why revision is of paramount importance:

1. Enhancing Clarity: Revision allows you to review all your paragraphs for clarity in addressing the essay question. It's an opportunity to ensure that your ideas are expressed in a straightforward and comprehensible manner. Consider whether your arguments and explanations are easy to follow. If not, make the necessary revisions to improve clarity.

2. Polishing Grammar and Style: Revision is your chance to correct grammatical errors, typographical mistakes, and awkward sentence structures. A well-edited essay not only conveys professionalism but also ensures that your message is not overshadowed by writing issues.

3. Strengthening the Structure: During revision, you can evaluate the overall structure of your essay. Check whether your introduction effectively sets the stage, the main body logically flows from one point to the next, and your conclusion provides a satisfying resolution. Adjust the structure as needed to improve the overall flow and coherence of your essay.

4. Refining Arguments: Careful revision enables you to scrutinize your arguments and evidence. Consider whether the points you've made are adequately supported by data, examples, and analysis. If you find any gaps or areas for improvement, make the necessary adjustments.

5. Seeking Feedback: It's often beneficial to seek feedback from peers, professors, or writing tutors during the revision process. Fresh perspectives can highlight areas for improvement that you might have missed.

However, if you find the prospect of revising your work overwhelming or time-consuming, there's a convenient solution: you can simply ask for our assistance and say, ' write my essay online .' Our professional writers are here to ensure your essay is not only solid and well-structured but also error-free and ready to make a strong impact.

Final Thoughts

Mastering how to write an economics essay is a journey that demands dedication, research, and careful planning. Whether you're a student, a budding economist, or someone curious about the world of economics, embrace the challenge of essay writing with enthusiasm. Your research papers have the power to inform, inspire, and impact our understanding of this complex and ever-evolving field. So, keep writing, keep revising, and keep exploring the world of economics through the lens of your academic writing. And remember, there's support available if you ever choose to pay for essay to meet your academic goals!

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Essay on Economics

In this essay we will discuss about Economics. After reading this essay you will learn about: 1. Subject Matter of Economics 2. Economics as a Science 3. Economics as an Art 4. Neo-Classical View of Marshall 5. The Classical View of Adam Smith 6. Basic Concepts of Economics 7. Types of Goods in Economics 8. Utility in Economics.

• Essay on Utility in Economics

Essay # Subject Matter of Economics :

Broadly speaking, the formulation of a definition is a precise procedure of explaining the subject matter. The majority of economic thinkers from Adam Smith to Pigou have defined the subject matter of economics as the study of the causes of material welfare or as the science of wealth.

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Marshall, in particular, confined it to the consumption, production, exchange and distribution of wealth by men engaged in the ordinary business of life. Men who are rational beings and act under the existing social, legal and institutional set up. It excludes the behaviour and activities of socially undesirable and abnormal persons like drunkards, misers, thieves, etc.

Professor Robbins, however, finds this subject matter as too restricted in scope to embrace all the facts. He cites numerous examples to show that certain human activities possess a definite economic significance but have little or no connection with material welfare.

The same good or service may promote material welfare at one time and less than one set of circumstances and not at another time under different circumstances. Robbins is, therefore, of the view that for a good or service to have economic significance it must command a price.

And for a good or service to command a price, it is not essential that it must promote material welfare, rather it must be scarce and capable of being put to alternative uses. Thus economics is not concerned so much with the analysis of the consumption, production, exchange and distribution of wealth as with a special aspect of human behaviour-that of allocating scarce means among competing ends.

This fundamental problem is ever present in all times and places and in all sets of circumstances. Thus the subject matter of economics includes the daily activities of the household, of the competitive business world and the administration of public resources in order to solve the problem of scarcity of resources.

The subject matter of economics includes the study of the problems of consumption, production, exchange and distribution of wealth, as well as the determination of the values of goods and services, the volume of employment and the determinants of economic growth. Besides, it includes the study of the causes of poverty, unemployment, underdevelopment, inflation, etc. and steps for their removal.

Essay # Economics as a Science :

There is considerable disagreement among economists whether economics is a science and if it is so, is it a positive or a normative science? In order to answer these questions, it is essential to know what science is and to what extent the characteristics of science are applicable to economics.

A science is a systematized body of knowledge ascertainable by observation and experimentation. It is a body of generalisations, principles, theories or laws which traces out a causal relationship between cause and effect.

For any discipline to be a science:

(i) It must be a systematized body of knowledge;

(ii) Have its own laws or theories;

(iii) Which can be tested by observation and experimentation?

(iv) Can make predictions;

(v) Be self-corrective; and

(vi) Have universal validity. If these features of a science are applied to economics, it can be said that economics is a science.

Economics is a systematized body of knowledge in which economic facts are studied and analysed in a systematic manner. For instance, economics is divided into consumption, production, exchange, distribution and public finance which have their laws and theories on whose basis these departments are studied and analysed in a systematic manner.

Like any other science, the generalisations, theories or laws of economics trace out a causal relationship between two or more phenomena. A definite result is expected to follow from a particular cause in economics like all other sciences.

An example of a principle in chemistry is that, all other things being equal, a combination of hydrogen and oxygen in the proportion of 2: 1 will form water. In physics, the law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal.

Similarly, in economics, the law of demand tells us that other things remaining the same, a fall in price leads to extension in demand and a rise in price to contraction in demand. Here rise or fall in price is the cause and, contraction or extension is its effect. Hence economics is a science like any other science which has its own theories and laws which establish a relation between cause and effect.

