Solidarity economy or social and solidarity economy (SSE)
refers to a wide range of economic activities that aim to prioritize
social profitability instead of purely financial profits. A key feature
that distinguishes solidarity economy entities from private and public
enterprises is the participatory and democratic nature of governance in decision-making processes as one of the main principles of the SSE sector. Active participation of all people involved in decision-making procedures contributes to their empowerment as active political subjects. However, different SSE organizational structures reflect variations in democratic governance and inclusive participation. Ultimately, SSE represents a crucial tool in guaranteeing that social justice ideals are upheld and that the wellbeing of the most vulnerable populations is paid attention to during the planning processes.
Overview
Some
refer to solidarity economy as a method for naming and conceptualizing
transformative monetary qualities, practices, and foundations that exist
throughout the world. These incorporate, yet are not constrained to,
egalitarian and participatory monetary conduct by people, laborers, and
makers, for example, by a person who is a moral shopper, specialist, and
additionally financial specialist, or by a specialist co-op, reasonable
exchange business, or dynamic association. It is an economic formation which seeks to improve the quality of life of a region or community on the basis of solidarity, often through local business and not-for-profit endeavors. It mainly consists of activities organized to address and transform exploitation under capitalist economics and the large-corporation, large-shareholder-dominated economy and can include diverse activities. For some, it refers to a set of strategies and a struggle aimed at the abolition of capitalism
and the social relations that it supports and encourages; for others,
it names strategies for "humanizing" the capitalist economy—seeking to
supplement capitalist globalization with community-based "social safety nets".
Historically, classical utilitarians argued that individuals
should adopt a system which maximizes the total of all individuals'
utility. When the utilities of people are summed, the personal utilities
become equivalent. In other words, one's personal utility is equivalent
to the utility of others. Individuals can then comprehend how other
people feel, forming the foundation of the solidarity economy. Solidarity might be more effective than alienated individuality in certain instances. Game theory
can explain greater productivity via solidarity. Sometimes in game
theory contexts, cooperative instances might lead to a larger benefit,
however game theory fundamentally presupposes the selfish nature of
individual individuals. A major distinction between solidarity and game
theory is that solidarity economy places and recognizes the selfless
component of humans above their egotistical features.
History
"Solidarity economy" was used as an economic organizing concept as early as 1937, when Felipe Alaiz
advocated for the development of economic solidarity among worker
collectives in urban and rural areas during the Spanish Civil War It emerged more widely as a term in Latin America over the past twenty
years in response to community and worker demands to expand forms of
social inclusion and unity. Different conceptions of Solidarity Economy
originated among movements seeking to create grassroots economies during
the military dictatorships that dominated Latin America during the
1970s and 1980s and subsequently, flourished as of the emergence of
financial neoliberal democracies in the 1990s up to the present.
The term "Social Solidarity Economy" started to be used in the
late 90s. The first meeting of what would thereafter become the RIPESS
(Intercontinental network for the promotion of social solidarity
economy) network, took place in Lima,
Peru on July 4, 1997 and the participants from more than 30 countries
agreed that there needed to be a strong integration between the more
traditional social economy
structures (collective enterprises – a sector of the solidarity
economy) and the more holistic and alternative approaches of solidarity
economy practices and communities. The notion of solidarity economy has
gained popularity, particularly since the early 2000s. In fact, while in most francophone and hispanophone countries the
expression used is "Social AND Solidarity Economy", when the RIPESS
network was formally announced in December 2002, it chose to eliminate
the "AND" in its official name, in order to stress solidarity economy's
aim of transformative system change, which includes going beyond the
social economy. Another global network with the same aims, the Alliance
for a Responsible, Plural and United World, produced an enhanced
definition: "Production, distribution and consumption activities which
contribute to the democratisation of the economy via citizen engagement
at the local and global level. Many
networks continue to use the term Solidarity Economy and institutions
usually refer to SSE as Social and Solidarity Economy.
According to previous revolutionary trends, we could be in the
midst of a historical shift away from marketism and towards solidarity.
