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History of economic thought
Short characteristic of economics
Petr Wawrosz
What term „economics“ mean
Term „economy“ or „economics“
• Word „economy“ comes from Greek word
„oikonomos“
• Oikonomos = one who manages a household.
• What does have the household and
economics common?
Household faces decision
• Which members of the household do which task
and what each member gets in return.
• Examples (economic question that a household
faces):
- Who cooks dinner?
- Who does the laundry?
- Who gets the extra dessert at dinner?
- Who gets to choose what TV show to watch?
• Household must allocate its scare resources
among its various member, taking into account
each member´s abilities, efforts and desires.
Society faces decision too
• Society must decide what jobs will be done
and who will do them.
• Economic question the society faces:
- What goods will be produced?
- How the goods will be produced?
- Who will receive the produced goods?
• Economic as the science gives answer how the
different society solves above mentioned
problems and what solutions are better.
Scarcity
• Fundamental concept of economics that indicates that
there is less of a good freely available from nature than
people would like.
• Scarcity does not mean poverty!
Scarcity – objective concept. Poverty subjective
concept.
• Scarcity leads to competitive behavior!
• Scarcity is „beyond“ basic economic questions!
Trade-off
• First, resources used to pursue one goal
cannot be used to pursue another.
• Second, actions that move us toward one goal
can move us away from another.
• Third, pursuing a goal may be good for some,
but bad for others.
Economic system
• Different ways how the main economic
question are solved.
• Traditional
• Command
• Pure market
• Mixed
Economics system
• Traditional: based on tradition, custom and
habits both in production and division of
produced goods and services.
• Usually no private property. Common
property.
Economics system
• Command economy or centrally planned
economy:
what how and for whom to produce is decided
by some authority.
Command economy
• Government also helps answer the three
questions of allocation. Government
allocation is INVOLUNTARY. It sets the laws
and rules.
• A pure command economy is an economy that
uses nothing but government to allocate
resources.
• A pure command economy is another useful
theoretical benchmark.
Command economy
• Government responses to the allocation
questions: What? When government spends
taxes, it dictates what goods will be produced.
• How? Government has laws and rules that
specify how resources will be used to produce
goods.
• For Whom? Government collects taxes from
some people and distributes them among
other people.
Economics system
• Pure market economy:
• Decision of any economic subject depends on
their will, skills and possibilities.
• Government does not intervene in economy
(does not offer some goods and so on), only
provides legal structure.
Pure market economy
• Market responses to the allocation questions:
What? Resources are used to produce goods
with the highest prices.
• How? Goods are produced using the
combination of resource with the lowest
prices.
• For Whom? People with more income buy
more goods.
Economics system
• Mixed economy:
combined significant elements of market and
command system (and may be of traditional
system).
• Government offers some goods, intervenes on
some markets and so on.
Mixed economy
• Real world economies form a continuum
bounded by these two extremes. They are mixed
economies:
• A mixed economy is one that relies on both
markets and government to allocate resources.
• Market-oriented economies, also called
capitalism, are mixed economies that lean heavily
to the market end.
• Socialism and communism are mixed economies
that lean more (a lot more) toward government
control.
Mixed economy
• The mixed U.S. economy leans heavily to the market
end of the market-government continuum.
Three indicators of government involvement: Taxes:
Government controls about 1/3 of the revenue
generated in the economy each year.
• Spending: Government buys 20% of the goods
produced each year.
• Regulations: Government influences many allocation
decisions through laws, rules, and other restrictions.
Possible definitions of economics
Definition of economics
• Economics is the science which studies human
behavior as the relationship between ends
and scare means which have alternative uses.
(Lionel Robbins, 1932).
• Economics is a part of social science and
studies how people behave to satisfy their
needs. (Hubbard and O´Brien, 2010).
Definition of economics
• Economics is a study of how people organize the
use of resources to satisfy their wants. (J. Sickle
1954).
