Copyright 1997-2001

In his textbook, "The Principles of Economics," Alfred Marshall, a distinguished, turn-of-the century English economist, described his discipline in the following manner.

Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well being. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man. For man's character has been moulded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world's history have been the religious and the economic. Here and there the ardour of the military or the artistic spirit has been for a while predominant: but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together.

Religious motives are more intense than economic, but their direct action seldom extends over so large a part of life. For the business by which a person earns his livelihood generally fills his thoughts during by far the greater part of those hours in which his mind is at its best; during them his character is being formed by the way in which he uses his faculties in his work, by the thoughts and the feelings which it suggests, and by his relations to his associates in work, his employers or his employees. And very often the influence exerted on a person's character by the amount of his income is hardly less, if it is less, than that exerted by the way in which it is earned. It may make little difference to the fullness of life of a family whether its yearly income is �1000 or �5000; but it makes a very great difference whether the income is �30 or �150: for with �150 the family has,with �30 it has not, the material conditions of a complete life.

Why Study It -- Economic issues dominate the headlines. A huge share of any nation's major problems are entirely or at least partially economic in nature. From childhood to adulthood we all constantly make economic decisions. Buy candy or a toy? Buy this automobile or that automobile? Save money or spend it? Put money in a bank certificate of deposit or buy shares in a mutual fund? Rent an apartment or buy a house? Buy now or wait until later when the price may be lower? Most decisions we make have economic consequences. Live here or there? Get married? Go to college? Major in this or that?  A large part of our lives are devoted to an economic endeavor, earning a living. Among our major concerns in life are the size of our salaries, the availability of goods and services and their prices, and the size of the tax bite from our paychecks.

When people go to the polls to vote, the candidates they vote for is often largely determined by economic considerations. What will this candidate do for the nation's economy? The state's? My city's? Will my standard of living be favorably affected by what this candidate would do if elected? Is the tax policy this candidate favors equitable? Are this candidate's policies inflationary? Is this candidate in favor of  free trade, or does this candidate, instead, favor a tariff to protect the industry in which I am employed, the one I work in, or one I buy things from? Is this candidate in favor of  more or less spending on defense? What is this candidate's position on welfare spending? Where does this candidate stand in regard to social security?

The people of the Soviet Union were told decade after decade that their economy would catch up with and surpass those of  the Western World because communism was a more productive system than capitalism. The fact that this did not happen is widely believed to be the chief reason why communism collapsed.

There would be no need to know anything about economics in the absence of scarcity. If we could produce everything we want, waste--unused resources or the using of resources to produce things worth less than the resources used up in producing them--would not be a problem. But this is not the case. Most people want to consume more than they are currently consuming. As a whole, people want to consume more than we can currently produce even if we fully employ all resources, use the most productive technology, and organize our resources in the most efficient manner.

Required to produce goods and services are raw materials (the soil and its products), real capital (tools, equipment, inventories, buildings, etc.), labor, and entrepreneurship (people who take the risk involved in acquiring and organizing resources to produce goods and services that will sell at prices that may or may not cover what they have spent to get them produced). Raw materials used to always be called land. Man-made resources like machinery is called "real" capital to distinguish it from monetary capital.

Economizing means being efficient, but economic efficiency is not always the same as engineering efficiency. If when a given quantity of fuel A is burned it produces more heat than does the same amount of  fuel B, an engineer would say it is more efficient to use A. An economist might disagree. Because fuel A is in short supply and in high demand, its price per unit may be much higher than fuel B's. As a result, a unit of  heat (B.T.U.) might be produced more cheaply using fuel B; therefore, economically, it would be the more efficient. In order to maximize society's well being, it is necessary that the more economic choice be made.

What It Is About -- Economics is concerned with both the practical and the philosophical. The largest of the social sciences, economics is concerned with the consumption, distribution, and production of goods and services. Therefore, economics deals with what is happening in the marketplace. It is the study of how societies decide what to produce, how to produce it, and who gets to consume what is produced.

