Defining economics is incredibly difficult, especially when trying to condense the concept into one phrase. Sure, there’s the standard way of framing it. Economics is a social science that seeks to analyze and give a description of the production, distribution and consumer behavior trends of wealth. What good does that do in understanding a growingly global economy? Well, for one thing, it oversimplifies the ways in which markets interact and react to one another.
Historical Summary of Economics
When considering the history and branches of economics, where does one begin? In the 19th century, economics was a hobby during leisure time and little to do with academics. Economists introduced economic policies, but had little control over their passing. In modern society, government, agencies and even commercial banks have their economists. While the increasingly important role of economists shifts political discourse, it also crowds the world with perspectives. For example, a political economist has very different motives than a corporate economist.
Economists dedicate their time in teaching economics in tertiary institutions and all over the world. Although the work varies from advisory levels for research, either individually or in consulting firms, industries and for the government. The demand for economists services remains insatiable. The increasingly global structure of economic systems also means more and more collaboration. When one economist comes up with a theory, it’s illogical to assume it only has implications for one region of the world. Plus, consider the dynamic contrasts of regions within a single country, like the United States. Application can be a tough thing to contextualize in economics, but it’s best to start from what many believe to be the beginning of modern economics.
Adam Smith and Classical Works in Economics
The birth of economics as a field of study traces back to the year 1776. At this time, a Scottish philosopher named Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. Economics didn’t necessarily begin here, however The Greeks played a significant role in the middle age scholastics between the 15th and 18th century. At this time, economic nationalism was the most popular form of theory. Smith came up with the first treatise in economics through his magisterial influence. Classical economics refers to Smith’s works and the works of his contemporaries.
Next, Smith’s book, The Wealth of Nations, played an equally influential role in the field of economics. The book, just as the title suggests, looks at economic development and policies that lead to a promotion or end up hindering economic growth. In the simplest terms, Smith determined that three things make up economics. First, land is crucial to economics. Owning land is a form of value on its own, but it can also be used to create valuable goods. Farming or housing a factory makes land important and profitable. Next, labor is important to economics because it creates valuable goods. Without workers, there are no goods to be traded and sold for money. Lastly, capital is the monetary way in which value is traded and contributed to an economic system.
Smith’s Deeper Contributions
Smith identified the private sector as the driver of the economy governing human activity. In a commercial society, self-interest controls individual motives. Everyone can only have a negligible impact on prices. Private sectors allow for selfish, individual motives to be countered by a general, communal balance. In competitive markets, Smith believed he had come across an instrument capable of converting individual selfish interest to public virtues for maximum production. However, this is only possible if the competitive system is backed up by the necessary legal and institutional framework.
Smith also helped provide context for the importance of a division of labor. With some workers doing one thing and others the next, more capital can be gained. Smith took this concept further than just the worker as well. Resource allocation is a major area of economics cited to Smith. The concept examines the way resources are managed. A logical use of resources involves using everything available to produce value. Often seen as huge influence on the Industrial Revolution, Smith is cited to this day as a founding economist.
Marxism and a Labor-Minded Approach
Other than Smith, few have been as prolific and influential. That being said, it’s fair to say no economist shaped 19th and 20th century economics more than Karl Marx. Some consider his work philosophical or political, but at his core, Marx is an economic theorist. His approach to economics came not from profits, but from the people working for a wage. In Marx’ view, the labor theory of value is the single greatest influencer in society. Simply put, labor is one’s ability to produce something of value. Wages should coincide with produced value. That being said, it’s important to look at the goods being produced through that labor.
For example, let’s say a cotton factory employs 10 workers at $5 an hour. Each hour, the value of produced cotton is worth $5000. By spending $500 on labor each hour, the company turns a hefty profit. Some of that goes into running the factory, or possibly paying for the means to produce the cotton. The company’s leader owns the means to produce the cotton. That being said, workers in the factory produce everything of value, which in this case is cotton. The gross indifference between the value of the worker’s labor and what they earn is the core of Marx’ beliefs.
Marx’ form of economics is socialism. Under a socialist economy, workers share the means of production through communal ownership. This keeps one person from earning more than they deserve. As we’ll discuss briefly below, the political implementation of socialism is called communism.
It’s tough to look at the situation workers are in and not feel cheated. Because of this, many see Marx’ calls for action to be philosophical in nature. When considering what is economics, the easy answer is to define the term as money-focused. Marx, however, pointed out that without workers, there is no economy. Marx believed workers deserve a fairer wage for the value they produce. If the only thing stopping them from fair wages is the means of production, Marx calls on workers to seize these factories. By controlling the means of production, workers can once and for all earn the value they create through their labor.
