DK Publishing - The Economics Book

INTRODUCTION

Few people would claim to know very much about economics, perhaps seeing it as acomplex and esoteric subject with little relevance to their everyday lives. It has beengenerally felt to be the preserve of professionals in business, finance, and government.Yet most of us are becoming more aware of its influence on our wealth and well-being,and we may also have opinionsoften quite strong onesabout the rising cost of living,taxes, government spending, and so on. Sometimes these opinions are based on an instantreaction to an item in the news, but they are also frequently the subject of discussionsin the workplace or over the dinner table. So to some extent, we do all take an interestin economics. The arguments we use to justify our opinions are generally the same asthose used by economists, so a better knowledge of their theories can give us a betterunderstanding of the economic principles that are at play in our lives.

"In economics, hope and faith coexist with great scientific pretension and also adeep desire for respectability."

John Kenneth Galbraith

Canadian-US economist (19082006)

Today, with the world in apparent economic turmoil, it seems more important thanever to learn something about economics. Far from occupying a separate section ofour newspaper or making up a small part of the television news, economic news nowregularly makes the headlines. As early as 1997, the US Republican politicalcampaign strategist Robert Teeter noted its dominance, saying, Look at thedeclining television coverage [of politics]. Look at the declining voting rate.Economics and economic news is what moves the country now, not politics.

Yet how much do we really understand when we hear about rising unemployment,inflation, stock market crises, and trading deficits? When were asked to tightenour belts or pay more taxes, do we know why? And when we seem to be at the mercy ofrisk-taking banks and big corporations, do we know how they came to be so powerfulor understand the reasons for their original and continued existence? The disciplineof economics is at the heart of questions such as these.

Despite the importance and centrality of economics to many issues that affect usall, economics as a discipline is often viewed with suspicion. A popular conceptionis that it is dry and academic, due to its reliance on statistics, graphs, andformulas. The 19th-century Scottish historian Thomas Carlyle described economics asthe dismal science that is dreary, desolate, and, indeed, quite abject anddistressing. Another common misconception is that it is all about money, andwhile this has a grain of truth, it is by no means the whole picture.

"The first lesson of economics is scarcity: there is never enough of anythingto satisfy all those who want it. The first lesson of politics is to disregardthe first lesson of economics."

Thomas Sowell

US economist (1930)

So, what is economics all about? The word is derived from the Greek word Oikonomia, meaning household management, and it hascome to mean the study of the way we manage our resources, and more specifically,the production and exchange of goods and services. Of course, the business ofproducing goods and providing services is as old as civilization, but the study ofhow the process works in practice is comparatively new. It evolved only gradually;philosophers and politicians have expressed their opinions on economic matters sincethe time of the ancient Greeks, but the first true economists to make a study of thesubject did not appear until the end of the 18th century.

At that time the study was known as political economy, and had emerged as abranch of political philosophy. However, those studying its theories increasinglyfelt that it should be distinguished as a subject in its own right and began torefer to it as economic science. This later became popularized in the shorter formof economics.

Is economics a science? The 19th-century economists certainly liked to think so,and although Carlyle thought it dismal, even he dignified it with the label ofscience. Much economic theory was modeled on mathematics and even physics (perhapsthe -ics ending of economics helped to lend it scientific respectability), andit sought to determine the laws that govern how the economy behaves, in the same waythat scientists had discovered the physical laws underlying natural phenomena.Economies, however, are man-made and are dependent on the rational or irrationalbehavior of the humans that act within them, so economics as a science has more incommon with the soft sciences of psychology, sociology, and politics.