What Is Economics?
08 August 2017 | Pago Pago, American Samoa
There is much confusion about what economics is. Above all, it is a theory of choice, properly understood. Choice among quantifiable alternatives, even if shadow prices have to be imputed to make that choice. That is the macro view of what economics is. Beyond that, it is something else.
First, it is a set of first order approximations not to be relied on about how various parts of the economy work or interact. The assessment is objective, not subjective. Second, it is a set of tentative assumptions about how humans respond to economic incentives in large and small groups in different economic contexts.
Third, it is a set of analytical techniques -- both economic, econometric and statistical -- that economists use to develop and analyze economic phenomena and data. Fourth, it includes the various means and methods of accurately presenting that data to others, once the analytical framework decided upon has been stabilized. How it is used is also presented. Common themes and motifs reoccur. The wheel is not re-invented at every turn.
How those approximations, assumptions and techniques are used depends on the context, the problem being studied and the purpose of the effort. Economics is very much a studied way of looking at economic phenomena. Economists think like economists, that is, they sort through economic approximations, assumptions and analytical techniques in similar fashion, in similar contexts and for similar purposes. There is much more uniformity of thinking among economists than people suppose, especially when they have not been bought off and are free to think about and approach specific problems freely.
Economics is not so much a body of hard and fast knowledge about how specific parts of the economy work, independently of context, circumstances and viewpoint. Most people think it is and they very much misunderstand. Regrettably some economists themselves present such a face to the world, even though they know better. They are often bought off and have ulterior motives. But thinking freely without a preloaded agenda, they know better and think like economists and more uniformly, as I have described.
For example, in the neo-classical model, a cut in income taxes would normally result in increased investment and growth. But if the model is modified in Keynesian fashion to recognized huge income inequality and much hoarding by the the rich investment class due to extremely high liquidity preferences, the neo-classical model fails and the normal result is NOT increased investment and growth but simply increased hoarding with no increase in consumption or invetment. Even some economists get lost here.
Thinking of economics more like a carpenter's tool belt is closer to the mark than a raw global declaration of how the economy works at all times. The tools can be used in specific contexts to address specific problems in much the same way a carpenter uses them in giving shape to a home he is building according to a model set out in his mind and plans. Economics is about solving specific economic problems and addressing particular questions for specific purposes. That is doing economics, instead of talking about it.
Philosophically, this is the most pragmatic approach to economics. It does not buy into one or another school of thought, but picks and chooses whatever, methods, tools, approaches or set of techniques from whatever school is deemed most useful in the circumstances, modified as thought best for optimal results.
This is thinking like an economist. This thought process is the distinctive feature and salient characteristic of an economist. Others don't think like economists and most don't really understand very well how good economists think about economic phenomena and problems.
It makes for much confusion, which too few economists try much to dispel.