What is “economics” in the most general sense

In this post I will try to say what economics is – at least, as far as I understand it 😛 . The purpose of this piece is to be part of the set of posts for new readers – so feedback is very appreciated.

Economics aims to understand one thing, and one thing only. Scarcity. It is the study of scarcity, every concept in economics is based on scarcity. As a result, we should define scarcity:

Definition: Scarcity: A state where, when something is free, humans want more of it than is avaliable.

However, economists are even narrower than that. We don’t study why things are scarce persee, we don’t study how resources are formed or how people’s desires for these things evolve.

Economics is a specific type of social science. What we do study is:

Definition: Economics: The study of how humans/societies allocate scarce resources.

This is a definition of economics that ALL economists should agree on. Every type of economist will believe there are bits missing. But if we want to capture the essence of all schools of economics, this would be the fundamental nugget that binds them together.

Neo-classical economics (which is what I mystically perform 😉 ) makes a few more assumptions. These assumptions were mentioned and discussed here namely:

  1. They believe in methodological individualism – fundamentally when an economist analyses the economy he believes the whole is the sum of its parts.
  2. People have preferences.
  3. People act at the margin to maximise net “happiness” – fundamentally this suggests that make choices based on the associated additional costs and benefits associated with the action.

When these are introduced we get the concept of “opportunity cost” – as we are stating that actions are derived from individuals, not a social whole.

Definition: Opportunity cost: The “next best” alternative to your best choice in a situation.

In this case, the fact that there is an “opportunity cost”, and that people can recognise it implies that, in a situation people make a choice between their best and second best alternative.

If something happens, to reduce the desirability of the best alternative, the person may switch to their “second best”. This would be a person acting based on a change in incentives.

Definition: Incentives: Something that drives an individuals choice – outcome oriented as it relies on the idea of a “payoff”.

In this case the idea of “choice” is essential. Effectively, people make choices based on incentives. As a result, when studying the allocation of resources, we are looking at the choices of people who are allocating time, goods, etc. The allocation of these things that people provide will depend on the initial amount of things (endowment), their ability to trade, and the choices they make.

In the case of economics, people are driven to make choices to “satisfy their preferences” – as a result, this acts as the driver of their actions.

So in this case, economics is the study of:

Definition: Neoclassical economics: The study of the allocation of resources given scarcity, when humans makes choices to satisfy their preferences.

Now if I have made any horrendous errors – or if there is debate surrounding anything I’ve said, go for it in the comments.

  • HH

    I’d add Budget Constraint. It complements scarcity. If there is something that more people want than can have it, it’s important that not all people have an infinite amount of anything [like money] to trade for it. Otherwise, you’d get a lot of people bidding infinity dollars to get it. [Yes, I get that scarcity by definition covers money and money-like assets – if we had infinite resources, they wouldn’t be scarce.] But I think adding budget constraint is key.

  • Great post.

    “Definition: Economics: The study of how humans/societies allocate scarce resources.” I don’t like the active voice when talking about societies. I think the reification of society is a major problem in how many people think about economics. My definition of economics, which is heavily influenced by the Austrians, would be more like: “The study of individual choice among competing goals and the aggregate result of such choices at a societal level.” That’s really only a semantic quibble, and I realise my views on this are fairly idiosyncratic.

    “People act at the margin to maximise net “happiness” – fundamentally this suggests that make choices based on the associated additional costs and benefits associated with the action.” Happiness connotes self-regarding preferences, or if preferences are other-regarding that we only strive to fulfill them for the warm fuzzies they gives us, rather than purely having a preference over something which doesn’t directly affect our happiness. I like to explain utility theory to non-economists in terms of people having goals which they attempt to achieve, making trade-offs between competing goals.

    I think people are often confused by the idea of scarcity. Non-rival goods, for example, seem non-scarce until you consider the fact that they (if they are at all economically interesting) take resources to produce in the first place.

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  • Good initial post and comments.

  • Dr.Jeffrey M Doyle

    I AGREE WITH THE PREVIOUS COMMENT-GOOD INITIAL POST AND COMMENTS.

    I WOULD SAY THE UNDERLYING PREMISE DEFINING ECONOMICS IS THE “SCIENCE” OR STUDY OF CHOICE

  • john

    I realise this is o/t but I’m curious if you think “system complexity” is an issue in the global economy?

    “The global economy is a system, a complex interconnected, real time set of processes and relationships that thrives when it is growing. The problem is this: we are now operating that system right up against, I would argue beyond, the limits of its capacity to function. these two broad limits are set by two broad challenges: ecological limits and system complexity’

    that was from the press re Earth Hour series. http://www.paulgilding.com

  • Alex

    Your definition is scarily similar to this…

  • anonymous

    In the most general sense, it’s everything, of course.

  • @HH

    Hi HH,

    My view is that a budget constraint is really just an illustration of scarcity – when it comes to working out what an individual will do it is essential, but when making broad definitions mentioning scarcity alone should be sufficient IMO

  • @Brad Taylor

    Hi Brad,

    “I don’t like the active voice when talking about societies. I think the reification of society is a major problem in how many people think about economics”

    That is a very good point – the active tone is a rhetorical device that cropped up during the socialist calculation debate.

    However, I would also note that, in my view, the definition you provide is a bit narrow for “economics” – as not all economics is based on reductionism or the study of the individual. Now, I think it should be – but as a starting point it is not necessarily the case.

    “I think people are often confused by the idea of scarcity”

    Which is why it is the issue we have to always come back to when explaining issues. I think even some economists forget about scarcity occasionally …

  • @Dr.Jeffrey M Doyle

    Hi Jeffrey,

    I would say that neo-classical economics is inherently the study of individual choice – and there is a subset of that (economic science) which is what Robbins defines. In theory economic science and neo-classical economics should be equal – but I think that when we look at how economics IS DONE this isn’t necessarily the case 😉

  • @john

    I have no doubt that this matters at the macro level – however, it is best not to overwhelm ourselves with it. Ultimately, there is some hope that we can move from premises about individual behaviour to the outcomes for a society – however, it isn’t exactly clear what happens when we “aggregate” things together. This is actually a major problem for macro.

  • @Alex

    Love that video – beautiful 🙂

  • @anonymous

    Most definitely – its like you read my mind 🙂

  • Paul Walker mentions a lot of good definitions of economics here:

    http://antidismal.blogspot.com/2009/03/what-is-economics-in-most-general-sense.html

    While they are definitions I agree with – they aren’t “general” enough for me. In so far as they miss out the schools of thought that don’t believe in reductionism but are still under the umbrella of “general economics”.