Economics is also a science because its laws possess universal validity such as the law of diminishing returns, the law of diminishing marginal utility, the law of demand, Gresham’s law, etc. Again, economics is a science because of its self-corrective nature.

It goes on revising its conclusions in the light of new facts based on observations. Economic theories or principles are being revised in the fields of macroeconomics, monetary economics, international economics, public finance and economic development. But certain economists do not accord economics the status of a science because it does not possess the other features of a science.

Science is not merely a collection of facts by observation. It also involves testing of facts by experimentation. Unlike natural sciences, there is no scope for experimentation in economics because economics is related to man, his problems and activities.

Economic phenomena are very complex as they relate to man whose activities are bound by his tastes, habits, and social and legal institutions of the society in which he lives. Economics is thus concerned with human beings who act irrationally and there is no scope for experimentation in economics.

Even though economics possesses statistical, mathematical and econometric methods of testing its phenomena but these are not so accurate as to judge the true validity of economic laws and theories. As a result, exact quantitative prediction is not possible in economics. For instance, a rise in price may not lead to contraction in demand rather it may expand it if people fear a shortage in anticipation of war.

Even if demand contracts as a result of the rise in price, it is not possible to predict accurately how much the demand will contract. Thus, as opined by Marshall: “In sciences that relate to man exactness is less attainable.” But this does not mean that economics is not a science.

It is definitely a science like any other science. Biology and Meteorology are those sciences in which the scope for predictability is less. The law of tides explains why the tide is strong at a new and full moon and weak at the moon’s first quarter.

At the same time, it is possible to predict the exact hour when the tide will rise. But it may not happen so. The tide may rise earlier or later than the predicted time due to some unforeseen circumstances. Marshall, therefore, compared the laws of economics with the laws of tides rather than with the simple and exact law of gravitation.

For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty.

Essay # Economics as an Art:

Art is the practical application of scientific principles. According to J. N.Keynes, “An art is a system of rules for the attainment of given ends.” Science lays down certain principles while art puts these principles into practical use.

To analyse the causes and effects of poverty falls within the purview of science and to lay down principles for the removal of poverty is art. Art facilitates the verification of economic theories. As pointed out by the Italian economist Cossa, “Art directs, art un-poses, predicts or proposes rules. It solves general economic problems.” Economics is thus both a science and an art in this sense.

However, certain economists do not consider it advisable to treat economics as both a science and an art. For the pressure of practical problems will hinder the development of economics as a science. This will, in turn, react on the effectiveness of the corresponding art.

Therefore, any attempt to solve a particular economic problem in full will so complicate the problem that the work may become hopeless. For this reason, Marshall regarded economics as “a science pure and applied, rather than a science and an art.”

Economists today are realising more and more the need for practical application of the conclusions reached on important economic problems. Therefore, “Economics should not be considered as a tyrannical oracle whose word is final. But when the preliminary work has been truly done, Applied Economics will at certain times on certain subjects speak with the authority to which it is entitled.”

Economics is thus regarded both a science and an art, though economists prefer to use the term applied economics in place of the latter. Samuelson opines, “Economics is the oldest of the arts, the newest of sciences indeed the queen of all the social sciences.”

Economics—Positive or Normative Science :

Before we discuss whether economics is a positive or normative science, let us understand their meanings which are best described by J.N. Keynes (father of Lord Keynes) in these words:

“A positive science may be defined as a body of systematized knowledge concerning what is, a normative science as a body of systematized knowledge relating to criteria of what ought to be, and concerned with the ideal as distinguished from the actual.” Thus positive economics is concerned with “what is” and normative economics with “what ought to be.”

Economics as a Positive Science :

It was Robbins who in his An Essay on the Nature and Significance of Economic Science brought into sharp focus the controversy as to whether economics is a positive or a normative science.

Robbins’ View:

Robbins regards economics as a pure science of what is, which is not concerned with moral or ethical questions. Economics is neutral between ends. The economist has no right to pass judgment on the wisdom or folly of the ends itself.

He is simply concerned with the problem of scarce resources in relation to the ends desired. The manufacture and sale of cigarettes and wine may be injurious to health and therefore morally unjustifiable, but the economist has no right to pass judgment on this, since both satisfy human wants and involve economic activity.

Following the classical economists, Robbins regards the propositions involving the verb ought as different in kind from the proposition involving the verb is. He finds a ‘logical gulf’ between the positive and normative fields of enquiry as they “are not on the same plane of discourse.”

Since “Economics deals with ascertainable facts” and “ethics with valuations and obligations,” he finds no reason for “not keeping them separate, or failing to recognise their essential difference.” He, therefore, opines that “the function of economists consists in exploring and not advocating and condemning.”

Thus an economist should not select an end, but remain neutral, and simply point out the means by which the ends can be achieved.

Friedman’s View:

Like Robbins, Friedman also considers economics as a positive science. According to him, “the ultimate goal of a positive science is the development of a ‘theory’ or ‘hypothesis’ that yields valid and meaningful (not truistic) predictions about phenomena not yet observed.” In this context, economics provides systematic generalisations which can be used for making correct predictions.

Since the predictions of economics can be tested, economics is a positive science like physics which should be free from value judgments. According to Friedman, the aim of an economist is like that of a true scientist who formulates new hypotheses.

Hypotheses permit us to predict about future events or to explain only what happened in the past. But predictions of such hypotheses may or may not be limited by events. Thus economics claims to be a positive science like any other natural science.

