Economics

I

Introduction

Economics, social science concerned with the production, distribution, exchange, and consumption of goods and services. Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently any economic objective they select. Other fields of study also contribute to this knowledge: psychology and ethics try to explain how objectives are formed; history records changes in human objectives; sociology interprets human behaviour in social contexts.

Standard economics can be divided into two major fields. The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. 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 second field, macroeconomics, deals with modern explanations of national income and employment. Macroeconomics dates from the book, The General Theory of Employment, Interest, and Money (1936), by the British economist John Maynard Keynes. His explanation of prosperity and depression centres on the total or aggregate demand for goods and services by consumers, business investors, and governments. Because, according to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending by government, and consequently larger budget deficits.

II

History of Economic Thought

Economic issues have occupied people's minds throughout the ages. Aristotle and Plato in ancient Greece wrote about problems of wealth, property, and trade. Both were prejudiced against commerce, feeling that to live by trade was undesirable. The Romans borrowed their economic ideas from the Greeks and showed the same contempt for trade. During the Middle Ages the economic ideas of the Roman Catholic Church were expressed in the canon law, which condemned usury (the taking of interest for money loaned) and regarded commerce as inferior to agriculture.

Economics as a subject of modern study, distinguishable from moral philosophy and politics, dates from the work, Inquiry into the Nature and Causes of the Wealth of Nations (1776), by the Scottish philosopher and economist Adam Smith. Mercantilism and the speculations of the physiocrats were precursors of the classical economics of Smith and his 19th-century successors.

A

Mercantilism

The development of modern nationalism during the 16th century shifted attention to the problem of increasing the wealth and power of the various nation-states. The economic policy of the leaders of that time, known as mercantilism, sought to encourage national self-sufficiency. The heyday of the mercantilist school in England and western Europe occurred from the 16th to the early 18th centuries.

Mercantilists valued gold and silver as an index of national power. Without the gold and silver mines in the New World from which Spain drew its riches, a nation could accumulate these precious metals only by selling more merchandise to foreigners than it bought from them. This favourable balance of trade necessarily compelled foreigners to cover their deficits by shipping gold and silver.

Mercantilists took for granted that their own country was either at war with its neighbours, recovering from a recent conflict, or getting ready to plunge into a new war. With gold and silver, a ruler could hire mercenaries to fight, a practice followed by King George III of Great Britain when he used Hessian troops during the American War of Independence. As needed, the monarch could also buy weapons, uniforms, and food to supply the soldiers and sailors.

Mercantilist preoccupation with precious metals also inspired several domestic policies. It was vital for a nation to keep wages low and the population large and growing. A large, ill-paid population produced more goods to be sold at low prices to foreigners. Ordinary men and women were encouraged to work hard and avoid such extravagances as tea, gin, ribbons, ruffles, and silks. It also followed that the earlier that children began to work, the better it was for their country's prosperity. One mercantilist writer had a plan for children of the poor: “When these children are four years old, they shall be sent to the county workhouse and there taught to read two hours a day and be kept fully employed the rest of the time in any of the manufactures of the house which best suits their age, strength, and capacity.”

B

Physiocracy

Physiocracy was briefly in vogue in France during the second half of the 18th century as a reaction against the narrow and restrictive policies of mercantilism. The founder of the school, François Quesnay, was a doctor at the royal court of King Louis XV. His major work, the Tableau économique, an attempt to trace income flows through the economy, crudely anticipated 20th-century national income accounting. All wealth, in the doctrine of the physiocrats, originates in agriculture; through trade, wealth is distributed from farmers to other groups. The physiocrats were partisans of free trade and laissez-faire. They maintained that the revenue of the state should be raised by a single direct tax levied on the land. Adam Smith met the leading physiocrats and wrote—for the most part, favourably—of their doctrines.