Solidarity-based economic approaches
Protest for the poor with banner reading "solidarity without limits"
One SSE approach focuses primarily on making the current economic
system sustainable. Its objective is the creation of enterprises that
serve its members or the community, instead of simply striving for
financial profit by prioritising people and work over capital in the
distribution of revenue and
surplus. Human, financial, and environmental assets are just a few instances of
the variables that influence a company's sustainability. This notion,
which is relevant to SSE enterprises, is integrated into social systems
like social accountability and social balance.United Nations Research Institute for Social Development
has concluded that "social and solidarity economy, a
science-in-the-making, cannot go very far in framing discourses and in
engaging with the bigger picture, as an alternative to the crisesridden
"dominant economic paradigm"" and calls for further developing SSE into a
new scientific theory with its own foundations which would offer an
alternative to the homo economicus. Environmental development, furthermore known as sustainable
development, is a type of economic and social advancement that ensures
living standards within the ecosystem and therefore is tailored to the
needs of each sustained region in order to become both humanistic and
sustainable throughout time.
Another approach in this regard could be the "Bill on the Hook"
project of the Istanbul Metropolitan Municipality. The initiative
primarily aimed to provide much-needed financial support for the
citizens of Istanbul during the COVID-19 pandemic.
The platform anonymously matches the donors with households that have
outstanding utility bills. In just 31 hours, the campaign generated over
1 million USD (18,600,000 TL) and helped 57,423 people in Istanbul pay
their water and gas bills. "Bill on the Hook" is still keeping its popularity, mainly because a
large number of households are still unable to pay their utility bills
on time due to the current hyperinflation environment in Turkey.
Specialized literature includes the following variables as contributing elements to the sustainability of entrepreneurship in the SSE:
Social factors. It is vital to acknowledge that belief
systems should have solid grounds and also acknowledge the possible risk
that particular designations may cause as to understand how social
psychology contributes to the sociological growth and organizational
strength.
Politics, religion, and culture. Within each historical and
cultural heritage, it is important to ensure factors such as cultural
legacy, ancient traditions, as well as the implementation of awareness,
while also keeping a sense of community and identity.
Associativity. Associativity is a component of competition
which enables the implementation of organisational structures that
enable decision-making procedures centered on sustainability through
time.
Education. Consequently, functionality of SSE will rely on
the input of the involved stakeholders, on the learning programs that
are tailored to the experience, literacy, and educational backgrounds of
their staff.
Models of intervention in sustainable development. Models
should not be uniform processes; rather, these should be created and
implemented as part of collaborative initiatives under participatory
operations.
Core values and principles
The RIPESS Charter of the Intercontinental Network for the Promotion of Social Solidarity
Economy sets out eleven core values to promote the ethical and
value-based economic model:
Humanism – putting human beings, their dignity, culture and full development at the centre
Diversity – encouraging representation of players of all sectors of society
Creativity – promoting innovation that contribute to social change
Sustainable Development – respecting the balance of the ecosystem by protecting the environment and biodiversity
Equality, equity and justice for all - fighting against all forms of discrimination and oppression
Respecting the integration of countries and people - opposing economic, political, and cultural domination of the North over the South
A plural and solidarity-based economy - providing an alternative to the neoliberal economic model by taking actions towards a plural and solidarity-based economy
Also, sharing some of the above-mentioned points, six principles have been described in the REAS Charter for Solidarity Economy:
Principle of equity. Introduces an ethical or justice
principle in equality. It is a value that recognizes all people as
subjects of equal dignity and protects their right not to be subjected
to relationships based on domination regardless of their social
condition, gender, age, ethnicity, origin, ability, etc. Society must
satisfy, in an equitable manner, the respective interests of all people.
Principle of work. Work is a key element in the quality of
life of people, community and economic relations between citizens and
states. Importance of recovering the human, social, political, economic
and cultural dimension of work that allows the development of people's
capacities. Work is much more than a job or an occupation.
Principle of environmental sustainability.
All productive and economic activity is related to nature. The good
relationship with nature is a source of economic wealth and health.
