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Lecture 1.

Defining Economics
In this lecture, I explore the territory of economics, particularly how it is or should be
defined.1
CONCEPTS
One approach to defining economics is to see it as an academic discipline, if only because
you are here in class! After call, class in the university setting is all about learning, and
it involves a teacher and various devices that impose discipline on the students.
In this class, we will learn that:
- As an academic discipline, economics can help explain many things, including
everyday phenomena, in ways that are more than just common sense.
- It takes an economic mind to bring the perspective of economics on the thing to
be explained. But it requires a broad background of knowledge of many other
disciplines to make oneself a good economist.
- Certain other disciplines are important to economics. Homework: (a) do some
research on the views of leading economists Keynes, for example- on what it
takes to be an economist; (b) as a fresh student in economics, what do you think
you need also to know to learn economics well.
OF WHAT USE IS ECONOMICS ANYWAY?
In my opinion, a good economist should be able to explain such things as tall fences in
poor countries and no fences in rich, the attractiveness of a Robin Hood figure in a
society of rich and poor (or powerful and powerless), why graft and corruption exist, how
potholes in the streets will get fixed, why airline food tastes bad, the despotic manners
of teachers and security guards, how monogamy became the rule on marriage contracts,
or how movie stars and world-class athletes get to enjoy high incomes. That is quite a
long list of things to explain! But the most important thing to explain is perhaps why a
country is poor or rich.
WHAT IS ECONOMICS?
A very early definition was given by Alfred Marshall. He said economics is a study of
mans actions in the ordinary business of life; it inquires how he gets his income and how
he uses it. Marshall first published his main economics book, called Principles in
1890. It is sad but true that much of what we know of economics has not changed much
for the past 100 years or so.
Heres another definition, which is used by practically all the textbooks: Economics is the
study of how to satisfy wants from limited (scarce) resources. This was thought to be best
articulated in a book by Lionel Robbins in 1932. It is also often said that the wants we
talk about are unlimited because there is no limit to human desire. Of course, you are
free to argue that a non-materialistic man (or person) would be content with a simple life,
wanting no more than a jug of wine, a loaf of bread, and someone to enjoy life with.
1

A useful reference to this topic is Ronald Coases 1975 conference paper on Economics and Contiguous
Disciplines, published in the Journal of Legal Studies in 1978.

Dictionary definitions:
- Phenomenon: A fact perceptible by the senses.
- Art: Discipline that does not rely on the scientific method; Creative or
imaginative activity.
- Science: Knowledge gained through experience; Observation, identification,
description, experimental investigation, and theoretical explanation of
phenomena. (Root: Latin, scientia, knowledge.)
- Economy: The system of economic activity in a country or region.
Another definition focuses on social institutions that deal with production and
distribution of economic goods and services (as proposed by George Stigler in1952).
Note that this definition is to some extent circular how do we know what is economic
as opposed to non-economic? It also raises a follow-up question, what social
institutions are we talking about? It turns out that social institution means how we
organize an economy (which requires a definition of economy, so you will have to wait
a little as I will go into that in a while).
Yet another definition in a textbook (by Gregory Mankiw) is that economics is the study
of how society manages its scarce resources. This definition raises questions: Why
should society manage its resources? You can retort that, of course, we manage
because we have certain wants or goals, and then we are back to the Robbins 1932
definition. The idea of management is attractive if you are into studying business
administration, i.e., you are still very much influenced by Marshalls 1890 definition
based on the ordinary business of life.
When I first studied economics, I noticed that it was almost always about incentives
what factors influence production, consumption, saving, investment, etc. In other words,
it tries to explain economic events by looking into what motivates humans in their
decisions on what to produce and consume, how much to save, where to invest, etc. I
thought then, and still do, that economics was a little like detective work that involved
mainly the trick of following the money (or profit), or whatever it is that makes people
choose a certain path or alternative. It should be obvious to you, by now, that economics
is a study of humans and not of aliens, stars, birds, bees, rocks, or minerals.
The incentive-driven path leads to a truly broad definition from Ronald Coase:
Economics is the study of human choice. Another authority (Richard Posner) mixes
everything up by stating that economics is the study of human choice in a world of
limited resources and unlimited human wants. I like Coases definition because with it
economics can be applied to almost anything that humans do. For example, economics
can be used to analyze crime and punishment. Economics can also be used to explain
decisions on whether or how many to have children, whether or why we believe in a
supreme Deity, or why we elect A over B for town mayor or dog catcher. Coases
definition makes an economist an interesting figure that can poke his nose into just about
anything!

THE ECONOMIC PROBLEM


It also makes sense to relate the definition of economics with that Thing called THE
ECONOMIC PROBLEM. In most textbooks, the economic problem is the question of
how humans decide the questions of what or how much to produce and consume, who
will produce and consume, and how income and wealth are to be distributed. The
solution to the economic problem is effectively any one or combination of the ways of
organizing an economy, and, for now, it is useful to know that there are three such ways:
the free market, central planning or dictatorship (also known as socialism or
communism), or government regulation (which has elements of the first two ways).
When put in this way, we can also define economics as the study of how to solve the
economic problem (and as such this definition is effectively the same as the 1952 Stigler
definition).
BUT WHAT IS AN ECONOMY?
If an economy is something to be organized, what exactly is it? Mankiw states that an
economy is just a group of people interacting with one another as they go about their
lives. Is this a good definition? It is certainly one in the spirit of Coases definition of
economics as the study of human choice. Note, however, the dictionary meaning of
economy, as a system of economic activity in a country or region. If that is what an
economy is, what exactly is a system of economic activity? In my view, that system
is the social institutions (from Stiglers definition) which we use to determine the
production and distribution of economic goods and services. The system, as noted
already, is any one of the following three: a market, a dictatorship, or a combination of
both.
QUESTIONS TO PONDER:
- What are the costs and benefits of studying economics?
- Is economics hard or easy to learn?
- Are economists typically (at least superficially) like normal people? Or, are they
weird? If so, how?
- If there is only one thing you will learn and not forget from studying economics,
what might that be?
- In what ways, if any, is economics similar to religion? If it differs from religion,
how does it differ?
- Are there really only two ways of organizing an economy -- market vs.
dictatorship? Or perhaps three, if you include a combination of the first two? Can
there be such a thing as economic anarchy, where everyone just does his thing?
- If an economy refers to the social institutions in the economic sphere, what exactly
is an institution?

Revised May 31, 2009


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