Economics

Economics

Definition of Topic: Economics is the study of supply and demand. It defines the ways that human beings allocate resources and how resources are distributed amongst a market. It allows you to see trends in current market places and predict what may happen in the future. Many different subjects were once regarded as a part of economics. Political science and even sociology were once considered part of the field. These subjects still play a major role in understanding economics but are also completely separate disciplines today.

History: Since ancient times, humans have contemplated basic economic problems. Many great minds have tried to master the subject. Aristotle and Plato were probably the first to document such studies. Both agreed that living by trade was ill fated. Influenced by Greek economic ideals the Romans built their wealth. After the fall of Rome, the Catholic Church would become the power behind most economic laws. They would condemn usury and regarded commerce as inferior to agriculture.

It wasn't until 1776 that economics became a study of its own. Adam Smith is considered the father of economics. Through his work Inquiry into the Nature and Causes of the Wealth of Nations, he used mercantilism and physiocracy to develop classical economics. Smith emphasized consumption, rather than production to broaden the scope of economics. Modern thought still follows his examples for permitting self-interest in order to promote national prosperity. This is most evident when looking at today's smaller business market.

Twenty years later, Malthus would write a discouraging, but very influential book, An Essay on the Principle of Population. Malthus believed that the human race would eventually be doomed by overpopulation. His theory was that food would increase in arithmetic ratio but population would double every generation. This theory is faulty because it does not account for disease, famine, war, etc. Malthus' view of supply and demand left a permanent impression on generations to come. It would hence be know as "the dismal science."

Next to revolutionize economics would be the Communist Manifesto in 1848. Karl Marx had the classical vision of capitalism, Marxism was in large measure a sharp rebuttal, but to some extent it embodied variations of classical themes. For Marx, the labor theory was a clue to the inner workings of capitalism, the master key to the inequities and exploitation of an unjust system. In the long run, Marx believed that capitalism was certain to falter because its tendency to concentrate income and wealth in ever fewer hands created more and more severe crises of excess output and rising unemployment. For Marx, capitalism's fatal contradiction was between improving technological efficiency and the lack of purchasing power to buy what was produced in ever larger quantities.

John Maynard Keynes was a student of Alfred Marshall and an exponent of neoclassical economics until the 1930s. The Great Depression bewildered economists and politicians alike. The economists continued to hold, against mounting evidence to the contrary, that time and nature would restore prosperity if government refrained from manipulating the economy. Unfortunately, approved remedies simply did not work. In the U.S., Franklin D. Roosevelt's 1932 landslide presidential victory over Herbert Hoover attested to the political bankruptcy of laissez-faire policies.

New explanations and fresh policies were urgently required; this was precisely what Keynes supplied. In his enduring work The General Theory of Employment, Interest, and Money, the central message translates into two powerful propositions. Existing explanations of unemployment he declared to be nonsense: Neither high prices nor high wages could explain persistent depression and mass unemployment. Instead, he proposed an alternative explanation of these phenomena focused on what he termed aggregate demand--that is, the total spending of consumers, business investors, and governmental bodies. When aggregate demand is low, he theorized, sales and jobs suffer; when it is high, all is well and prosperous.

Present and future aspects in business: Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility. For their part, entrepreneurs seek as much profit as they can extract from their operations. The field of economics has undergone a remarkable expansion in the 20th century. As the world economy has grown increasingly large and complex. Today, economists are employed in large numbers in private industry, government, and higher education. Many subjects, such as political science and sociology, which were once regarded as part of the study of economics, have today become separate disciplines, although the study of any one generally implies a working knowledge of the others.1

Variation exists among capitalist economies. In most of them, the government owns and operates railroads and airlines. Even where outright government ownership or operation is exceptional, as in Japan, the central government exerts tremendous influence over economic activity. The United States, the most devoted of major capitalist economies to free enterprise, has nevertheless rescued faltering corporations such as Lockheed and Chrysler and has, for all practical purposes, converted a number of major defense contractors into federal subsidiaries. Many American economists have come to accept the concept of a "mixed economy," combining private initiative with some government control.

The major differences between Communist and American economic organization concern ownership of factories, farms, and other enterprises, as well as contrasting principles of pricing and income distribution. In the U.S. two-thirds of the nation's gross national product (GNP) is directly generated by profit-making business enterprises, farmers, and such voluntary nongovernmental entities as private universities, hospitals, cooperatives, and foundations. Of the remaining one-third of the GNP, which is generated by the government, more than half represents transfers from taxpayers to old-age pensioners, veterans, welfare recipients, and other groups of beneficiaries.

In recent years in the U.S., the federal government has begun to deregulate industries such as air transportation and thus to diminish its influence over prices and the provision of services. Indeed, the most important price controlled by public influence is the price of money--that is, the rate of interest.

Although American opposition to both controls and national planning is strong, the U.S. government has repeatedly resorted to these measures in times of emergency, such as during World War II and the Korean War. In general,