Therefore, environmental sustainability must be integrated into all
activities, evaluating the environmental impact (ecological footprint).
Principle of cooperation.Cooperation
instead of competition. Model of society based on harmonious local
development and fair commercial relationships. Solidarity Economy is
based on participatory and democratic ethics, which wants to promote
learning and cooperative work between people and organizations.
Principle of non-profit-making. The economic model to be
pursued is aimed at the integral, collective and individual development
of people, and as a means, the efficient management of economically
viable, sustainable and profitable projects, whose benefits are
reinvested and redistributed. This "non-profit-making" is closely linked
to the way of measuring results, which take into account not only the
economic aspects, but also the human, social, environmental, cultural
and participatory aspects; and the final result is the comprehensive
benefit.
Principle of territorial responsibility. Participation in the
sustainable local and community development of the territory.
Organizations fully integrated into the territory and social environment
in which they carry out their activities, which requires involvement in
networks and cooperation with other organizations of the nearby social
and economic fabric, within the same geographical area. This
collaboration is a way for concrete positive and solidary experiences to
transform the structures that generate inequality, domination and
exclusion.
Challenges of a solidarity economy
Market
relation pressures – As Solidarity Economy enterprises expand, it
often becomes more immersed in market relations and global value chains,
making it confront new pressures that force large SSE organizations to
adopt practices that are characteristic of for-profit enterprise and
dilute core SSE principles. An example of such a case could be the
growing criticism of microcredit practices.
Informal economy vulnerability – Solidarity Economy interacts
with the informal economy of atomized workers and producers a complex
web of social relations. The challenge lies in transitioning out of this
informality, transforming a wide array of informal social relations
with multiple actors into governance and adopting necessary regulations.
Internal dynamics – Solidarity Economy organizations can be prone to elite capture and social exclusion.
This might be because of the types of producers that integrate
organizations such as cooperatives and/or due to the fact that those
with better education and skills end up dominating governance
structures.
Balancing multiple objectives – Solidarity Economy enterprises
are required to balance a variety of potential objectives related to
efficiency and equity, or economic, environmental, social and
emancipatory dimensions. This could be made additionally difficult by
the organization's membership homogeneity, misalignment of incentives
between managers and members, increased reliance on external support
etc.
These initiatives' variety and fragmentation – For the social
economy stakeholders/ institutions and their associated monetary
sponsors, this is regarded as a regular difficulty. Certain strategies
appear to be appropriate, whereas others seem to be less effective for
the social economy, due to its increased heterogeneity of initiatives.
Social economy businesses
Social economy businesses (SEB) are situated at the overlap of the social economy and the private sector.
This kind of hybrid organisations earn all or some part of their income
from the marketplace and they may be in competition with private sector
organisations. As many businesses that are primarily viewed as part of a
private sector have modified their business imperatives and taken on
social business models, it can sometimes be difficult to distinguish
between private sector and social economy businesses. The main
difference with private sector organisations is that SEB are guided by
social objectives that are reflected in their business mission and
strategies and built into their structure. In other words, in case of
SEB the prerogatives of capital do not dominate over the social
objectives in the organization's decision making.
Examples of organizations
The
term social and solidarity economy alludes to a wide scope of
organizations that are recognized from ordinary revenue driven venture,
business and casual economy by two center highlights. To start with,
they have unequivocal monetary and social (and frequently ecological)
goals. Second, they include differing types of co-employable, affiliated
and solidarity relations. They include the following examples:
Fair trade
organizations form part of the solidarity economy, as their aim is to
express practical solidarity with farmers in the developing world by
paying them fair prices for their produce.
Self-help
organizations also form part of the solidarity economy as members
support each other in dealing with their problems as a practical form of
solidarity.
Co-operatives and especially worker cooperatives form part of the solidarity economy if their aims include a commitment to solidarity in some form.
Trade unions are often considered a key part of the solidarity economy as they are based on the principle of solidarity between workers.
