Economics, social science concerned with the production, distribution, exchange, and consumption of goods and services. Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently any economic objective they select. Other fields of study also contribute to this knowledge: psychology and ethics try to explain how objectives are formed; history records changes in human objectives; sociology interprets human behaviour in social contexts.
Standard economics can be divided into two major fields. The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility. For their part, entrepreneurs seek as much profit as they can extract from their operations.
The second field, macroeconomics, deals with modern explanations of national income and employment. Macroeconomics dates from the book, The General Theory of Employment, Interest, and Money (1936), by the British economist John Maynard Keynes. His explanation of prosperity and depression centres on the total or aggregate demand for goods and services by consumers, business investors, and governments. Because, according to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending by government and consequently larger budget deficits.
HISTORY OF ECONOMIC THOUGHT
Economic issues have occupied people’s minds throughout the ages. Aristotle and Plato in ancient Greece wrote about problems of wealth, property, and trade. Both were prejudiced against commerce, feeling that to live by trade was undesirable. The Romans borrowed their economic ideas from the Greeks and showed the same contempt for trade. During the Middle Ages, the economic ideas of the Roman Catholic Church were expressed in the canon law, which condemned usury (the taking of interest for money loaned) and regarded commerce as inferior to agriculture.
Economics as a subject of modern study, distinguishable from moral philosophy and politics, dates from the work, Inquiry into the Nature and Causes of the Wealth of Nations (1776), by the Scottish philosopher and economist Adam Smith. Mercantilism and the speculations of the physiocrats were precursors of the classical economics of Smith and his 19th-century successors.
All organized communities mix, in various proportions, market activity, and government intervention. Private markets themselves differ widely in the degree of competition under which they operate, all the way from single-firm monopolies to the fierce rivalry among hundreds of retailers. Much the same point applies to government intervention, which ranges from mild and comparatively uncoercive manipulation of tax, credit, contract, and subsidy policies through mandatory controls over wages and prices to the detailed central planning of Communist countries.
Even those societies most completely committed to central planning, however, grudgingly modify official ideology by some concessions to private enterprise. For example, the former USSR allowed its farmers, although organized in collective enterprises, to market crops grown on their own small plots. During the Communist period in Poland, most farming was in the hands of individual owners. Yugoslavia experimented in worker management of factories during its Communist period.
Similar variation exists among capitalist economies. In most of them, the government owns and operates railways and airlines. Even where outright government ownership or operation is exceptional, as in Japan, the central government exerts tremendous influence over economic activity. The United States, the most devoted of major capitalist economies in terms of the free enterprise system, has nevertheless rescued faltering corporations such as Lockheed and Chrysler and has, for all practical purposes, converted a number of major defence contractors into federal subsidiaries. Many American economists have come to accept the concept of a “mixed economy”, combining private initiative with some government control.