Conclusion:

Thus economics is a positive science. It seeks to explain what actually happens and not what ought to happen. This view was held even by the nineteenth century economists. Almost all leading economists from Nassau Senior and J.S. Mill onwards had declared that the science of economics should be concerned with what is and not with what ought to be.

Economics as a Normative Science :

Economics is a normative science of “what ought to be.” As a normative science, economics is con­cerned with the evaluation of economic events from the ethical viewpoint. Marshall, Pigou, Hawtrey, Frazer and other economists do not agree that economics is only a positive science.

They argue that economics is a social science which involves value judgments’ and value judgments cannot be verified to be true or false. It is not an objective science like natural sciences. This is due to the following reasons.

First, the assumptions on which economic laws, theories or principles are based relate to man and his problems. When we try to test and predict economic events on their basis, the subjectivity element always enters.

Second, economics being a social science, economic theories are influenced by social and political factors. In testing them, economists are likely to use subjective value judgements.

Third, in natural sciences, experiments are conducted which lead to the formulation of laws. But in economics experimentation is not possible. Therefore, the laws of economics are at best tendencies.

Conclusion :

Thus the view that economics is only a positive science is divorced from reality. The science of econom­ics cannot be separated from the normative aspect. Economics as a science is concerned with human welfare and involves ethical considerations. Therefore, economics is also a normative science.

As pointed out by Pigou, Marshall believed that “economic science is chiefly neither valuable neither as an intellectual gymnastics nor even as a means of winning truth for its own sake, but as a handmaid of ethics and a servant of practice.”

On these considerations, economics is not only “light-bearing,” but also “fruit- bearing.” Economists cannot afford to be mere spectators and arm-chair academicians. “An economist who is only an economist,” said Fraser “is a poor pretty fish.”

In this age of planning when all nations aspire to be welfare states, it is only the economist who is in a position to advocate, condemn and remedy the economic ills of the modern world. “When we elect to watch the play of human motives that are ordinary—that are something mean and dismal and ignoble,” wrote Prof. Pigou, “our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge but rather the physiologist’s knowledge for the healing that knowledge may help to bring.” It is not enough for the economist to explain and analyse the problems of unequal distribution of wealth, industrial peace, social security, etc. Rather his work is to offer suggestions for the solution of such problems.

Had he remained a mere theoretician, poverty and misery and class-conflicts would have been the lot of mankind. The fact that economists are called upon to pronounce judgements and tender advice on economic problems shows that the normative aspect of the economic science has been gaining ground ever since the laissez-faire spirit became dead.

Wootton is right when she says, “It is very difficult for economists to divest their discussions completely of all normative significance.” Myrdal is more forthright when he says that economics is necessarily value-loaded and “a ‘disinterested social science’ has never existed and, for logical reasons, cannot exist.”

About the relation between normative and positive economics, Friedman observes: “The conclusions of positive economics seem to be, and are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained.”

Normative economics cannot be independent of positive economics, though positive economics is free from value judgements. Economics is, therefore, not only a positive science of “what is” but also a normative science of “what ought to be.”

Essay # Robbins Scarcity Definition of Economics:

It was Lord Robbins who with the publication of his Nature and Significance of Economic Science in 1932 not only revealed the logical inconsistencies and inadequacies of the earlier definitions but also formulated his own definition of economics. According to Robbins, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

This definition is based on the following related postulates:

1. Economics is related to one aspect of human behaviour, of maximising satisfaction from scarce resources.

2. Ends or wants are scarce. When a particular want is satisfied others crop up to take its place. Multiplicity of wants makes it imperative for human beings to work ceaselessly for their satisfaction but they are usable to satisfy all.

3. The obvious reason for the non-satisfaction of unlimited wants is the scarcity of means at the disposal of mankind. The time and means available for satisfying these ends are scarce or limited.

4. The scarce means are capable of alternative uses. Land is capable of being used for growing rice, sugarcane, wheat, maize, etc. Likewise, coal can be made use of in factories, railways, for generation of electricity, etc. At a time, the use of a scarce resource for one end prevents its use for any other purpose.

5. The ends are of varying importance which necessarily leads to the problem of choice—of selecting the uses to which scarce resources can be put.

6. Economics is related to all kinds of behaviour that involve the problem of choice. This clearly distinguishes economics from technical, political, historical or other aspects. The problem of how to build a college building with given resources is technical.

But the problem of choosing the best combination of resources or the problem of allocating given building resources between an auditorium, library, laboratory, and lecture rooms, cycle-shed and canteen is economic. Thus economics is related to the valuation process which studies the production and distribution of goods and services for fulfilling the needs of mankind.

To conclude, economics is essentially a valuation process which is concerned with multiple ends and scarce means being put to alternative uses in order of their importance. In the ultimate analysis, the economic problem is one of economizing scarce means in relation to numerous ends.

Superiority of Robbins’ Definition :

Robbins’ definition is superior to the earlier definitions in more than one way.

Firstly, it does not contain such vague expressions as ‘material welfare’ and ‘material requisites of well are being’ which had made the neo-classical formulations classificatory. His definition, therefore, is analytical for it does not attempt to pick out certain kinds of behaviour, but focuses attention on a particular aspect of behaviour, the form imposed by the influence of scarcity.

Secondly, Robbins emphasizes that economics is a science. It is a systematized body of knowledge which gives its proud possessor a framework within which to analyse the problems associated with the study. Like other pure sciences, economics is neutral between ends.