Economists study both the economy as a whole, macroeconomics, and its individual components, microeconomics. Macroeconomists are concerned with such things as total employment and the price level.  The money supply and the activities of the banking industry are of great interest to macroeconomists. They are also concerned with such social issues as pollution and discrimination because they have economic consequences and may be alleviated by economic measures.

Microeconomists are concerned with how many people are employed in an industry or by a firm and the price of specific goods and services. Microeconomists, in other words, are concerned with the "pieces" that make up the "whole"   macroeconomists are concerned with.

Economists study the interrelationship between all segments of society and the social-historical process. They study how societies grow and develop and the interrelationships between political, social, and economic systems. Their objective is to find solutions to socio-economic problems such as an inadequate standard of living, slow economic growth, shortages, economic inequities, and poorly functioning markets.

Clearly, the subject matter of economics is relevant to everybody. Economics is intrinsically interesting. As a result, it long ago captured the attention of some of the world's greatest thinkers. Not long after colleges and universities came into being the study of economic issues became an academic discipline, first as a branch of philosophy; later as a separate discipline. In the twentieth century schools of business grew out of economics departments.

The ideas of the earliest great economist, Scotsman Adam Smith, greatly influenced the men who founded the United States. Another economist, Karl Marx, a native of Germany, who labeled the economic system described and admired by Smith, capitalism, picked up on some aspects of  Smith's analysis and concluded that a quite different system, communism, was inevitably destined to replace capitalism.

In a capitalist economy the decisions about what to produce, how to produce it, and who gets it are determined in the marketplace that is, by the free interaction between individual buyers and sellers. In a free market economy--what Marx called capitalism--a product is produced because those who own a business believe that people will buy it for enough to cover the cost of producing it, including a return to the owners of the  business. In communism these decisions are made by a central authority. In a capitalist economy there is private property, because only if you own something will somebody voluntarily pay you for it. (If everybody gets to use something, whether or not they pay for it, nobody will voluntarily pay for it.) Marx believed that the existence of private property makes it possible for the few to exploit the many. As a result, he believed private property should be abolished.

Like everybody else, economists have value judgments. Some, like the American economist Milton Friedman, favor the free market system, not only for the objective reason that it is more efficient than socialism and its most extreme variant, communism, but also because he believes it promotes things he values: individual freedom and democracy.

Positive economics is the study of what is. Normative economics is the study of what should be. When Adam Smith studied the making of pins, marveling over how output per worker had been greatly increased by the division of  labor--each worker doing a specific part of the job of making a pin, rather than doing everything required--he was engaged in positive (value-free) economic analysis. Karl Marx's advocacy of income equality--something free markets will not produce--is an example of normative economic analysis.

British economist John Maynard Keynes abhorred communism, but, like Karl Marx, he thought capitalism was inherently unstable, and this could lead to its destruction. As a result, he advocated what we today call the welfare state: government intervention in the economy to stabilize it and to provide the public with a social safety net (unemployment insurance, welfare payments, etc.). That capitalist economies are unstable is a positive statement. That people are entitled to public welfare is a value judgment, therefore, this is a normative statement.

Students often assume that a positive statement must be true. This is not true. Saying that the Moon is made of green cheese is a positive statement because no value judgment is involved. Keynes' belief that capitalist economies are unstable, too, could be untrue.

Note

Private property, coupled with the freedom on the part of buyers and sellers to negotiate binding, legal contracts, permits private persons and businesses to obtain control of, employ, and dispose of economic resources. Private property rights are limited to a greater or lesser degree by the government that creates and enforces them. A related freedom is the freedom of enterprise and choice. Freedom of enterprise means that the government does not interfere with a business' ability to enter a market of its choice. Freedom of choice means that government does not interfere with the choices made by individuals and businesses. Economists use the term laissez faire to describe an economy that exhibits these features.