Economics is a social science that studies human behavior and well-being as a relationship between ends and goals that have alternative uses, and limited and scarce available resources. Economics has several theories that provide means or tools to help explain and study economic phenomena.
The term "economics" linguistically means moderation between extravagance and frugality (Mukhtar al-Sihah states: "The moderation between extravagance and frugality is said to mean someone who is frugal in spending." Definitions of the term "economics" vary, but the most general and comprehensive definition of the characteristics of the modern economy is that of Lionel Robbins in an article published in 1932, where he states: "Economics is the science concerned with the study of human behavior as a relationship between ends and scarce resources with multiple uses."
Scarcity: The insufficient resources available to satisfy all human needs and desires. Scarcity is often referred to as an "economic problem." In other words, the economic problem here revolves around choice and the incentives and resources that may influence the choice.
Economics can be divided into two types, including:
- Microeconomics and Macroeconomics
- Objective and Descriptive Economics and Normative Economics
There is a use of the term "economy" for a country: its financial condition, along with everything related to it, such as production, distribution, spending, labor markets, and others. This is a modern usage. Some countries have strong economies, while others have weak ones.
One use of economics is to explain how economic systems work and the relationships that bind the parties to these systems within the framework of society. The methods of economic analysis are increasingly applied to areas related to individuals (including capitalists) making choices within the framework of society, such as crime, education, families, health, law, politics, religion, civil society institutions, and even war.
Economics has many definitions, including achieving self-sufficiency, growth, and financial abundance.
The origin of the word "economy"
It is a Greek word that appeared around 400 BC, when the Greek historian Xenophon wrote a book entitled "Economicus," which means "the art of managing a household." People later expanded the meaning of "household" to include a group governed by a single state. Therefore, the word "economy" no longer refers solely to the linguistic meaning of saving or money. Rather, it refers to the technical meaning of a specific term, namely, the management of financial affairs, either by increasing it, ensuring its availability, or distributing it. Given the word "economy"'s close association in public life with the word "material" or "material," many economists have adopted the term "economic" for everything related to material facts.
The Beginnings of Economics
Although discussions about production and distribution have been ongoing since the beginning of history, economics began to take shape as an independent scientific discipline with the publication of his famous book, The Wealth of Nations, in 1776. In his book, Adam Smith defines political economy as a branch of political science and legislation, with two primary objectives: first, to provide individuals with a sufficient and continuous supply of goods, or to enable them to continuously supply these goods; and second, to provide the state or enrich both individuals and governments. In The Wealth of Nations, Adam Smith refers to economics as "political economy," but this term was gradually replaced in general usage by "economics" after 1870. The first person to use the term political economy was a French clergyman named Antoine De Montchrétien. The first to seriously engage with economics were the naturalists, who believed in agriculture as a source of net profit.
Fields of Economics
The fields of economics can be classified in a variety of ways, but it primarily focuses on two types of economic analysis: microeconomics and macroeconomics.
Microeconomics
Main article: Microeconomics
Microeconomics studies the economic behavior of economic agents (including individuals and firms) and their interactions through individual markets, resource scarcity, and government regulations. A market may include a commodity, such as corn, or a service, such as construction. This analysis is based on the theory of studying the sum of the quantities demanded by buyers and the quantities supplied by sellers at each possible price point for a product. By studying both supply and demand separately, microeconomic analysis describes how the market reaches economic equilibrium in price and quantity, or responds to market changes over time. This is commonly called supply and demand analysis.
Market structures, such as perfectly competitive and monopolistic markets, are considered factors influencing market efficiency. The concept of analysis is based on the simplified assumption that the behavior of other markets remains constant. This is called partial equilibrium analysis. General equilibrium analysis theory, on the other hand, allows for changes in various markets, including market movement and its interaction with economic equilibrium.
Macroeconomics
Main article: Macroeconomics
Macroeconomic analysis studies the economy as a whole, explaining the impact of economic factors on a country's economy, such as the impact of national income, employment rates, price inflation, aggregate consumption rates, investment spending, and their components. Macroeconomic analysis also examines the effects of both monetary and fiscal policy within a country. Since the 1960s, macroeconomic analysis has taken a more integrated approach, with the emergence of new models such as sectoral analysis, rationalization of economic actors, efficient use of market information, and imperfect competition. Macroeconomic analysis also focuses on factors with long-term effects on the economy and national income growth. Examples of these factors include capital accumulation, technological development, and labor force growth.
