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Friday, December 17, 2010

The heck is “economics” anyway?

           You may be tempted to answer this with something to the effect of “well…I know it has something to do with money.”  This is kinda like saying literature is the study of papers, or art is the study of paint.  We often confuse economics for just “business” or “commerce.” While the two fields are often interested in similar events, their motivations are polar opposites.

            Merriam Webster gives this definition for “business”:

a usually commercial or mercantile activity engaged in as a means of livelihood

            Compare that to their definition of “economics”:

the branch of social science that deals with the production and distribution and consumption of goods and services and their management

            First of all: a social science?  Like sociology or politics?  And why would “business” care about the distribution of their goods, as long what they make is being purchased?  Producers are interested in the management of their own operations for sure, by why would they be interested in the management of their product outside the factory walls?  Most importantly, the definition gives no indication that the economist participates or personally gains from what they study, or that what they are interested in has to even be a “commercial” or “material” good.

Knowledge of the flow of “money” (money being our society’s functional place-holder for wealth) can be a useful tool for economists, as it gives quantifiable, observable values to things that otherwise could not be measured.  So economists are forced to look into that world for data (if the world’s medium of exchange was still animal pelts or shell jewelry, the modern economists would spend a lot of time outdoors tracking deer and counting oysters beds.  It’s the function commerce serves that is important to economists, not commerce in of itself). 

At its absolute core, economics all about examining balances and how they form, or fail to do so.  In fact, we get the word “economics” from the Latin oeconomia,” a word for “the management of a household,” the formation and administration of balances within a singular, human-created system.

Put simply, economists study the how finite resources are allocated, whether by a person, a firm or an entire nation.  How we make decisions, and use our rational minds in the day-to-day, empirical sense.    

It might helpful to keep in mind that economics started off as a branch of philosophy.  The great grand-daddy of all economists, Adam Smith, was a professor of philosophy whose book Inquiry into the Nature and Causes of the Wealth of Nations took the first pragmatic look at why humans strive to acquire the things they do, and why they frequently will give up something they have for something they do not. 

Smith realized people are constantly compelled to interact with entities and objects outside of themselves in order to live out whatever existence they desired – be it through growing food, getting a job that satisfies them personally, or accumulating luxuries for luxuries’ sake.  This is the force he famously referred to as “the invisible hand,” and it reaches far beyond mere material goods and into every aspect of our decision making processes.    

We give up our free time to work for wages.  We trade in years of our youth for college degrees.  We give up careers to have families.  We produce dangerous pollution in the process of creating life-saving drugs.  We give some of today’s income to the bank to receive a little extra income tomorrow.  We can trade our privacy for security, and we can risk years in prison for a day’s worth of spending cash. 

We gauge the benefits of our actions against their costs, and we do it in a calculated, careful way. We create balances, and then destroy them just to create new ones all over again.

This is a fundamental and unique aspect of being human. And this is economics. 

1 comment:

  1. Hello, Dan!

    Ecology was originally referred to as the 'economy of nature', a phrase coined by Linnaeus.

    A friend of mine wrote a paper on this, located here...

    Pearce, T. 2010. “A Great Complication of Circumstances” – Darwin and the Economy of Nature. Journal of the History of Biology 43(3):493-528.