{"id":6720,"date":"2019-10-15T17:47:40","date_gmt":"2019-10-15T16:47:40","guid":{"rendered":"https:\/\/progressiveeconomyforum.com\/development\/?p=6720"},"modified":"2019-10-16T13:14:30","modified_gmt":"2019-10-16T12:14:30","slug":"what-is-economics","status":"publish","type":"post","link":"https:\/\/progressiveeconomyforum.com\/development\/blog\/what-is-economics\/","title":{"rendered":"Principals of Macroeconomics: 1. What is Economics?"},"content":{"rendered":"\n

When I\ntell people I am an economist (retired), they frequently presume that I have\nexpertise in how stock markets operate, and how markets operate in general. This, I think,\nreflects a perception that economics is about \u201csupply and demand\u201d and the\ndetermination of prices. This perception derives from a broadly accepted\ndefinition of economics by Lionel Robbins in his 1932 work, Essay\non the Nature and Significance of Economic Science<\/em><\/a>. He wrote that economics is \u201cthe science which\nstudies human behaviour as a relationship between ends and scarce means which\nhave alternative uses\u201d.<\/p>\n\n\n\n

This\ndefinition is repeated if one asks Google, what is economics? \u201cIn its most simple<\/strong> and concise\ndefinition, economics<\/strong> is the study of how society uses its\nlimited resources\u201d. A moment\u2019s reflection tells us that resources (Robbins\u2019\n\u201cmeans\u201d) are scarce or limited only if they are fully used. In any society the\nmost important resource is human labour, because it can be applied to the\nproduction of everything else. Unemployment statistics, going back well over a\ncentury in many countries, show that in most years economies operate with\nconsiderable idle labour (details here\npage 72<\/a>). <\/p>\n\n\n\n

Both Robbins and Google are wrong. In most years in most countries, we find substantial involuntary unemployment. Resources are not scarce. People look for jobs and cannot find them. Alongside the unemployment businesses operate with idle capacity. The central economic problem is not how society uses its resources, but how society can mobilize its resources so that they become scarce. If economics were the study of scarcity, then the common perception of economics as the study of markets would be correct, though a rather narrow field. The study of individual markets (even of the labour market)*<\/a>, cannot tell us why resources lie idle. <\/p>\n\n\n\n

Accounting for the coexistence of idle labour and private companies that\nwould potentially employ that labour requires explaining why overall\nexpenditure is insufficient to induce business to produce more. To put it\nsimply, when resources are idle, we must analyze the economy as a whole (\u201cmacroeconomics\u201d),\nnot individual markets (\u201cmicroeconomics\u201d). <\/p>\n\n\n\n

Insufficient expenditure for the economy as a whole manifested in unemployment is the normal condition for market economies, and can be succinctly described by the term \u201cdemand failure\u201d. Demand failures are the principal focus of macroeconomics, and result from a shortfall in one of the four components of aggregate demand, household consumption, private investment, exports and public sector spending. The first, household expenditure, is itself determined by people\u2019s incomes. This leaves three categories of expenditure<\/a> to determine national income (GDP), two private (investment and exports) and one from the public sector.<\/p>\n\n\n\n

Household consumption derives from national income. Private investment,\nexports and public spending determine national income. This distinction between\ninduced (consumption) and autonomous expenditure (investment, exports and\ngovernment spending) defines the two basic approaches to macroeconomics.<\/p>\n\n\n\n

It may seem logical that the economy as a whole, the \u201cmacroeconomy\u201d, is\nthe sum of its parts, all incomes of households and businesses added together. This\nis not the case, as a simple analogy shows. Imagine a balloon that consists of\na large number of pieces of canvas sewn together. Each piece represents a\nhousehold, a company or government. Sewn together these pieces form a globular\nballoon which we fill with helium. Because the pieces are of canvas, the\nballoon has a fixed size. Its size is literally the sum of its parts.<\/p>\n\n\n\n

Imagine a second balloon made of an expandable material, on which the\nincomes of households and businesses are marked as areas according to their\nsizes. As the elastic balloon inflates it becomes larger and each marked area\nincreases proportionately, and vice-versa. Expansion of the balloon is\nanalogous to economic growth and contraction represents recession. <\/p>\n\n\n\n

The expansion has a limit, determined by the strength of the elastic material. The maximum size represents the equivalent of full utilisation of resources (full employment). Any size larger represents inflation and possible popping of the balloon. Any size smaller has the balloon less expanded and indicates idle resources. The surface of the balloon represents the output potential of the economy, which increases as expenditures (demand) expand its size.<\/p>\n\n\n\n

The first, fixed-sized balloon represents a microeconomic vision of our\neconomy in which the total is the sum of the parts. For the second, expandable\nballoon, the size of each part depends on how much the balloon is inflated. That\nis macroeconomics. In the micro balloon the parts determine the total. In the\nmacro balloon the total determines the parts.<\/p>\n\n\n\n

Many writers have contributed to our understanding that macroeconomics is not micro writ large. In subsequent blogs I will focus on four of them, three British and one German: David Ricardo (1772-1823)<\/a>, Karl Marx (1818-1883)<\/a>, John Maynard Keynes (1883-1946)<\/a>, and Joan Robinson (1903-1983)<\/a>. Each provided an essential analytical step towards a macro vision of the economy.
<\/p>\n\n\n\n

Photo credit: Flickr\/Andrew_Writer<\/a><\/em>.<\/p>\n\n\n\n

\n\n\n\n

*<\/a> The idea that for the economy as a whole labour is idle because wages are \u201ctoo high\u201d is analytically and empirically unsound. Wages are the main component of market prices. In a competitive economy, a fall in wages provokes a proportional fall in prices, which leaves the real wage unchanged. Economists have known this analytical principle since the 1930s, falling money wages cannot bring full employment to an economy. This is discussed further in the blogs on Keynes and Robinson.<\/p>\n","protected":false},"excerpt":{"rendered":"

PEF Council Coordinator John Weeks writes for the blog to introduce his series ‘Principals of Macroeconomics’, with this piece exploring the definitions of economics.<\/p>\n","protected":false},"author":11,"featured_media":6723,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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