Understanding Economics: Definitions, Theories, and Key Concepts
1. Economics Definitions
A) Mill
Economics is the science that studies the social phenomena arising from human interactions in the production of wealth, excluding influences from other pursuits.
B) Marshall
Economics examines individuals’ everyday economic activities, including income acquisition and utilization, encompassing the study of wealth and human behavior.
C) Robbins
Economics is the science of human behavior concerning the allocation of scarce resources with alternative uses to achieve desired ends.
D) Mises
Economics, or catallactics, is the study of market economies, where actions involve economic calculation using money prices.
2. Paul Robbins’ Folk Economics
Folk economics refers to the intuitive economic understanding of untrained individuals, often focusing on distribution without considering incentives. It originates from societies with limited specialization, division of labor, capital investment, and economic growth. Folk economics can explain naive beliefs about international trade, labor, law, and industrial organization. Understanding economic principles is crucial for voters, and economists can improve communication and education by addressing folk economic notions. Economic training can enhance welfare by increasing trading opportunities due to a better understanding of gains from trade.
3. Practical Men vs. Theorists
Practical men draw conclusions from specific cases, while theorists use deductive reasoning based on broader experiences.
4. Proper Method of Political Economy
John Stuart Mill elevates economics to a philosophical realm by exploring human desires and the scope of economic measurement. His approach emphasizes the superiority of worker-owned cooperatives in a socialist system. Mill argues that production laws may be natural, but distribution laws are human-made. Wealth is the natural outcome of labor, but its distribution is determined by human decisions and institutions, not solely by nature. Economics, for Mill, is intertwined with social philosophy and politics.
5. Disturbing Influences in Economics
Mill compares the effects of economic motives to the superposition of forces in Newtonian astronomy, considering non-economic motives as “disturbing influences” akin to “frictions in mechanics.”
6. Modus Ponens and Modus Tollens
Modus Ponens: Affirming the antecedent correctly leads to affirming the consequent.
Modus Tollens: Denying the consequent correctly leads to rejecting the antecedent.
Modus Ponens in Reverse (Fallacy): Affirming the consequent falsely leads to affirming the antecedent.
Modus Tollens in Reverse (Fallacy): Denying the antecedent falsely leads to rejecting the consequent.
Antecedent & Consequent: The “if” and “then” parts of a conditional statement.
7. INUS Conditions
INUS (Insufficient, Non-Redundant, Unnecessary, and Sufficient) conditions, as defined by Mackie, describe a situation where a combination of factors is necessary and sufficient for an outcome, but no single factor is sufficient on its own.
8. Popper’s Methodology
Karl Popper’s scientific methodology emphasizes the potential falsifiability of theories. Science progresses through bold conjectures and rigorous testing. Failure to falsify leads to provisional acceptance. The line of demarcation distinguishes science from non-science based on falsifiability.
9. Kuhn’s Paradigm Shifts
Thomas Kuhn proposed that scientific knowledge advances through periodic “paradigm shifts” rather than linear progression. These shifts introduce new perspectives that were previously inconceivable, and scientific truth is determined by consensus within the scientific community, not solely by objective criteria.
10. Lakatosian Research Programmes
Imre Lakatos’ research programmes are built upon a core of fundamental assumptions that cannot be abandoned without rejecting the entire programme. A programme is theoretically progressive if each new theory predicts novel facts, and empirically progressive if those predictions are verified.
11. Weak Axiom of Revealed Preference
Revealed preference theory assumes that consumer preferences can be inferred from their purchasing behavior. This theory emerged as an alternative to demand theories based on diminishing marginal rates of substitution.
12. Friedman’s View on Economics
Milton Friedman argued for the objectivity of economics, similar to physical sciences, with economists agreeing on fundamental principles. The goal of positive science is theory development and empirical verification, not limited to future events. Multiple hypotheses can explain observed facts, and logical completeness is not essential. The inability to conduct experiments and the presence of tautologies are not significant drawbacks. Good theories can have inaccurate assumptions.
13. MV=PY Equation
The equation of exchange (MV=PY) is a fundamental concept in macroeconomics, relating money supply (M), velocity of money (V), price level (P), and real output (Y). While sometimes dismissed as a tautology, it provides valuable insights into the relationship between these variables.
14. Economics as a Science
Economics studies human behavior, particularly resource allocation, requiring analysis of economic, commercial, and financial life in its institutional context. A strong foundation in theory and numeracy is essential, along with insights from politics, history, sociology, and common sense. Economics reflects the external expression of human interrelationships within a complex and interconnected global system. Studying this system through economic principles and drawing conclusions constitutes a scientific approach.