Recent Resurgence in Marx’ Ideology
Many point to capitalism as a negative influence on the world in the last 50 years. Income inequality, stagnating wages, and a wealth gap are causing major problems for many people. The debate rages on against the 1%, who hold more wealth than 99% of people in the United States. While socialism may never fully take off in the U.S., welfare programs are popular in Europe. Modern, Marxian ideas like national healthcare, wealth taxes, and other programs are popular. Whether they take off in the United States is yet to be seen. The things Marx lays out are common critiques we hear today from people and politicians. For now, Marx remains a key economic theorist in the world’s discussions on capital and labor.
Is Socialism the Same as Communism?
As briefly mentioned above, Marx’ form of economics is socialism. Communism is the political implementation of socialism. This is not a summary of political theories, so we won’t dive into communism much. The terms do not mean the same thing. Socialism strictly refers to the economic aspects of Marx’ theories. A competing theory to socialism is Keynes’ theory of macroeconomics.
Keynes and the Macro Approach to Economics
It’s not very often your name becomes an economic approach. Marx has this occur after his work, and so does John Maynard Keynes. Keynes is a master of macroeconomic models. Hitting his professional stride right after the great depression, his 1936 book, The General Theory of Employment, Interest and Money, is a work on recessions and fixing large economic missteps. The big takeaway after the depression to Keynes was demand of labor. Without a demand for labor, job markets crash and economies follow. An entire economy functions on four things: consumption, investment, government purchases, and net exports. In a healthy economy, one of these four things will boost the others. A demand for one of these four things, especially consumption, drives the others down. Consumer spending is a key portion of Keynes’ theory.
When consumer spending is down, everything else falls as well. While prices may respond to supply and demand at a slow rate, jobs and consumption do not. That is to say, if citizens consume less, then prices might not change right away. However, jobs will drop faster, as companies find ways to make up the money they lose from decreasing sales. The key to real economic change in a stagnating or struggling economy is spending. Any sort of spending, whether it be consumption, investment, or government expenditures, must increase to push real growth.
Recent Resurgence in Keynes’ Ideology
After the global economic collapse of 2008, Keynes reentered popular discourse. His works all deal with recessions, making it quite timely for the crisis at hand. The idea of stimulus spending at a governmental level, or things like the 2000s citizen stimulus package under George W. Bush, all stem from Keynes. Keynes’ theories will certainly be thrown around as experts decide what to do with the problems of the future.
The Global Economy
Thanks to technology, the world’s nations are more interconnected than ever. On the one hand, trade is fluid and seamless in today’s world. That also means recessions in one part of the globe can mean turmoil for all. The three largest areas of focus in the global economy are trade, tariffs, and international finance.
Trade is crucial to keeping international economies stable. Trade works on a global scale because of the various exports a region has to offer. We see the manufacturing power of India driving the country’s economy to new heights. What a country like France might lack in manufacturing, they make up for in purchasing power. What a country like Egypt might lack in purchasing power, they can make up for in their own valuable goods to trade. The needs we see in a supply-demand system of a single nation apply to a global economic system. When trade flows freely, capitalistic principals of supply and demand, labor abundance in times of growth, and other phenomenon occur across oceans. One thing that halts international trade, however, is the presence of tariffs.
A tariff is a tax a country pays to import or export goods to another country. Tariffs are put in place to protect domestic production. For example, there may be tariffs put in place on foreign cars to drive up the price, encouraging the purchase of domestically produced vehicles. It’s almost universally agreed that tariffs halt free trade and economic growth. Nevertheless, a competitive global economy means domestic production is at risk from competing nations. If China can produce cars for less money than the United States, then why would someone buy an American-made car? Tariffs are a great example of protectionism, a phenomenon increasingly common in the global economic age. Protectionism helps domestic economies stay safe from international competition that might look to be undercutting prices or values on goods.
International finance is a sub-section of economics that deals with the study of economic dealings between two nations. The political and economic outcomes of two countries working together in a trade deal has implications for tens of hundreds of countries across the globe. For example, the trade war between China and the United States effects the financial standing of multiple countries. Because countries can create their own currency, sign trade deals, and control their production and policy, the global economy cares deeply about each individual country’s policies.
Conclusion and Student’s Guide
As the global economy grows, many things are changing in the world of economics. Ironically, however, the concepts dating back to the days of Adam Smith and Karl Marx are relevant even today. The influence of domestic and international economics plays a role in the lives of billions of people across the globe. Knowing economics helps better prepare individuals to understand some of the day’s most pressing issues.
Finally, I would like to bring your attention to the following student guide:
This guide provides detailed insights and resources on the following topics:
– Differences Between Microeconomics and Macroeconomics
– Key Principles of Microeconomics
– Key Research Areas in Macroeconomics
– Overview of the History of Economics
– The Four Building Blocks of International Economics
– A Look at International Trade and Finance, Multinational Corporations, Globalization
– Microeconomics and Macroeconomics Principles on Business Decisions
– And much more!