The ends may be noble or ignoble, material or immaterial, economic or non-economic, economics is not concerned with them as such. Economics has thus nothing to do with Ethics. For, according to Robbins, “Economics deals with ascertainable facts. Ethics with valuation and obligations. The two Fields of inquiry are not on the same plane of discourse.”

Thirdly, Robbins has made economics a valuation process. Whenever the ends are unlimited and the means are scarce, they give rise to an economic problem. In such a situation, there is little need for defining economics as the study of the causes of material welfare. The problems of production and distribution of wealth are also of economizing scarce resources in relation to varied ends.

Lastly, there is universality in Robbin’s scarcity definition of economics. It is as much applicable to a Robinson Crusoe economy as to a communist economy and a capitalist economy. Its laws are like the laws of life and are independent of all legal and political frameworks. All this led economists to describe Robbins’ definition as the “dominant academic doctrine” of the times.

Criticisms of Robbins’ Definition :

Many economists have criticized Robbins’ definition on the following grounds:

1. Artificial Relation between Ends and Means:

Some critics characterize the relationship between ends and scarce means as presented by Robbins as “artificial schemaIn his definition, Robbins fails to explain fully the nature of ‘ends’ and the difficulties associated with it.”

2. Difficult to Separate Ends from Means:

Robbins’ assumption of definite ends is also unacceptable because immediate ends may act as intermediaries to further ends. In fact, it is difficult to separate ends from means distinctly. Immediate ends may be the means to the achievement of further ends, and means by themselves may be the ends of earlier actions.

3. Economics not Neutral between Ends:

Economists have criticized Robbins’ definition for its ethical neutrality. Robbins’ contention that “Economics is neutral between ends” is unwarranted. Unlike physical sciences, economics is concerned not with matter but with human behaviour. It is, therefore, not possible for economists to dissociate economics from Ethics.

4. Neglects the Study of Welfare:

Robbins’ formulation of economizing scarce means in relation to ends for the solution of all economic problems is simply a valuation problem. This has tended to narrow the jurisdiction of economics. According to Boulding, “Prof. Robbins in defining economics as a valuation problem seems to deprive economics of the right to study welfare.” Economics will be an incomplete body of knowledge without the study of welfare which Robbins neglects.

5. Economics not Merely a Positive but also a Normative Science:

By concentrating exclusively on the valuation problem, Robbins has made economics a positive science. But economists like Souter, Parsons, Wootton, and Macfie regard it not only a positive science but also a normative science. According to Macfie, “Economics is fundamentally a normative science, not merely a positive science like chemistry.”

6. Robbins’ Definition too Narrow and too Wide:

Robertson regards Robbins’ definition “at once too narrow and too wide.” It is too narrow since it does not include organisational defects which lead to idle resources. On the other hand, the problem of allocating scarce means among given ends is such that it may arise even in fields which lie outside the jurisdiction of economics.

The captain of a team in a playground or an army commander in battlefield may be faced with the problem of scarce resources in the event of a member being injured. Thus, Robbins’ scarcity formulation is applicable even to non-economic problems thereby making the scope of economics too wide.

7. Economics Concerned with Social Behaviour rather than Individual Behaviour:

Robbins’ concep­tion of economics is essentially a micro analysis. It is concerned with individual behaviour, of economizing ends with the limited means at his disposal. But economics is not concerned with individualistic ends and means alone.

It has nothing to do with a Robinson Crusoe economy. Our economic problems are related to social rather than individual behaviour. Robbins’ definition is, therefore, steeped in classical tradition and fails to emphasize the macro-economic character of economics.

8. Fails to Analyse the Problems of Unemployment of Resources:

Robbins’ scarcity formulation pos­sesses little practical usefulness as it fails to analyse the causes of general unemployment of resources. Unemployment is caused not by scarcity of resources but by their abundance. It is, therefore, only in a fully employed economy that the problem of allocating scarce resources among alternative uses arises.

Thus the scarcity definition of Robbins, applicable as it is to a fully employed economy, is unrealistic for analysing the economic problems of the real world.

9. Does not Offer Solutions to the Problems of LDCs:

Robbins’ conception of economics offers no solution to the problems of underdeveloped countries. The problems of underdeveloped countries are con­cerned with the development of unused resources. Resources are in abundance in such economies but they are either unutilized, or underutilised or misutilised.

Robbins’ scarcity formulation, however, takes the resources as given and analyses their allocation among alternative uses.

10. Neglects the Problems of Growth and Stability:

Robbins’ scarcity definition neglects the problems of growth and stability which are the corner stone’s of the present day economics.

Of the two definitions of welfare and scarcity, it is not possible to say with precision which is better than the other.

As Boulding opines:

“To define it as a study of mankind in the ordinary business of life, is surely too broad. To define it as the study of material wealth is too narrow. To define it as the study of human valuation and choice is again probably too wide, and to define it as the study of that part of human activity subject to the measuring rod of money is again too narrow.” He, therefore, agrees with Jacob Viner that “Economics is what economists do.”

However, the truth is that keeping in view the present day trend of establishing welfare states in the world; the welfare definitions are more practicable whereas the scarcity definitions are more scientific.

A satisfactory definition must combine both these conceptions of economics. We may define economics as a social science concerned with the proper use and allocation of resources for the achievement and mainte­nance of growth and stability.

Essay # Neo-Classical View of Marshall :

It was, however, the neo-classical school led by Alfred Marshall which gave economics a respectable place among social sciences. Marshall laid emphasis on man and his welfare. Wealth was regarded as the source of human welfare, not an end in itself but a means to an end.

According to Marshall, “Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well­being. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.”

