Friday 5 July 2013

What is Economics?

Lionel Robbins, a British economist, said that "Economics is the study of the use of scarce resources which have alternative uses." This might be the best definition of economics I have come across. Resources are scarce which means that people want more than is available to them. Another way of saying it is that our wants are unlimited and the resources to fulfill our wants are limited. Scarcity required us to economize, therefore the need for economics was born. 

Scarcity has also required us to study trade-offs or the various uses of resources. Thomas Sowell states in his brilliant book Basic Economics:

"Not only scarcity but also "alternative uses" are at the heart of economics. If each resource had only one use, economics would be much simpler. But water can be used to produce ice or steam by itself or innumerable other mixtures and compounds in combination with other things. A virtually limitless number of products can also be produce from wood or from petroleum, iron ore, etc. How much of each resource should be allocated to each of its many uses? Every economy has to answer that question, and each one does, in one way or another, efficiently or inefficiently. Doing so efficiently is what economics is all about."

Fallacy of Economics

You may have heard the saying that an economist thinks he knows more about money than the people who have it. This comes from a misunderstanding of economics and what it entails. Decisions don't even have to involve money to be economic. Economics is not about how to make money or how to run a business. It is about the study of relationships between items such as prices, commerce, wages, and international trade from the viewpoint of how it affects the distribution of scarce resources to society. Even more broadly defined, Economics is the inquiry of praxeology - the study of human action or conduct. Ludwig von Mises championed the inclusion of all human action into the study of economics and anything less was incomplete.

Benefit of Economics

How can we benefit from economics? Economics helps us determine how well the various uses of resources affects our society. More specifically, we can determine what particular actions or policies do to either increase poverty or wealth. This can be very valuable indeed.