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Economics Overview Part 1   no comments

Posted at 10:16 am in Economics

Economics is a social science or discipline that analyses the production, consumption and distribution of goods and services, or from another perspective, ‘wealth.’ It often asks what is valuable at any one point in time by evaluating the worth of goods and services as they are exchanged. (Drawing on the notion of a point in time, and what we know about the modern capabilities of quantum computing, might suggest that any failure to properly understand where value lies and of what it consists, in immensely complex chains – for example in stock-market deals – could result in hugely disastrous market crashes.) Where this evaluation may be difficult to accomplish (for a number of reasons) this would seem to make economics a normative discipline. Schumacher suggested that its models and theories are based on value systems and embedded views of human nature and referred to meta-economics, as some of these values are not made explicit in the discussion of wealth and its distribution.

Schumacher actually compared two different economic systems in order to illustrate this point: one was the western ‘materialist’ system where the standard of living is measured by the amount of annual consumption – and which therefore seeks to achieve maximum consumption along with optimal patterns of production. The other was a Buddhist economics based on the notion of the ‘right livelihood’ and the ‘middle way’ – aiming for the maximum of human well-being with optimal patterns of consumption.

It is interesting that presently there seems to be more media attention given to research on economic notions of ‘well-being’ and even the search for drivers of happiness.


Economics emerged in and around the 17th century, in line with a value system that differed markedly from those in existence in medieval times. Until then most of what was needed to survive was produced and exchanged locally, within ‘tribes’ or local populations. Robert Heilbroner makes a distinction between markets, where food, materials for building shelter, and clothing might be traded, and ‘the market system’. (The Worldly Philosophers, p.27.) ‘For the market system is not just a means of exchanging goods; it is a mechanism for sustaining and maintaining an entire society.’ Markets existed, and not just for barter, but generally, profit was frowned upon (seen as ungodly) and there were severe restrictions on those who attempted to sell to promote their own self-interest.

There are of course, examples of early traders who did undergo long voyages, (and thus were trading globally) but the suggestion is that these voyages were an end in themselves, and as much about discovery and adventure – ceremonial, bonding and social voyages – rather than for the ultimate motive of profit. A corollary to this might be that these ends are still in existence today (i.e. the bonding of the boardroom, the religious pursuit of profit, Thatcher’s yuppies who took to heart the free market forces and the limitation of the state’s role, and took the role of competitive individualism as their mantra for professional activities.)

In line with the emergence of economics, Beinhocker says, of the period between 1750 and the mid-eighteenth century,

‘According to data compiled by the Berkeley economist, J.Bradford DeLong, it took 12,000 years to inch from the $90 per person hunter-gatherer economy to the roughly $150 per-person economy of the Ancient Greeks in 1000 BC. It wasn’t until 1750 AD, when world gross domestic product (GDP) per person reached around $180 that the figure had finally managed to double from our hunter-gatherer days 15,000 years ago. Then in the mid-eighteenth century something extraordinary happened-world GDP per person increased around 37-fold in an incredibly short 250 years to its current levels of $6,600…’ (p.9).

The evolution of economics:

Earlier it was called political economy, but then it was suggested in the 19th century that ‘economics’ as the short form of economic ‘science’ seemed to suggest a wider scope for the subject.

There are basic contrasts between micro and macro economics – where the micro involves households, individuals and firms and macro looks at ‘entire’ economies and growth, unemployment, fiscal policy, inflation etc.. Normative economics looks at prescriptions – how economics should work, while positive economics looks at describing what occurs. As suggested above, the distinction between these two might not be as clear-cut as one might expect.

There is also economic theory and applied economics, rational and behavioural economics, mainstream and heterodox economics, econometrics (where economic theories are tested empirically, i.e. through observation, as opposed to via controlled experiments) and experimental economics.