Certain logical inferences can be drawn from Marshall’s definition.

First, economics is concerned with man’s ordinary business of life. It is related to his wealth-getting and wealth-using activities. Or, as Marshall put it: It “deals with his [man’s] efforts to satisfy his wants, in so far as the efforts and wants are capable of being measured in terms of wealth or its general representative, i.e. money.”

Secondly, economics is a social science. It “is a study of men as they live and move and think in the ordinary business of life.” Thus, economics is concerned with the economic aspects of social life. It excludes the activities of socially undesirable and abnormal persons like thieves, misers, etc.

Thirdly, it is related to those economic activities which promote material welfare. Non-economic activities and activities having ignoble ends are excluded from the study of economics. Lastly, by using the broad term ‘Economics’ in place of the narrower term ‘Political Economy’, Marshall lifted economics to the realm of a science and divested it of all political influences.

Marshall, however, emphasised that economics is concerned with wealth simply by accident and its “true philosophic raison d’etre must be sought elsewhere.” Robbins, therefore, in his Essay on the Nature and Significance of Economic Science finds fault with Cannan’s enunciation of the welfare conception of economics on the following grounds.

1. Distinction between Material and Non-Material things Faulty:

Robbins criticizes the distinction between material and non-material things as established by the neo-classical economists. The latter include only those activities within the scope of economics which lead to the production and consumption of material goods and services.

Robbins, however, regards all goods and services which command a price and enter into the circle of exchange as economic whether they are material or non-material.

The services of teachers, lawyers, actors, etc. have each their economic aspect, because they are scarce and possess value. To say that services are non-material “is not only perverse, it is also misleading. For it is not the materiality of even material means of gratification,” says Robbins, “which gives them their status as economic goods; it is their relation to valuations. The ‘materialist’ definition of Economics, therefore, misrepresents the science as we know it.”

2. Economics not concerned with Material Welfare:

Robbins also objects to the use of the word welfare along with material. For the neo-classical economists, economics is concerned with the causes of material welfare. To Robbins, however, there are certain material activities but they do not promote welfare.

For example, the manufacture and sale of wine is an economic activity but it is not conducive to human welfare. Such goods are significant from the economic point of view because they are scarce and have value.

3. Contradiction:

There is a contradiction in the “non-material definition of productivity”, used by Marshall. He regards the services of opera singers and dancers as productive so long as they are demanded by the people. But since they are non-material, they do not promote human welfare. As such, their services are not the subject matter of economics.

Robbins, however, points out that “the services of the opera dancer are wealth. Economics deals with the pricing of their services, equally with the pricing of the services of a cook. He, therefore, concludes: “Whatever Economics is concerned with, it is not concerned with the causes of material welfare as such.”

4. Concept of Economic Welfare Vague:

The idea of economic welfare is vague. Money cannot be regarded as an accurate measure of welfare, for the conception of welfare is subjective and relative. The idea of welfare varies with each individual. Wine may give pleasure to a drunkard, but it may be harmful for the novice.

Again, it may be useful for people living in Siberia and Iceland but injurious for those living in hot climates. This interpersonal comparison of utility implies value judgment, which transports economics to the realm of Ethics. But Robbins has nothing to do with Ethics. To him, Economics is entirely neutral between ends. The ends may be noble or base, the economist is not concerned with them as such.

5. Welfare Definition & Classificatory and Not Analytical:

Robbins criticizes the material welfare defini­tions as being classificatory rather than analytical. These definitions deal with certain kinds of human behaviour—those directed towards the procurement of material welfare.

But other kinds of activities concerned with a particular aspect of human behaviour lie outside the jurisdiction of economics. Whereas the neo­classical described certain activities being “economic” and “non-economic”, Robbins finds no valid reason for making this distinction as every human activity has an economic aspect when it is undertaken under the influence of scarcity.

6. Economics not a Social Science but a Human Science:

Robbins does not agree with Marshall that economics is a social science— “a study of men as they live and move and think in the ordinary business of life.” Rather he regards economics as a human science. Economics is as much concerned with an exchange economy as with a Robinson Crusoe economy. The central problem in economics, according to Robbins, is that of valuation which is one of allocation of scarce means among alternative ends.

Since the generalisations of the theory of value are as applicable to the behaviour of an isolated man or to the executive authority of a communist society, as to the behaviour of man in an exchange economy. Therefore, economics should be regarded as a human science.

Essay # The Classical View of Adam Smith :

The classical economists beginning with Adam Smith defined economics as the science of wealth. Adam Smith defined it as the “nature and causes of wealth of nations,” whereby it “proposes to enrich both the people and the sovereign.”

Among his followers, J.B. Say in France defined economics as “the study of the laws which govern wealth;” to Nassau Senior at Oxford, “the subject treated by political economists…is not happiness, but wealth;” whereas to F.A. Walker in America, “Economics is that body of knowledge which relates to wealth.”

According to J.S. Mill, “Writers on Political Economy profess to teach the nature of wealth and the laws which govern its production, distribution and exchange.” To J.E. Cairnes, “Political Economy is a science…it deals with the phenomena of wealth.” While B. Price declared in 1878 that “all are agreed that it is concerned with wealth.”

Its Criticisms :

The classical view was misleading and had serious defects. This conception of economics as a science of wealth laid exclusive stress on material wealth. Following Smith and Say, the Earl of Lauderdale (1804) and McCulloch (1827) regarded economics as related to material wealth, wealth being “the object of man’s desires.”

