WHAT IS ECONOMICS?
Economics is one of the social sciences. Any
society has to address the problem of how and what
to produce for its material survival, and how goods
and services which are produced should be
distributed among its population. Economists
explore how people and institutions behave and
function when producing, exchanging and using
goods and services. Our main motivation is to find
mechanisms which encourage efficiency in the
production and use of material goods and
resources, while at the same time producing a
pattern of income distribution which society finds
acceptable.
Many of the problems which dominate our newspaper headlines are economic problems. Why are some
countries poor with very low growth rates while a small number of countries enjoy high living standards
and high growth rates? What is the role of international trade, and the movement of capital from one
country to another, in explaining these global
inequalities? Why are some countries so much
more successful at creating employment or
reducing unemployment than other countries?
Within countries, why do some people earn so
much more than others, and what are the best
ways to tackle and reduce poverty? Is it
possible to pursue economic growth and still
protect our natural and physical environments?
How should governments try to raise the
finance needed to pay for health and education services and income support programmes? What is the
proper role for government in the economy? Would we be better off with much lower taxes but also poorer
social services than we presently enjoy?
Calling economics a social science also reflects the way economists analyse problems, in that economists
aim to develop theories of human behaviour and test them against the facts. These theories are
summarised in economic models which define the relationships between variables which we believe best
explain the events we observe. An important part of the work of an economist is collecting and analysing
observations about economic phenomena - prices, employment, costs, Gross Domestic Product - what
we call data. The art of the economist is to blend together theory, data and statistical techniques to arrive
at a new understanding of economic problems or to make policy recommendations which hopefully will
improve the welfare and living standards of our society.
Microeconomics and macroeconomics
A fundamental feature of the world we live in is scarcity. We cannot all of us have all of the things we
would like all of the time, we are forced to make choices. Economics studies the way society organises
itself to make choices about what goods and services to produce (how do we decide how much food to
produce versus how many houses or how
many haircuts?). It also studies how we
produce these goods and services (how
firms are organised) and who receives
these goods and services (the distribution
of income). In modern industrialised
societies most of these decisions are made
through markets. For example, food
markets link together consumers shopping
in supermarkets with farmers who produce
food; if consumers increase their demand
for organic foods, food markets send this signal (in the form of a higher price) to provide an incentive to
farmers to switch to growing more organic food. Other examples of markets in a modern economy are
financial markets (which link savers and investors),
labour markets (which link employers and
employees), the housing market (which links those
looking for housing accommodation with the
builders of houses or the suppliers of rented
accommodation), transport markets (which link
travellers with those providing transport services),
energy markets (which link energy suppliers with
consumers of energy) and so on. Microeconomics is
that branch of economics which studies the
behaviour of individual markets and of decisionmakers - consumers and firms - within these markets. Each individual market has its own unique
characteristics, determined in part by the degree and nature of government regulation. Think of the Dublin
taxi market, or the market for charter holidays, or the market for legal services. What determines prices in
these markets? Do these markets work efficiently? Is the nature of government intervention in these
markets appropriate? These are the sorts of questions asked by microeconomists.
The other main branch of economics is macroeconomics. Macroeconomics is concerned with the
behaviour and functioning of the whole economy. Macroeconomists work with questions such as what
determines the overall growth rate of an economy and what policies would be effective in trying a raise an
economy's growth rate? What determines the overall rate of price inflation in any economy and how might
governments try to maintain price stability? Macroeconomics became the dominant interest of economists
between the 1950s and 1970s largely due to two factors: first, the development of national income
accounts which allowed us to systematically measure national economic performance for the first time;
and secondly, the belief, stimulated by the work of the English economist John Maynard Keynes, that
governments had both the duty and the ability to seek to stabilise the growth of the overall economy in
order to avoid both damaging recessions and high unemployment, on the one hand, and inflation and
price increases, on the other hand. Today, many economists have lost faith in the ability of governments
to successfully intervene in a discretionary way at the macroeconomic level, but this remains an area of
active debate and research among the economics profession.