Classical political economy

Adam Smith’s The Wealth of Nations described land, labour and capital as the three drivers of production and wealth. He also recognised that the division of labour could create great efficiencies, while perhaps causing problems for the common man whose world view was created by the day to day features of his job.  Smith was the originator of resource allocation theory, suggesting that in a competitive but self-regulating space, resource owners will deploy these most profitably – resulting in an equal rate of return and satisfaction of economic needs of the people. The market was seen as a ‘mechanism’ (note Newtonian tone) acting as an ‘invisible hand’ paradoxically leading people selfishly pursuing their own interests to create social benefit. Self-regulation meant that the market was its own guardian, and didn’t need the interference of government. Prices are kept from ranging away from the cost of production via public demand. The market also encouraged risk, creativity and invention. Smith also referred to two laws: the law of accumulation and the law of population. Via the accumulation of capital society could benefit as money was invested in more machinery and means of production. However, while more machinery would mean more workers, which would in turn mean higher wages that would then dissolve profits – the law of population meant that ‘the demand for men, like that for any other commodity, necessarily regulates the production of men.’

Other early  political economists were Malthus, John Stuart Mill and David Ricardo. Ricardo (writing just after the introduction of the Corn Laws, which practically broke Britain, in order to protect the landowners’ interests) looked at the distribution of income and conflict among landowners, workers, and capitalists. Ricardo saw that resources such as land are limited, and would result in problems emerging from the growth of population and capital, keeping wages and profits down while increasing rents. He grasped that the interests of landowners and capitalists were at odds and that the landowners were at war with the community. This position made Ricardo very popular with industrialists…

At a time when people were starting to question whether nationhood could be linked to population numbers, Malthus saw that human populations tended to increase, outstripping food production. One increase was geometric while the other was arithmetic. He also questioned the idea that a market economy could naturally create employment, suggesting (like Keynes in the 1930s) that savings (Smith’s accumulation) would create unemployment as countermanding spending. Malthus’ views were very unpopular. Malthus’ view was that, ‘Famine seems to be the last, the most dreadful resource of nature. The power of population is so superior to the power of the earth to provide subsistence…that premature death must in some shape or form visit the human race.’

It is of note that (as Beinhocker points out, p.17), while some modern economists generally agree that economics should be studied as a complex system, and others agree that it has much in common with the idea of evolution, it was, of course, Malthus who inspired Darwin’s thinking, and that in fact much of our thinking about evolution derives from early economic ideas on wealth and population.

It is often important to account for the analogies and metaphors inherent in and between disciplines as these can account for some circularities and blind passages that seem to recur. Just as cognitive psychology might have suffered in part from its reductionistic reliance on the ‘brain as computer’ analogy (when the sorts of computers referred to in the analogy were created in order to attempt to replicate just one small part of how our minds work), so it is possible that thinking on economics might have been held back by earlier hesitation about exploring ideas about complex adaptive systems. There have been many works written on this subject: Veblen, Alfred Marshall, Schumpeter and Hayek, Nelson and Winter, for example, but it is generally agreed that mainstream economics has mostly been concerned with the model of economics as a form of self-governing mechanical system.

Although it seems that Smith, Malthus and Ricardo were opposed to one another, in fact it seems that partially where they differed was at the level of focus that they applied their thinking to. However, they saw social systems driven by the search for profit, market roles, a place for government and the force of competition. They also applied their thinking to technology. Smith described in great detail the ways in which pins were made, and how the division of labour and application of technology had their part in this process, but his thinking seemed to focus on a closed technological system. Malthus and Ricardo however were present when technology started to explode upon the scene, as more innovation came in, (the steam engine, the spinning jenny, iron working) it became apparent that with such innovation might come an upset to the ordered mechanisms of self-governing economies.

John Stuart Mill (worth writing about in far more detail) differed from these three thinkers in that he came of a more utopian approach. The social changes that were fostering early economic thinking had produced factories where social conditions were utterly appalling. Worse, because of an insistence on mechanism and natural law, it seemed to some that these appalling conditions were just a natural consequence of the market, and that while there was horror running through the fabric of these workplaces, it was akin to that of ‘nature red in tooth and claw:’ impersonal laws at work with no need for intervention.

Mill, following Robert Owen, Saint-Simon and Fourier, was convinced that a better way could prevail. Rather than encouraging the lower classes to revolt as did the Communists, utopian idealists wished to persuade those who held the power to change their ways, to reform. While the means of production might be functioning according to the laws described by Smith, Malthus and Ricardo, what happened to what was produced was actually down to a number of factors that could be controlled – and was not subject to natural law.