In an age when religious sentiments ran high, this conception of economics was interpreted as concerning only the acquisition of riches or money. This led economics to be branded as the science of Mormonism, of bread and butter, a dismal science, the science of getting rich.

Bailey called it “a mean, degrading, sordid inquiry.” To Carlyle it was a “pig-science.” Ruskin lamented in the Preface to his Unto the Last that economists were in “an entirely damned state of soul.” Even economists like Jevons and Edge worth were despaired of this wealth-oriented conception of economics. Edge worth regarded it as “dealing with the lower elements of human nature.”

The main drawback in wealth definition of economics had been its undue emphasis on wealth-producing activities. Wealth was considered to be an end in itself. Moreover, as pointed out by Macfie the “fatal word ‘material’ is probably more responsible for the ignorant slanders on the ‘dismal science’ than any other description.”

By stressing on the word ‘material wealth’ the classical economists narrowed the scope of economics by excluding all economic activities which are related to the production of non-material goods and services, such as of doctors, teachers, etc.

Essay # Basic Concepts of Economics:

Ordinarily, the concept of value is related to the concept of utility. Utility is the want satisfying quality of a thing when we use or consume it. Thus utility is the value-in-use of a commodity. For instance, water quenches our thirst. When we use water to quench our thirst, it is the value-in-use of water.

In economics, value means the power that goods and services have to exchange other goods and services, i.e. value-in-exchange. If one pen can be exchanged for two pencils, then the value of one pen is equal to two pencils. For a commodity to have value, it must possess the following three characteristics.

a. Utility:

It should have utility. A rotten egg has no utility because it cannot be exchanged for anything. It possesses no value-in-exchange.

b. Scarcity:

Mere utility does not create value unless it is scarce. A good or service is scarce (limited) in relation to its demand. All economic goods like pen, book, etc. are scarce and have value. But free goods like air do not possess value. Thus goods possessing the quality of scarcity have value.

c. Transferability:

Besides the above two characteristics, a good should be transferable from one place to another or from one person to another. Thus a commodity to have value-in-exchange must possess the qualities of utility, scarcity and transferability.

2. Value and Price :

In common language, the terms ‘value’ and ‘price’ are used as synonyms (i.e. the same). But in economics, the meaning of price is different from that of value. Price is value expressed in terms of money. Value is expressed in terms of other goods. If one pen is equal to two pencils and one pen can be had for Rs.10. Then the price of one pen is Rs.10 and the price of one pencil is Rs.5.

Value is a relative concept in comparison to the concept of price. It means that there cannot be a general rise or fall in values, but there can be a general rise or fall in prices. Suppose 1 pen = 2 pencils. If the value of pen increases it means that one pen can buy more pencils in exchange.

Let it be 1 pen= 4 pencils. It means that the value of pencils has fallen. So when the value of one commodity raises that of the other good in exchange falls. Thus there cannot be a general rise or fall in values. On the other hand, when prices of goods start rising or falling, they rise or fall together.

It is another thing that prices of some goods may rise or fall slowly or swiftly than others. Thus there can be a general rise or fall in prices.

3. Wealth :

In common use, the term ‘wealth’ means money, property, gold, etc. But in economics it is used to describe all things that have value. For a commodity to be called wealth, it must prossess utility, scarcity and transferability. If it lacks even one quality, it cannot be termed as wealth.

Forms of Wealth:

Wealth may be of the following types:

1. Individual Wealth:

Wealth owned by an individual is called private or individual wealth such as a car, house, company, etc.

2. Social Wealth:

Goods which are owned by the society are called social or collective wealth, such as schools, colleges, roads, canals, mines, forests, etc.

3. National or Real Wealth:

National wealth includes all individual and social wealth. It consists of material assets possessed by the society. National wealth is real wealth.

4. International Wealth:

The United Nations Organisation and its various agencies like the World Bank, IMF, WHO, etc. are international wealth because all countries contribute towards their operations.

5. Financial Wealth:

Financial wealth is the holding of money, stocks, bonds, etc. by individuals in the society. Financial wealth is excluded from national wealth. This is because money, stocks, bonds, etc. which individuals hold as wealth are claims against one another.

Some differences :

Wealth is different from capital, income and money.

Wealth and Capital:

Goods which have value are termed as wealth. But capital is that part of wealth which is used for further production of wealth. Furniture used in the home is wealth but given on rent is capital. Thus all capital is wealth but all wealth is not capital.

Wealth and Income:

Wealth is a stock and income is a flow. Income is the earning from wealth. The shares of a company are wealth but the dividend received on them is income.

Wealth and Money:

Money consists of coins and currency notes. Money is the liquid form of wealth. All money is wealth but all wealth is not money.

4. Stocks and Flows :

Distinction may be made here between a stock variable and a flow variable. A stock variable has no time dimension. Its value is ascertained at some point in time. A stock variable does not involve the specification of any particular length of time. On the other hand, a flow variable has a time dimension. It is related to a specified period of time.

So national income is a flow and national wealth is a stock. Change in any variable which can be measured over a period of time relates to a flow. In this sense, in ventories are stocks but change in inventories in a flow.

A number of other examples of stocks and flows can also be given. Money is a stock but the spending of money is flow. Government debt is stock. Saving and investment and operating surplus during a year are flows but if they relate to the past year, they are stocks.

But certain variables are only in the form of flows such as NNP, NDP, value added, dividends, tax payments, imports, exports, net foreign investment, social security benefits, wages and salaries, etc.