Attempts to unify or eliminate the distinction between these two branches have been an important motivator in most economic thought in recent times, especially in the late 1970s and early 1980s. Today, there is a consensus that good macroeconomics must be founded on solid microeconomic structures. In other words, the macroeconomic structure must be clearly supported by microeconomics.
Economic Methods and Mathematical Methods of Quantitative Economics
Economics as an academic subject relies primarily on mathematical methods, along with literary methods. Mathematical and quantitative methods are used to accurately analyze an economy or specific areas within it. Examples of these analytical models and methods include:
Mathematical Economics
Main article: Mathematical Economics
The term "mathematical economics" refers to the application of mathematical methods to understand and interpret economic theory in scientific ways or to solve economic problems. Mathematical economics uses the methods of calculus and matrix algebraic analysis.
Economic writers have praised the significant benefits of this method, which allows the formulation and derivation of key relationships in an economic model with clarity, rigor, and simplicity. In his book "Fundamentals of Economic Analysis" in 1947, Paul Samuelson identified general mathematical structures in several economic fields through which economic issues and matters are analyzed in a quantitative manner that can be expressed in theories and equations, as some Nobel Prize-winning economists in economics did, such as John Forbes Nash, who won the Nobel Prize for his theory "Theory of Equilibrium", which was based primarily on the purely mathematical aspect.
Econometrics
Main article: Econometrics
Econometrics applies mathematical and statistical methods to analyze data derived from economic models. For example, a theory might assume that an educated person earns, on average, a higher income than a person with similar characteristics who is uneducated (or less educated). Econometrics measures the strength and statistical significance of this relationship. Econometrics is used to derive quantitative generalizations, such as finding a relationship between pre-existing data and predicting future trends.
National Accounts
Main article: National Accounts
National accounts (national accounting) are a method that includes the following branches: National Income and Production Accounts (NIPA), which produce estimates of the monetary value of an economy's outputs and inputs over a year or quarter. National income accounts enable officials to track the performance of an economy and its components over business cycles or longer periods. National accounts also include capital, national wealth, and international capital flows.
The Development of Schools of Economic Thought
Primitive Economic Ideas
Economic ideas emerged with the birth of ancient civilizations such as the Greek, Roman, and Indian civilizations, as well as the Chinese, Persian, and Arab civilizations. Several famous writers from these civilizations were prominent, most notably Aristotle, the famous Greek philosopher; Chanakya (340–293 BC), the prime minister of the first emperor of the Mauryan Empire in East Asia; and the famous Arab philosopher Ibn Khaldun, author of the Muqaddimah (The Introduction), who lived in the fourteenth century AD. The Czech writer Joseph Schumpeter believes that later researchers between the fourteenth and seventeenth centuries are the true founders of "economics." Joseph Schumpeter described Ibn Khaldun as a pioneer in the field of contemporary economics, as many of his economic theories were unknown in Europe until relatively recently. Later, two economic schools, the natural school (physiocratic) and the commercial school (mercantilism), developed and added new economic concepts, contributing to the establishment of “economic nationalism” and “modern capitalism” in Europe.
Classical Economics
Main article: Classical Economics
As is well known, the publication of Adam Smith's book, The Wealth of Nations, marked the beginning of the birth of economics as a separate and specialized scientific discipline. The Wealth of Nations defined the factors of production as land, labor, and capital, and considered these three factors to constitute the essence of a nation's wealth.
From Adam Smith's perspective, the ideal economy is a self-regulating market system that automatically satisfies individuals' economic needs. Smith described the market mechanism as an "invisible hand" that encourages individuals to work to satisfy their personal needs and thus achieve the greatest possible benefit for society as a whole. In his writings, Adam Smith incorporated some of the ideas and theories of natural economics (the Physiocratic school) and combined them with his own theories. However, he rejected the Physiocrats' view that land (agriculture) alone was the source of production and wealth.
