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Economics is a broad area, with a lot of concepts and ideas that can be difficult at first to come to terms with. Below we introduce common theoretical concepts and areas in economics that you may see during your economics studies.
To fully grasp them, though, we have to understand how and why consideration of economics started, how today's economic theories differ from their original intent and what the theories of economics might look like in the future.
Why People Started Studying Economics
For most students of the discipline, economic theory originated with Adam Smith in the 18th Century; that's why he's considered the father or modern economics. The word 'modern' is key, here. The formulation of economic practices predates Adam Smith by several millennia.
Back to the Bronze Age, to be specific.
The Sumerians, as well as other Ancient peoples, began recording economic transactions as early as 3500 BCE. Though no formal economic theory was developed or established at that time, these populations developed methods for recording property ownership and transfer, as well as ways to calculate compound interest and record debt.
Many of their methods and premises feature in today's economic activities, even if there was no mention of macro- or microeconomics in their texts.
The Foundation of Today's Economics
While Adam Smith gave economic scholars The Invisible Hand and other foundational economic ideas, today's economics are driven by the work of John Maynard Keynes and Milton Friedman.
Macroeconomics, also known as Keynesian economics, looks at large-scale economic phenomena such as unemployment rates and inflation to determine the role of governments in shepherding the economy. Under the macroeconomic theory, money creation, government spending and taxation are all tools to manage the economy.
By contrast, the economic theory developed by Milton Friedman posits that the government's emphasis should be on monetary policy rather than fiscal policy. In other words, the more capitalism, the less government involvement - which Friedman saw as unnecessary meddling in economic activity, anyway.
That's rather ironic because the International Monetary Fund, a global governmental alliance, relies heavily on Milton Friedman's philosophies to guide its economic policies.
The Future of Economic Study
The governments that embraced the Friedman theory of economics over the last 3o years are realizing that rampant capitalism and trickle-down economics actually leads to greater economic inequality and social destabilization.
Academics and economists are developing new economic theories that factor in social welfare, environmental concerns and the economic impacts of ethical behaviour, both at the micro-and macroeconomic levels.
Ironically, these trends point to a reversal of economic thought, back to a time when the earliest economic thinkers projected that wealth accumulation by a few individuals would lead to greater societal harm overall.
As economic theory appears to have come full circle, let's go back to the roots of economic study together, to discover why it was thought that tracking economic activity was important.
The Beginning of Economic Thought
As soon as ancient societies developed writing systems, they developed methods of accounting for debts and property. On materials as diverse as clay tablets, papyrus and rice paper, scribes recorded their livestock and landholdings, debts and other financial transactions.
Admittedly, these recordings were limited to simple transactions: transfers of property, for example, or debt repayments, complete with interest calculations.
Later, from around the third millennium BCE, Ancient Egyptians began a system of wealth redistribution. Artefacts from that time prove the collection and distribution of money (capital), goods and land. Roughly 1,200 years later, the Code of Hammurabi was established; it is widely considered to be the world's first economic treatise.
The Code detailed the norms and ethics of economic activity, including ethical principles for merchants and tradesmen to follow. From then on, economic philosophy grew more specific and, well, philosophical.
- Greek philosopher Hesiod wrote Works and Days, which detailed principles of farm management.
- Athenian philosopher Xenophon based his work, Oikonomikon on Hesiod's principles, going further to detail estate management from an economic perspective.
- Aristotle asserted that, though private property ownership was a good idea, wealth accumulation for the sake of it was not honourable practice.
- In China, the Guanzi Essays laid the cornerstone for the Law of Supply and Demand, as well as the importance of maintaining a stable currency and governments' management of the money supply.
Throughout the Middle Ages, particularly in Europe, ethics continued to be a foundational aspect of economic thought. The works of Thomas Aquinas assert as much but it was Tunisian philosopher Ibn Khaldun who emphasised the dangers of monopolies and the rise and fall of empires from an economic perspective.
In his 1377 work, Al-Muqaddimah, he highlighted the benefits of profit motives and the division of labour, and how creating more cohesive societies would lead to economic growth.
The Genesis of Modern Economics
There's no debate over whether Adam Smith is, indeed, the father of modern economics; we find his ideas woven throughout economic policies all over the world. However, he borrowed many of his concepts from French philosophers who were frustrated with their government's trade policies and other economic positions.