5. Optimisation :

Optimisation means the most efficient use of resources subject to certain constraints it is the choice from all possible uses of resources which gives the best results, it is the task of maximisation or minimisation of an objective function it is a technique which is used by a consumer and a producer as decision-maker.

A consumer wants to buy the best combination of a consumer good when his objective function is to maximise his utility, given his fixed income as the constraints. Similarly, a producer wants to produce the most suitable level of output to maximise his profit, given the raw materials, capital, etc. as constraints.

As against this, a firm cans hence the objective of minimisation of its cost of production by choosing the best combination of factors of production, given the manpower resources, capital, etc. as constraints. Thus optimisation is the determination of the maximisation or minimisation of an objective function.

Essay # Types of Goods in Economics:

1. material and non-material goods:.

Goods may be material and non-material. Material goods are those which are tangible. They can be seen, touched and transferred from one place to another. For example, cars, shoes, cloth, machines, buildings, wheat, etc., are all material goods.

On the other hand, non-material goods are intangible for they do not possess any shape or weight and cannot be seen, touched or transferred. Services of all types are non-material goods such as those of doctors, engineers, actors, lawyers, teachers, etc. The characteristics common to both material and non-material goods are that they have value and satisfy human wants.

Economic and Non-economic Goods:

Material goods are further divided into economic and non-economic goods. Economic goods are those which have a price and their supply is less in relation to their demand or is scarce. The production of such goods requires scarce resources having alternative uses. For example, land is scarce and is capable of producing rice or sugarcane.

If the farmer wants to produce rice he will have to forgo the production of sugarcane. The price of rice equals the production of sugarcane forgone by the farmer. Thus economic goods relate to the problem of economizing scarce resources for the satisfaction of human wants. In this sense, all material goods are economic goods.

Non-economic goods are called free goods because they are free gifts of nature. They do not have any price and are unlimited in supply. Examples of non-economic goods are air, water, sunshine, etc. The concept of non-economic goods is relative to place and time. Sand lying near the river is a free good but when it is collected in a truck and carried to the town for house construction, it becomes an economic good.

It is now scarce in relation to its demand and fetches a price. There was a time when water could be had free from the wells and rivers. Now when it is stored and pumped through pipes to houses it is sold at a price to consumers.

Thus what is a free good today may become an economic good with technological advancement. For example, air which is a free good becomes an economic good when we install air conditioners, room coolers and fans.

Consumers’ Goods and Producers’ goods:

Economics goods are further divided into consumers’ goods and producers’ goods.

1. Consumers’ Goods:

Consumers’ goods are those final goods which directly satisfy the wants of consumers. Such goods are bread, milk, pen, clothes, furniture, etc. Consumers’ goods are further sub-divided into single-use consumers’ goods and durable use consumers’ goods.

(a) Single-use Consumers’ Goods:

These are goods which are used up in a single act of consumption. Such goods are foodstuffs, cigarettes, matches, fuel, etc. They are the articles of direct consumption because they satisfy human want directly. Similarly, the services of all types such as those of doctors, actors, lawyers, waiters, etc. are included under single use goods.

(b) Durable-use Consumers’ Goods:

These goods can be used for a considerable period of time. It is immaterial whether the period is short or long. Such goods are pens, tooth brushes, clothes, scooters, TV sets, etc.

2. Capital or Producers’ Goods:

Capital goods are those goods which help in the production of other goods that satisfy the wants of the consumers directly or indirectly, such as machines, plants, agricultural and industrial raw materials, etc. Producers’ goods are also classified into single-use producers’ goods and durable- use producers’ goods.

(a) Single-use Producers’ Goods:

Theses goods are used up in a single act of production. Such goods are raw cotton, coal used in factories, paper used for printing books, etc. When once used, these goods lose their original shape.

(b) Durable-use Producers’ Goods:

These goods can be used time and again. They do not lose their usability through a single use but are used over a long period of time. Capital goods of all types such as machines, plants, factory buildings, tools, implements, tractors, etc. are examples of durable-use producers’ goods.

The distinction between consumers’ goods and capital goods is based on the uses to which these goods are put. There are many goods such as electricity, coal, etc. which are used both as consumers’ goods and capital goods.

The distinction between single-use goods and durable-use goods has great significance from the point of the economy. The demand for single-use goods is more regular and steady over time and can be predicted in advance.

On the other hand, the demand for durable-use goods is irregular and uncertain. It takes much longer time to adjust supply to changes in demand in the case of such goods. This is partly the cause for trade cycles in an economy which produces durable-use goods in large quantities.

2. Intermediate Goods:

Goods sold by one firm to another for resale or for further production are called intermediate goods. They are single-use producers’ goods that are transformed to manufacture final goods. Intermediate goods are also termed as inputs.

Cotton from the fields is sold to the spinning mill where it is transformed into yarn. In turn, the yarn leaves the spinning mill by way of sale to the textile mill where it disappears into a new product, cloth. Again, cloth is sold by the mill to the trader to be sold as final goods.

3. Final Goods:

On the other hand, goods sold not for resale or for further production but for personal consumption or for investment are called final goods. On the basis of this definition, a particular good or service may be classified intermediate good or final good.

For instance, the water sold by the municipal corporation to commercial and industrial undertaking is an intermediate good because it is used by them for further production.

On the other hand, the water sold to individual households is final good because it is used for personal consumption. Similarly, the postal services sold to business houses are intermediate goods and those to households are final goods.

Thus the services of government enterprises and of non-profit institutions should be classified as intermediate or final goods according to the definition given above. What these enterprises and institutions purchase from firms are intermediate goods because they are used in the services they render to final consumers.

