What is Economics - Everything

“The study of money; Number crunching, Quantitative models, Decision making by a group of middle-aged white guys.” All answers you may receive after asking randomly one of the most fundamental and hardest questions: “What is Economics?”

Economists will generally not give these kind of answers. However, there is no consensus among them about what the right answer should be. Different economists answer this question differently, though some answers are more popular than others.

“The study of given ends and scarce means” is the well-known answer of Lionel Robbins, a 20th century economist. True as it may be, it is a rather abstract and therefore somewhat non-informative description. Another definition that is often heard says that economics is the study of decision-making. Even though that this rationale is correct and more concrete, your inner person will most likely disagree: your decision to, say, wear yellow socks today rather than red ones, could well be the object of study of psychologists but seems to be of little in interest to economists. Therefore, this definition could be considered as debatable or too broad.

My favourite definition combines these views and says that “economics is the study of (optimally) allocating resources”. Some of you might argue that this take on economics explains the use of complicated models, the emphasis of quantitative approaches, and the debatable and unrealistic nature of many of its assumptions. Yet, this view is too restricted!

The decision to read this article, to buy a new car, and to work or study is also economics. Instead of reading this article you could have gone for a run, taken a nap, or watched television. To read this article rather than to go to the gym is one way of allocating your time, while buying a car is an allocation of your money. Your decision to go working or to continue studying is an even more complicated economic problem as it not only affects current, but also future resources. Studying will most likely increase your future wages even though it decreases your current resources. To decide to take a job instead will provide more resources now, but could negatively affect you future income.

There are other decisions or events that impact the optimal allocation of resources. The imposition of taxes decreases your personal resources, while it will increase the government’s; the Brexit affects the resources of the United Kingdom and the European Union, both nationally and of citizens personally.

Consequently, the allocation of resources occurs on different levels, corresponding with different kinds of economics. The study regarding personal and firm specific resources, falls under microeconomics, whereas the study of national and/or global resource allocations is a part of macroeconomics. In macroeconomics the optimal allocation of resources is closely correlated with other fields as politics and philosophy, because optimality does not only have to be defined in economic and financial terms, but may well be based on your values and principles, that cannot be easily represented by an utility function.

The view of communists and classic-liberals is a clear example of this. Based on their principles and values the first believe that resources should be allocated equally to everyone, and independent of its further welfare consequences. Classic liberals, on the other hand, emphasize the importance of freedom and argue that the allocation should be based on free market clearing. Those two political theories and corresponding principles and values directly affect whether a resource allocation is considered to be optimal or not.

However, by showing the differences between the different types of costs and benefits involved, and the possible welfare trade-offs between such values as freedom and equality, economics has a direct bearing on these issues.

Indeed, economics could be more than you ever imagined. Economics could be correlated with everything. Economics could be everything.

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