Before the first Industrial Revolution, the period in which Mr Smith's economic ideas were fully crystallized, the European economy was driven by mercantilism; the practice of exploring, invading and colonializing territories. This allowed countries to claim their colonies' wealth as their own.
Naturally, this led to competition for new lands and resources, trade imbalances and tariffs.
Smith expanded on those French philosophers' ideas, detailing how, in his estimate, economies should function. His main idea was that governments should keep their noses out of economic dealings unless they were protecting competition that would naturally result from a free market. Governments should not impose tariffs or taxes, nor do anything that would interfere with the markets' Invisible Hand.
Smith's Invisible Hand postulate, detailed in his Wealth of Nations, lays out the concept that everyone acts in their own best self-interest, a phenomenon that would inevitably lead to prosperity, economic stability and social harmony.
Unfortunately, his views were clouded by the prejudices of the day. For instance, he distinguished between productive work - actually making goods and attaching a price tag to it, from 'unproductive labour', menial tasks such as cleaning and caring for children.
Obviously, such views have not aged well at all, considering that, today, governments are proposing plans to compensate unpaid work such as rearing children and domestic work. As for the Invisible Hand idea? Governments routinely subsidize industries and levy trade tariffs; clearly, these aspects of Adam Smith's seminal work have no bearing on modern economics.
Still, much of his work shapes today's economic policies. Let's examine some of the most important aspects of today's economics.
Fundamental Concepts in Economics
As we've just read, economics' long history proves that it is a hugely important subject. It can help us to understand why individuals and companies make the decisions they do, and it can also be used to predict how an economic system, whether local and domestic, will grow or contract over the coming years.
Although economics is more of a best guess than an absolute science, its insights are both interesting and relevant. As a result, it’s unsurprising that so many students choose to master economics in some shape or form, whether that is at A-Level at school or as an undergraduate or master’s degree at university.
Having said that, when you first start learning about economics, one of the main hurdles that students encounter is how to get to grips with the sheer number of economic terms, models, and theories there are, and what the implications of a particular theory or term have on an economic system.
Although, as we will see below, there are some core areas within economics, namely microeconomics, and macroeconomics, there are subsets of economics that you may come across in your studies at school or university, for instance, international or developmental economics.
Besides these core areas of economics, there are also a number of economic concepts and ideas that any budding student should have a handle on.
The fundamentals of economics include topics such as:
- Incentives, which can have a huge influence on how much demand there is for goods or services;
- Money, which underlines economic transactions;
- Productivity, which can be used as an empirical measuring tool to see how economies are performing, for better or worse; and
- Technology has influenced consumer behaviour and the amount of information available about goods or services and has spurred economic progress, with the Industrial Revolution being one famous example.
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What is Macroeconomics?
Macroeconomics is considered to be one of two major areas within economics, alongside microeconomics.
Macroeconomics is considered to be the overview of an economy as the whole and as such advocates a “top-down” approach to economic study.
The history of modern macroeconomics can be traced back to John Maynard Keynes, a British economist who was hugely influential during the early 20th century with his theories, including the idea of “boom” and “bust” economies.
Although people, both at the time and in later years, argued against Keynes’ ideas, for example, the Austrian-British economist Friedrich August von Hayek, Keynes has remained a popular figure in the world of economics, and his ideas have been developed into new schools of thought, including the post-Keynesian school.
Keynes had many ideas and theories, but one of the most enduring theories is that the economy is influenced largely by aggregate demand. As a result, Keynes was a strong advocate of government spending, particularly in times of economic downturn, in order to help stimulate the economy and promote economic growth.
Although Keynes is considered the modern founder of macroeconomic thought, there’s a lot more to learn about macroeconomics besides Keynes.
Crucially, macroeconomics studies key areas that influence the economy in the aggregate, including:
- Employment or unemployment levels in a country, or globally;
- Market failures and their consequences;
- Fiscal policies in place around the world; and
- The rate of inflation.
For this reason, macroeconomics can also play a crucial role when it comes to formulating a framework for economic policy. Indeed, economists that work for government bodies may find themselves examining macroeconomic factors within the country in order to understand and evaluate which economic policies would be most beneficial to the country, and economy, as a whole.
Economic policies that are likely to have been impacted by macroeconomic analysis include:
- The rate of corporation tax in effect for current and future years;
- Measures that are designed to improve employment rates and employment stability across the country; and
- Inflation measures and policies in place.