When the government buys cement, steel and other raw materials to build roads and bridges, consumers use the services of the roads and bridges which are final goods. The distinction between intermediate and final goods is of much importance in the computation of national income. It is especially so while computing national income by the product method or value added method.

Essay # Utility in Economics:

Meaning of utility:.

The want satisfying power of a commodity is called utility. It is a quality possessed by a commodity or service to satisfy human wants. Utility can also be defined as value-in-use of a commodity because the satisfaction which we get from the consumption of a commodity is its value-in-use.

Types of Utility :

Utility may take any of the following forms:

(1) Form Utility:

When utility is created and or added by changing the shape or form of goods, it is form utility. When a carpenter makes a table out of wood, he adds to the utility of wood by converting it into a more useful commodity like furniture. He has created form utility.

(2) Place Utility:

When the furniture is taken from the factory to the shop for sale, it leads to place utility. This is because it is transported from a place where it has no buyers to a place where it fetches a price.

(3) Time Utility:

When a farmer stores his wheat after harvesting for a few months and sells it when its price rises, he has created time utility and added to the value of wheat.

(4) Service Utility:

When doctors, teachers, lawyers, engineers, etc. satisfy human wants through their services, they create service utility. It is acquired through specialised knowledge and skills.

(5) Possession Utility:

Utility is also added by changing the possession of a commodity. A book on economic theory has little utility for a layman. But if it is owned by a student of economics, possession utility is created.

(6) Knowledge Utility:

When the utility of a commodity increases with the increase in knowledge about its use, it is the creation of knowledge utility through propaganda, advertisement, etc.

(7) Natural Utility:

All free goods such as water, air, sunshine, etc., possess natural utility. They have the capacity to satisfy our wants.

Characteristics of Utility :

The following are the characteristics of utility:

1. Utility and Usefulness:

Anything having utility does not mean that it is also useful. If a good possesses want satisfying power, it has utility. But the consumption of that good may be ‘useful’ or ‘harmful’. For example, the consumption of wine possesses utility for a man habitual to drinking because it satisfies his want to drink. But the use of wine is harmful for health, but it has utility. Thus utility is not usefulness.

2. Utility and Satisfaction:

Utility is the quality or power of a commodity to satisfy human wants, whereas satisfaction is the result of utility. Apples lying in the shop of a fruit seller have utility for us, but we get satisfaction only when we purchase and consume them. It means utility is present even before the actual consumption of a commodity and satisfaction is obtained only after its consumption. Utility is the cause and satisfaction is the effect or result.

3. Utility and Pleasure:

It is not necessary that a commodity processing utility also gives pleasure when we consume it. Utility is free from pain or pleasure. An injection possesses utility for a patient, because it can relieve him of his illness. But injection gives him no pleasure; instead it gives him some pain. Quinine is bitter in taste but it has the utility to treat the patient from malaria. So, there is no relationship between utility and pleasure.

4. Utility is Subjective:

Utility is a subjective and psychological concept. It means utility of a commodity differs from person to person. Opium is of great utility for a man accustomed to opium, but it has no utility for a man who is not accustomed to opium. In the same manner, utility of different commodities differs from person to person. Therefore, utility is subjective.

5. Utility is Relative:

Utility is a relative concept. A commodity may possess different utility at different times or at different places or for different persons. In olden days, a Tonga had greater utility. But now with the invention of bus, its utility has become less. A rain coat has greater utility in hilly areas during rainy season than in plain areas. A fan has greater utility in summer than in winter.

6. Utility is Abstract:

Utility is abstract which cannot be seen with eyes, or touched or felt with hands. For example, the argumentative power of an advocate is abstract. Similarly, utility is abstract. Utility of a commodity can neither be seen not touched or felt with hands.

Measurement of Utility :

According to Marshall, the utility of a commodity can be measured in terms of money. If a consumer is willing to pay Rs.2 for an orange and Re 1 for a banana, then the utility of an orange is equal to Rs.2 and that of a banana is Re. 1 to him.

It means that the utility of one orange is equal to 2 bananas. In other words, the utility of an orange to the consumer is twice that of the banana. But this analysis does not hold when there are two different consumers offering two different prices for the same commodity.

Suppose Bhanu offers Rs.2 for a banana for which Gautam is prepared to pay Re. 1.The higher price paid by Bhanu does not mean that he gets more utility and Gautam less utility. Thus money does not measure the utility from a commodity. It simply measures the intensity of our desire for a commodity. Despite this weakness, money is used as a measure of utility.

Cardinal and Ordinal Utility:

The terms ‘cardinal’ and ‘ordinal’ have been borrowed from mathematics. The numbers 1, 2, 3, 4, etc. are cardinal numbers. According to the cardinal system, the utility of a commodity is measured in units and that utility can be added, subtracted and compared.

For example, if the utility of one apple is 10 units, of banana 20 units and of orange 40 units, the utility of banana are double that of apple and of orange four times the apple and twice the banana.

The ordinal numbers are 1st, 2nd, 3rd, 4th, etc. which may stand for 1, 2, 4, 6 or 30, 40, 60, 80, etc. They tell us that the consumer prefers the first to the second and the third to the second and first, and so on. But they cannot tell by how much he prefers one to the other.

The entire Marshallian utility analysis is based on the cardinal measurement of utility. According to Hicks, utility cannot be measured cardinally because utility which a commodity possesses is subjective and psychological. He, therefore, rejects the quantitative measurement of utility and measures utility ordinally in terms of the indifference curve technique.

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