Many people tend to think that taking a course or reading a book on economics will help them become better managers of their money. To an extent they’re right. It can certainly help with household finances. In fact, the word economy comes from the Greek word oikonomia, meaning one who manages a household. That being said, economics is much broader and deeper in nature. This breadth and depth of economics is of course what makes it so interesting…and highly valued. Just look at the median salary and expected job growth of an economist:
So, just what is economics, anyway? How have economists attempted to succinctly define this fascinating field? Following are a few examples:
- “Economics is the study of the use of scarce resources which have alternative uses.” [Lionel Robbins quoted in Sowell, Thomas. (2015). Basic Economics (5th ed.). New York: Basic Books. p. 2.]
- “Economics is the study of wealth and how it is created or diminished.” [Skousen, Mark. (2017). Economic Logic (5th ed.). Washington, DC: Capital Press. p. 10.]
- “Economics is the study of how people choose to allocate their scarce resources.” [Wessels, Walter J. (2018). Economics (6th ed.). New York: Barron’s. p. 2.]
- “A social science that studies how individuals and organizations in society engage in the production, distribution, and consumption of goods and services.” [Diulio, E., and Salvatore, D. (2012). Principles of Economics (Schaum’s Outlines, 2nd ed.). New York: McGraw-Hill. p. 1.]
- “Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs, trying to determine how these groups should organize and coordinate efforts to achieve maximum output.” [Chappelow, Jim (2019, June 29). “Economics: Overview, Types, and Economic Indicators”. Retrieved from https://www.investopedia.com/terms/e/economics.asp on October 15, 2019.]
While these definitions of economics differ in certain ways, they nonetheless have significant areas of overlap. The point isn’t to debate over which definition more accurately captures the spirit of economics. The point of showing these various definitions is to demonstrate to the reader the breadth (and importance) of the subject matter.
Key Terms & Concepts in Economics
Each definition above contains either explicitly or implicitly key economic concepts and principles. Let’s fill out our knowledge of economics by taking a look at some of these.
Scarcity. Two of the definitions explicitly mention scarcity. This is a fundamental reality and economic principle that is pretty much learned on day one of an introductory economics course or on the first few pages of a book on economic principles. The principle of scarcity essentially means that while mankind has unlimited wants, there’s not an unlimited supply of resources. In other words, resources are scarce. Though resources may exist in abundance, there’s still a limited supply of them. The fact of scarcity means that there’s not enough of everything to go around to everyone. Time is also a scarce resource. We only have so much time in a day and it can’t be accumulated. While the lengthening of lifespans means that time has become less scarce, in a relative sense, our time in this life is still limited.
Types of Resources. There are natural resources, such as land and gold, human resources (e.g. labor used in the production process), and capital resources/goods, such as factories and tools that make labor more efficient in the production process. Another important resource in a market economy is the entrepreneur – “One who organizes, manages, and assumes the risks of a business or enterprise.” [Skousen. Economic Logic. p. 692.]
Opportunity Cost. The first definition above speaks of “alternative uses”. This refers to the important economic concept of opportunity cost. This is the “highest valued alternative good or activity that must be sacrificed as a result of choosing an option” [Gwartney, et al. (2016). Common Sense Economics (3rd ed.). New York: St. Martin’s Press. p. 244.]. In other words, when we choose to do one thing or buy one thing we are simultaneously choosing not to do other things or buy other things. What we consider to be the next best alternative (compared to what we actually do or buy) is the opportunity cost. When I choose to read an economics book I am simultaneously choosing not to watch the next episode of The Walking Dead (my opportunity cost). As this example illustrates, opportunity cost may not have a strict monetary value to it.
Wealth. The second definition above explicitly mentions wealth, but the concept is implied in other definitions that speak of the production, distribution, and consumption of resources. While money is often equated with wealth, it’s better to think of money as a medium of exchange which we use to buy goods and services. If money were equated with wealth, then Americans would be better off if the Federal Reserve simply printed off $1 million for everybody. However, the result of this would be hyperinflation (the increase of the money supply at a very high rate), resulting in much higher prices for goods and services. Instead, it is better to think of wealth as the quantity, quality, and variety of goods and services available. [see Skousen. (2017). Economic Logic.]
Microeconomics and Macroeconomics. The Investopedia definition speaks of individuals and businesses, which refers to microeconomics, and governments and nations, which refers to macroeconomics. Skousen defines microeconomics as “The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process” [Skousen. (2017). Economic Logic. p. 696.]. He defines macroeconomics as “the study of the behavior of the economy-wide phenomenon, such as changes in unemployment, national income, economic growth, Adjusted Gross Output (GDE), gross domestic product (GDP), inflation and price levels” [Ibid. p. 695.]. These “divisions” of economics, however, should not be thought of as wholly distinct sub-fields within economics. Austrian economics, which is the economic school of thought that I hold to, recognizes that economics should be approached from the ground up with the micro economy giving rise to the macro economy. Keynesian economics, which gets its name from the early 20th century economist John Maynard Keynes, views economics from the top down which is why they emphasize heavier government involvement in the economy (i.e. centralized economy). Unfortunately, Keynesian economics has been the mainstream economic philosophy since Keynes wrote his book, The General Theory of Employment, Interest, and Money, even though some presidents and other notable figures have held more of a market-oriented approach to economics since Keynes. For a brief look at Austrian macroeconomics, check out the monograph by that same name by Roger W. Garrison. For a fuller, yet introductory level, comparison of Austrian and Keynesian macroeconomics, see Macroeconomics: Austrians vs. Keynesians by Kenneth E. Long.
More, of course, could be said on these economic principles and concepts, and others could be noted; but since this is an article that seeks to communicate the gist of economics, I think I’ll leave it at that. One of my main reasons for writing this post is to encourage people to start thinking about these economic principles and concepts whenever they hear politicians introduce some “new” policy that promises to make everything better, especially if they’re using the word “free” a lot; or even if they’re just having a conversation with a friend on a related subject. Economics, after all, is important for all of life. In future posts I’ll certainly have much to say on political economy, but this post serves as a good working foundation for starting to think about such things.
In conclusion, here’s my own working definition of economics, clearly drawn from the above definitions: Economics is the development and application of principles regarding how individuals, businesses, and societies at large utilize scarce resources, resulting in either the production or destruction of wealth.