While macroeconomics has a huge role to play in the field of economics, any economics student also needs to understand the field of microeconomics, and how it interacts with macroeconomics, to have a fuller picture of what the concept of economics entails.
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What is Microeconomics?
While macroeconomics looks at the performance of the economy in aggregate, microeconomics looks at the economy from a “bottom-up” perspective.
One of the crucial figures behind the development of microeconomics is Alfred Marshall, who was a prominent economist during the 19th century.
The area of microeconomics remains a hugely significant area in economics. Economists that specialise in this area will look at topics as diverse as:
- Influences on supply and demand;
- Fluctuations in employment levels; and
- Production and manufacturing efficiency.
However, that’s not to say that there aren’t other areas within the field of economics that are seeing increased attention. In particular, another school of thought, known as behavioural economics, including behavioural finance, is gaining increased focus, as it sets out to challenge traditional economic schools of thought.
In particular, behavioural economics appears to contradict one of the key tenants of classical theory and neoclassical economics. Namely, behavioural economists argue that man does not inherently make economically rational decisions. This contradicts the views of classical and neoclassical economists, who tend to create economic models on the basis that human beings do make rational decisions.
Although these areas are fascinating to learn about, areas such as microeconomics and macroeconomics will likely remain highly relevant in economics courses over the coming years, so it’s imperative that any economics students are comfortable with microeconomics as a field.
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International Economics
International economics may not be as well studied as macroeconomics and microeconomics, but it is a highly relevant and popular area of economic study in its own right, with its own share of economic problems to solve.
Like many areas of economics, international economics is, in some respects, an interdisciplinary study, as international relations is at the forefront of international economics.
For instance, if a nation opts for punitive economic sanctions or trade policies towards a particular country, then the result of such policies would be a likely increase in international political tensions in the long run. Conversely, favourable trade policies may help bolster or sustain existing international relations.
Students that specialise in international economics and/or international relations can enjoy a range of career opportunities when they graduate from university. For instance, graduates in international economics could look for a role at:
- An international organisation, such as the WTO;
- A newspaper as a financial journalist;
- A governmental body, examining economic policy or analysing an economic model.
Over the last 20 years, the economic quakes that have destabilized global economics have created a crisis that now demands immediate attention. Obviously, we can't continue with the same economic practices and structures; we need the sharpest minds to chart a way forward. Let's find out what the economics of the future hold.
Going Forward: Tomorrow's Economic Policies
Over the last 20 years, the global economy was rattled by three major events: the 2002 Dot-com bubble and the 2008 Wall Street Crash - both originating in the US and, most recently, the COVID-19 pandemic.
Those three were the major quakes but there have been tremors rattling the economy for decades.
The climate crisis is perhaps one of our most urgent concerns, followed closely by the environmental impacts of continued industrial output. Growing economic inequality - never has there been a greater disparity in wealth between rich and poor nations and, indeed, rich and poor citizens in the same nation.
Economists such as Joseph Stiglitz and Partha Dasgupta have, for years, been sounding the alarm that rampant economic growth is not sustainable. Separately, they aver that a shift to more ethical consideration in economic policy is needed to avoid yet more inequality or, at worst, a cataclysmic crash; one from which recovery will be impossible.
To pivot away from monetarism, the economic theory that underpins world economics today, some believe that integrating aspects of microeconomics into macroeconomic theory. Others think that expanding microeconomics to include psychological factors - consumer behaviour and rationales, and then parlaying those concepts into macroeconomic philosophy.
Avid consumerism and the glut of products on the market has distorted consumer behaviour, which essentially debunks the thought that consumers act to their best self-interest. Furthermore, the bombardment of adverts consumers are subjected to at every turn affects their rationality and psychology, leading them to make imprudent economic decisions.
Finally, social media provides fertile ground for envy and competition, leading to more frequent and more costly economic decisions simply to remain socially accepted.
What started out as a way to account for one's livestock and the property has turned into wealth accumulation beyond anyone's wildest dreams and market instability far worse than anyone's worst nightmares.
Today's economists predict a return to ethical economics, where social welfare and consumer wellbeing are key components of economic policy worldwide. To wit, they're searching for ways around boom-and-bust business cycles and the invariably bursting financial bubbles that lead to uncertainty, both in the markets and for individual consumers.
And, because conservation and sustainability must be an integral part of every economic decision from now on, they will look for lasting economic solutions to these pressing ethical dilemmas.
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