The Science Behind Economics

Not many people would claim to know much about Economics& perhaps they see it as a difficult and esoteric subject with little relevance of theory to their everyday lives. It has been generally felt to be the preserve of those students aspiring to be professionals in business, finance and government departments. Yet, as a hopeful physicist/engineer, I think Economics is a great subject to study.

Today, with Economics affecting the lives of millions, it seems more important than ever to learn something about Economics. With the after-effects of the Wall Street crash in 2008 still being felt worldwide, further study in the field of Economics can lead to solutions to current economic issues. Yet how much does the general population really understand when they hear about Europe s debt crisis, Greece possibly leaving the Eurozone, stock market crises and trading deficits? When we re taxed on our imports from the UK or when our parents are asked to pay more income tax, do we know why? And when we seem to be dominated by the influence of risk-taking banks and big corporations, do we know how they came to be so powerful, or understand the reasons for their continued dominance? The theory and art of Economics is at the heart of questions such as these.

So what is Economics? From the Greek word Oiknomia meaning household management , the term has to come to mean the study of the way we manage our resources and more specifically, the production and exchange of goods and services. Philosophers and politicians have partaken in the field of Economics since the time of the ancient Greeks, but the first true economists to make a study of the subject only appeared at the end of the 18th century. The publication, in 1776, of the renowned The Wealth of Nations by Adam Smith, the father of Economics, led to the emergence of modern Economics. With the advent of the Industrial Revolution, enormous changes in the economy prompted interest in the subject. With the introduction of factories and mass producers of goods came a new era of economic organisation. This was the beginning of the so-called market economy.

Smith set the standard for economists with a comprehensive explanation of the competitive market. He suggested that an invisible hand guides the market, where the rational actions of self-interested individuals ultimately result in exactly what the wider society needs. Smith was a philosopher, and his book s subject was political economy it stretched beyond Economics to include politics, history, philosophy and anthropology. After Smith a new group of economic thinkers emerged who chose to concentrate entirely on the economy. Each of these built upon our understanding of the economy and laid the foundations for the various branches of Economics.

As the study of Economics evolved, economists identified specific areas to examine. One approach was studying the economy as a whole, either at a national or international level, which became known as macroeconomics . This area of Economics concerns topics such as growth and development, measurement of a country s wealth in terms of output and income, and its policies for international trade, taxation, and controlling inflation and unemployment. On the other hand, microeconomics looks at the interactions within the economy, between individual people and firms: supply and demand, buyers and sellers, markets and competition.

By the late 19th century, economists were approaching the subject through the disciplines of mathematics, engineering, and physics. Increasingly, ideas of the early classical economists such as Smith were subjected to rigorous examination. Neoclassical economists described the economy in graphs and formulae, and proposed laws that governed the workings of the markets. Naturally, there were differences of opinions among economists, and various schools of thought evolved. In the 20th century, revolutions in Russia and China brought almost a third of the world under communist rule, with planned economies rather than competitive markets. In the second half of the century, the USA had become the dominant economic superpower and was adopting ever-more laissez-faire policies - hands off approaches to allow the competitive market to create wealth and stimulate technological innovation. After the collapse of the Soviet un ion in 1991, it seemed that the free-market economy was the route to success, as Adam Smith predicted. However, not everyone agreed.

Over time, new areas of Economics incorporated ideas from scientific disciplines, with the development of theories such as game theory and chaos theory. These developments in economic theory have helped to show weaknesses in the capitalist system. The frequent financial crises that took place at the beginning of the 21st century suggested that there was something fundamentally wrong in the system. At the same time, scientists suggested that our ever-increasing wealth came at a cost to the environment in the form of disastrous climate change. With the emergence of new economies, especially in Southeast Asia and the so-called BRIC (Brazil, Russia, India, and China), economic power is once again shifting, and no doubt it s our role as economists to evolve new thinking to help manage our scarce resources.

It remains to be seen how the world economy will resolve it s problems, but, armed with the principles of Economics learned at high school and university, students studying Economics can figure out how we got into the present situation, and perhaps begin to see a way out.

Written by Rishi