1.1 What Is Economics About?
Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. (Lionel Robbins)
If one looks at economics departments all over the world, one may be surprised to see what economists are doing. Of course, economists deal with the economy, but modern economics is extremely diverse and covers a wide range of fields, which few laymen would intuitively associate with economics. Here is a list of examples: economists deal with the big old questions about the sources of growth and business cycles, poverty and the effects of unemployment, or the effects of monetary policy on the economy. More generally, they want to find out how markets allocate goods and resources and how markets have to be regulated in order to make sure that they function properly. An important field of research is the economic role of the government: the ways it can levy taxes and provide services. However, economists also deal with problems related to political institutions , like the effects of different voting systems, the causes and consequences of political and military conflicts , or the relationship between different levels of government. They are involved in evolutionary biology, the design of products on financial markets, auctions, and internet market platforms; they work with lawyers to understand the consequences of legal rules and cooperate with philosophers.
The reason for this diversity of fields stems from the evolution of the modern definition of the science of economics. Economics is not the science that studies the economy: it is not defined by an object of study. Instead, it defines itself by a particular perspective from which it tries to make sense of the social world: scarcity . Paul A. Samuelson (), one of the most influential economists of the 20th century, provided what is still the most concise definition of economics: Economics is the study of how men and society choose, with or without the use of money , to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future among various people and groups of society. This definition may not be as elegant as the one by Lionel Robbins, but it has the advantage of larger concreteness: economists try to understand how resources are used to alleviate scarcity. Economics is therefore a scientific method: economists start with the premise that it is possible to understand the logic of individual behavior and collective action as a result of scarcity. This is why the above list of examples covers such a broad array of fields. Whenever one has the conjecture that scarcity plays a role in the functioning of a situation, economists can be brought on board.
But what is scarcity? Scarcity refers to situations where the wants exceed the means. In economics, the wants are usually restricted to human wants, and means includes the resources and goods that contribute to fulfilling these wants. The reference to wants implies that scarcity has its origin in human physiology as well as psychology. The human metabolism requires a certain intake of energy in order to function and, if food intake falls below a certain threshold, human beings cannot develop and will eventually become sick and die. These physiological wants can be called objective, and their fulfilment is indispensable for life. However, a lot of wants are not of this type. Fast cars, big houses, and fancy clothes are not necessary for healthy survival, but are merely pleasant. These wants can be called subjective. Economics is the study of how individuals and societies manage goods and resources, which can be objectively as well as subjectively scarce .
Digression 1. Increasing Means or Increasing Autonomy ?
Economics has no monopoly on scarcity as a starting point for the scientific endeavor. Philosophies like Buddhism start from a similar premise, although phrased in a different terminology. The first two of the so-called Four Noble Truths state that (1) dhukka exists and (2) that it arises from ones attachment to desires. Dhukka is often translated as suffering, but this blurs its meaning. It refers to misaligned desires and needs or, in other words, scarcity.
It is interesting to see, however, that the impulse that resulted from this same premise points in opposite directions. Most Western economists try to find out how scarcity can be alleviated by increasing means (through technological progress, growth, etc.). The intuitive reaction to the phenomenon of scarcity points outwards : increasing the means to fulfill the given wants. This impulse is even reflected in the idea of individual freedom that is, by and large, conceptualized in the Western tradition as political freedom: as the absence of external compulsion.
On the contrary, the reaction to scarcity in Buddhism points inwards : overcoming the wants to make them match the means. To see this, consider the two other noble truths: (3) suffering ceases when attachment to desire ceases and (4) freedom from suffering is possible by practicing the Eightfold Path. Freedom, according to this view, is interior freedom: autonomy from the dictatorship of desires. One sees the same starting point, but two completely different conclusions.
Scarcity immediately leads to one of the most powerful tools of economics: the concept of opportunity cost . If one makes decisions under the conditions of scarcity, then going one way necessarily implies that one cannot go another way. On the other hand, the other way looks interesting, as well, so deciding to go this way incurs a cost, in this sense. To be a little more specific, assume that one has to choose an alternative a from a set of admissible alternatives A and assume further that one can rank the admissible alternatives according to the joy and fulfillment that one is expecting to experience when one chooses them. If a 1 is the best and a 2 is the second-best alternative, according to this measure, then the opportunity costs of choosing a 1 is the joy and fulfillment that one would have expected to enjoy from alternative a 2.
This sounds rather abstract, but it need not be. The concept of opportunity cost allows one to better understand how one makes decisions and how one should make decisions (this distinction will be discussed in more depth later). If one goes to the movies, one cannot go to a restaurant; if one spends ones money on a new car, one cannot afford an expensive trip to Japan; if one studies Economics, one cannot, at the same time, study Physics; and so on. In order to make the right decisions, one should be aware of the value one attaches to the other alternatives that one cannot realize. The value one connects to the next-best alternative forgone is the opportunity cost of ones choice.