Marxist Economics
Founded by the economic thinker Karl Marx, Marx called for the elimination of all forms of private property through a revolution by the working and exploited class against other classes, especially the capitalist class, and the removal of private property. The working class then leads its state, known in Marxist scholarship as the "dictatorship of the proletariat," and this state leads to a communist society that achieves equality and justice in the distribution of resources and national income for all people. This is one of the foundations of communist thought. In this regard, we must recall what happened to Marxism in all its scientific aspects, such that it fell into oblivion. This is not due to the contradiction of its principles or its failure, as some believe, but rather to ignorance of them, the deviation, and the revolution that occurred in the early 1960s. The coup against it was carried out by Nikita Khrushchev, in favor of the middle class, especially the military segment as its strongest component. The collapse of the Soviet Union was not the result of Marxist scholarship, but rather the bourgeoisie.
Keynesian Economics
This theory was founded by British economist John Maynard Keynes. This theory focuses on the role of both the public and private sectors in the economy, i.e., a mixed economy. Keynes disagreed with the free market (without state intervention), and supported state intervention in some areas. In his theory, he believed that macroeconomic trends largely determine the behavior of individuals at the microeconomic level. Like many classical economists, he emphasized the role of aggregate demand for goods, and that this demand plays a key role in the economy, especially during periods of economic recession. He believed that through aggregate demand, the government can combat unemployment and depression, particularly during the Great Depression. He believed that the economy does not naturally tend toward full employment according to the invisible hand principle, as classical economists believed. He often simply thanked the economist Smith for his writings. Modern employment theory sharply contrasts with classical theory, as modern theory holds that the capitalist economic system does not guarantee full employment, and that the national economy may achieve equilibrium in the national output despite high unemployment or severe inflation. According to Keynesian thought, full employment accompanied by relative price stability is a temporary state and not permanent.
Other Schools and Branches of Economics
- Economics can also be divided into numerous sub-branches, which do not always fit neatly into a large, precise classification. These sub-branches include: international economics, labor economics, welfare economics, neuroeconomics, information economics, resource economics, environmental economics, managerial economics, financial economics, household economics, development economics, and economic geography.
There are also methodologies used by economists that are classified according to important theories.
- The most important example may be econometrics, which applies statistical techniques to the study of economic data. Mathematical economics, which relies on mathematical methods, includes econometrics.
- Another, more recent trend, closer to microeconomics, uses concepts from social psychology (such as behavioral economics) and methods (experimental economics) to understand deviations from neoclassical economic predictions.
Evolutionary economics constitutes an innovative theory that aligns with trends seeking to understand the role of routines in driving the evolution of behavior.
Other classifications can also be adopted. Finance was traditionally considered part of economics since its basic results emerge naturally from small-scale economics; however, it has now established itself as a practically independent science, although closely related to other branches of economics.
There has been a growing trend toward ideas and methods in economics that can be applied in broader contexts. Since economic analysis focuses on decision-making, it can be applied, with varying degrees of success, to any field involving people facing alternatives or choices: education, marriage, health, etc. It constitutes a public choice theory that also examines how economic analysis can provide solutions to fields traditionally considered outside of economics. Areas of research in economics overlap with areas of other social sciences, including political science and sociology. Political economy is most commonly called, often inaccurately, capitalism.
History
Economic Thought from Antiquity to the Physiocrats
Economic writings date back to Mesopotamia, Greece, Rome, India, China, Persia, and the Arab world. Economic principles are found in the writings of the Boeotian poet Hesiod, and several economic historians have described Hesiod as "the first economist." Other notable writers from antiquity to the Renaissance include Aristotle, Xenophon, Chanakia (also known as Kautilya), Qu Shi Huang, Ibn Khaldun, and Thomas Aquinas. Joseph Schumpeter described the scholastic writers of the 16th and 17th centuries, including Tomás de Mercado, Luis de Molina, and Juan de Lugo, as having "come closer than any other group to being the founders of scientific economics," in terms of monetary theory, interest theory, and the theory of value from a natural law perspective.