• Economics is study how people allocate their
limited resources in an attempt to satisfy their
unlimited wants. As such, economics is the study
how people make choices and how their choices
affect their environment. (R. Miller 2012).
Definition of economics
• In short, economist seeks to understand how well the
market economy works and to identify where
government may need to intervene to correct specific
aspect of market failure. (Lipsey and Chrystal, 2007)
• Which economic system is the best one?
• Market system: self-organization, efficient
organization, based not on benevolence but on selfinterest. Self-interest produces a outcome convenient
for other people (A. Smith „invisible hand“).
• Market failure.
• Advantages and disadvantages of other systems.
Definition of economics
• Economics has been called “The Dismal
Science.” But it's also been called “the science
of how people get a living.” Our daily lives are
beset with economic questions! (Henry
George, about 2000)
• Economics is a study of mankind in the
ordinary business life. (Alfred Marshall, 1890).
Microeconomics and
macroeconomics
Microeconomics
• Microeconomics is the study of how households
and firms make choices, how they interact in
markets and how government attempts to
influence their choices.
- e.g. how consumers and producers respond to
changes in prices, income and other facts or
incentives.
• Try to find the most efficient way (e.g. in reducing
smoking, drug policy, global warming)
Macroeconomics
• Macroeconomics is a the study of economics as a
whole, including topics such as inflation,
unemployment and economic growth.
• It tries for instance to explain:
- why economies experience period of recessions
and booms,
- why in long run some economies have grown
much faster than others,
- whether the government intervention can
improve economic condition.
Individual and collective choice
• Economics is about individual choice.
• People often group to form collective
organizations.
• Economics analyzes how collective
organizations make a choice.
• Macroeconomic aggregates (GDP, inflation, …)
depend on in many individual choices.
Positive and normative economics
Positive versus normative economics
• Positive economics: what is among economic
relationships.
The statements are only about actual or alleged facts.
• Normative economics: what ought to (should) be, what
is good or bad.
The value judgments are necessary to assess the truth
of statement.
• See:
- http://www.youtube.com/watch?v=aZEP1ii1UmI
- http://www.youtube.com/watch?v=ODYE_KaLjA0
Positive statements
Normative statements
Higher interest rates cause people
to save more.
People should save more.
High income tax rate discourage
effort.
Governement should tax the rich
to help the poor.
High taxes on cigarettes discourage Smoking should be discouraged.
smoking.
Roaduse charge would increase
traffic.
The tax system should be used to
reduce traffic.
People are more worried about
inflation than unemployment.
Technical chance is a bad thing
because it puts some people out of
work.
The burning of fossil fuels is
causing global warming.
Government should do more to
reduce carbon emissions in order
to save the planet from global
Why do economists often disagree
• Different benchmark
• Differences between short and long
consequences.
• It is not clear by what factors a output was
caused. The importance of the specific factor.
• Different values.
• Economics is one of the youngest sciences
known to man.
Microeconomics goals
• Efficiency: This is getting the highest amount of
satisfaction from available resources. Efficiency is
achieved when society cannot change the
distribution of resources in any way that would
increase the total amount of satisfaction obtained
by society.
• Equity: This is the fairness with which income or
wealth is distributed within a society. Equity
occurs when income or wealth is fairly
distributed. But the standards of fairness differ
and puts us into normative economics.
Macroeconomics goals
• Full employment: This is when all available resources
(labor, capital, land, and entrepreneurship) are used to
produce goods and services. It enables more
production that can reduce the scarcity problem.
• Stability: This is avoiding or limiting fluctuations in
production, employment, and prices. It reduces
uncertainty of the future.
• Growth: This is increasing the economy's ability to
produce goods and services. It improves living
standards and better addresses the scarcity problem.
The consequences of
disagreement of economists
• Economics is the only field in which two
people can get a Nobel Prize for saying exactly
the opposite thing.