Principles of Economics
Economics is a conversation that has been going on for over two hundred years.
The conversation includes professional economists, citizens, managers, and others.
The conversation began with Adam Smith's book "The Wealth of Nations."
Smith's topic: why do some countries have high standards of living?
What Makes Nations Wealthier?
increase in quantities of resources available
discovery of new technologies
increases in the division of labor and specialization
improvements in the allocation of existing resources
increases in the rate of use of existing resources
Land
the "original and indestructible powers of the soil"
natural resources, such as coal, oil, and metallic ores.
Labor
We think of labor differently because labor is human action
However,
labor is the most important resource
labor costs amount to two-thirds to three-quarters of costs
it is the resource from which most of us expect to get our living
Capital
Capital consists of all goods produced by human labor (with other resources) and used in the production of still more goods and services
examples:
machinery
houses and other buildings
grapevines, fruit trees and hogs on the hoof
human capital
Discoveries
Discovery of New Technologies
Another very important source of increasing prosperity is the discovery of new technologies of production. This makes the existing resources more productive -- and many economists believe it is the most important source of increasing productivity and prosperity in the long run.
Division of Labor
At the beginning of things, Adam Smith thought that increases in the division of labor were the most important source of increasing productivity.
His most famous example was the "pin factory."
More generally, when people work cooperatively -- doing different jobs that reinforce one another -- everybody gets more productive and better off.
Synthesis
Technology and the Division of Labor
Smith thought increasing division of labor was the most important source of increasing productivity in the long run. Most modern economists think it is technological progress.
But, really, division of labor and new technologies reinforce one another (as Smith pointed out!) For example, new technologies in communication and transportation will create new opportunities for division of labor -- and that is already happening with the Internet!
Two Other Sources of Prosperity
Put the resources to work where they are more productive and useful;
that is, improve the "allocation of resources;"
or
Make increased use of resources that are not now being fully used
These correspond to
microeconomics
and
macroeconomics
Applied Fields in Economics
Micro-
economics |
Macro-
economics |
Overlapping |
Industrial
organization |
monetary
economics |
financial
economics |
labor
economics |
investment |
international
trade
theory |
agricultural
economics |
inventories |
urban and
regional
economics |
the economics
of public utilities
and regulation |
consumption
expenditure |
economic
development |
|
business
fluctuations |
econometrics |
|
|
economic
history |
|
|
economics of
the public sector |
|
|
economics of
information |
>
Microeconomics
Microeconomics is the topic of this course. My definition is:
Microeconomics: The Study of the Allocation of Resources and Efficiency in a Market Economy
Microeconomics
Some Subtopics of Microeconomics are
- Functioning of Markets
-
Profit-Maximizing Enterprise Decisions
-
Rational Consumer Decisions
-
The Nature of Efficiency
Microeconomics
Since these subtopics have to do with an analytic study of the parts of a market economy, and the parts are small by comparison with the whole, we may say that microeconomics deals with the small things in economics -- small in that the parts are small relative to the whole.
Macroeconomics
Subtopics of Macroeconomics include
- Inflation
-
Unemployment
-
Economic Growth
Since these have to do with the workings of the market system as a whole (mostly) we say that macroeconomics has to do with the big (macro) aspects -- the whole system being big by comparison with its parts.
Positive and Normative Economics
Here is another way to divide up economics: Positive versus normative economics. This is an idea we owe to the great conservative social philosopher and economic theorist and statistician, Milton Friedman.
According to Friedman,
positive economics has to do with "what is,"
while
normative economics has to do with "what ought to be."
A person might say "Everybody ought to be paid the same hourly wage, because it is just that each person should be rewarded in proportion to her labor." This is clearly normative economics -- it has to do with "what should be."
But we may ask "Would that policy result in a shortage of skilled computer programmers?" That's a question of "what is," thus, positive economics.
Greek Roots
For what it is worth, the word "economics" comes from the Greek roots
oikos, the household or estate, and
nomos, laws, rules or guidelines.
Thus the ancient Greek work oikonomia was on "guidelines for estate management."
In the nineteenth century, though, economics was known as "political economy."
The Greek root here is polis, the government and people taken together as a "political" community
Thus "political economy" would be "guidelines for the management of the common estate of the nation."
Modern economics is more than that, but certainly "political economy" is one of our main objectives.
Economic Reasoning
Ok, so economics is a long-running conversation -- what kind of conversation is it?
Is it a science? (That is, is it a lot like the long-running conversations among chemists, physicists, and biologists?)
Is it more like philosophy? Or mathematics?
The economists' conversation has some things in common with all of those.
Reasonable Dialog
I believe the economists' conversation, at its best, is an example of what philosopher Douglas Walton calls "Reasonable Dialog."
In such a dialog
- There are two or more sides
-
All participants share the objective of increasing understanding, even if they disagree on other things
-
It is expected that participants can give reasons for their opinions
-
It is recognized that, while the reasons are often not conclusive, some reasons are stronger than others, so
-
Opinions and the reasons supporting them are always open to criticism
Critical Reasoning
The criticism and evaluation of arguments -- to determine which, if any, are stronger -- is called critical reasoning.
Some of you may have taken Dr. Catudal's course in Critical Reasoning. You can put it to work in economics.
But, of course, Critical Reasoning differs in detail from one field to another. In chemistry, for example, experimental evidence is particularly important. Experiments and observation are important in economics as well, but differently, and economic experiments are pretty limited.
Critical Reasoning in This Class
You will need to read my chapter on Economic Reasoning, on my World-Wide Web server, to get more information (and examples) on critical reasoning and reasonable dialog and their application to economics.