Solidarity Economy Networks,
such as the U.S. Solidarity Economy Network (USSEN), co-founded by
Julie Matthaei (professor of economics with a focus on feminist
economics and the political economy of gender, race and class at
Wellesley College)
The earlier term for the discipline was "political economy", but
since the late 19th century, it has commonly been called "economics". The term is ultimately derived from Ancient Greekοἰκονομία (oikonomia) which is a term for the "way (nomos) to run a household (oikos)", or in other words the know-how of an οἰκονομικός (oikonomikos), or "household or homestead manager". Derived terms such as "economy" can therefore often mean "frugal" or "thrifty". By extension then, "political economy" was the way to manage a polis or state.
There are a variety of modern definitions of economics; some reflect evolving views of the subject or different views among economists.Scottish philosopher Adam Smith (1776) defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as:
a branch of the science of a
statesman or legislator [with the twofold objectives of providing] a
plentiful revenue or subsistence for the people ... [and] to supply the
state or commonwealth with a revenue for the publick services.
The science which traces the laws
of such of the phenomena of society as arise from the combined
operations of mankind for the production of wealth, in so far as those
phenomena are not modified by the pursuit of any other object.
Economics is a study of man in the
ordinary business of life. It enquires how he gets his income and how he
uses it. Thus, it is on the one side, the study of wealth and on the
other and more important side, a part of the study of man.
Lionel Robbins (1932) developed implications of what has been termed "[p]erhaps the most commonly accepted current definition of the subject":
Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Robbins described the definition as not classificatory in "pick[ing] out certain kinds of behaviour" but rather analytical in "focus[ing] attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." He affirmed that previous economists have usually centred their studies
on the analysis of wealth: how wealth is created (production),
distributed, and consumed; and how wealth can grow. But he said that economics can be used to study other things, such as
war, that are outside its usual focus. This is because war has as the
goal winning it (as a sought-after end), generates both cost and benefits; and, resources
(human life and other costs) are used to attain the goal. If the war is
not winnable or if the expected costs outweigh the benefits, the
deciding actors (assuming they are rational) may never go to war (a decision)
but rather explore other alternatives. Economics cannot be defined as
the science that studies wealth, war, crime, education, and any other
field economic analysis can be applied to; but, as the science that
studies a particular common aspect of each of those subjects (they all
use scarce resources to attain a sought-after end).
Some subsequent comments criticised the definition as overly
broad in failing to limit its subject matter to analysis of markets.
From the 1960s, however, such comments abated as the economic theory of
maximizing behaviour and rational-choice modelling expanded the domain of the subject to areas previously treated in other fields. There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment.
Gary Becker,
a contributor to the expansion of economics into new areas, described
the approach he favoured as "combin[ing the] assumptions of maximizing
behaviour, stable preferences, and market equilibrium, used relentlessly and unflinchingly." One commentary characterises the remark as making economics an approach
rather than a subject matter but with great specificity as to the
"choice process and the type of social interaction
that [such] analysis involves." The same source reviews a range of
definitions included in principles of economics textbooks and concludes
that the lack of agreement need not affect the subject-matter that the
texts treat. Among economists more generally, it argues that a
particular definition presented may reflect the direction toward which
the author believes economics is evolving, or should evolve.
Many economists including Nobel Prize winners James M. Buchanan and Ronald Coase
reject the method-based definition of Robbins and continue to prefer
definitions like those of Say, in terms of its subject matter. Ha-Joon Chang
has for example argued that the definition of Robbins would make
economics very peculiar because all other sciences define themselves in
terms of the area of inquiry or object of inquiry rather than the
methodology. In the biology department, it is not said that all biology
should be studied with DNA analysis. People study living organisms in
many different ways, so some people will perform DNA analysis, others
might analyse anatomy, and still others might build game theoretic
models of animal behaviour. But they are all called biology because they
all study living organisms. According to Ha Joon Chang, this view that
the economy can and should be studied in only one way (for example by
studying only rational choices), and going even one step further and
basically redefining economics as a theory of everything, is peculiar.
A 1638 painting of a French seaport during the heyday of mercantilism
Questions regarding distribution of resources are found throughout the writings of the Boeotian poet Hesiod and several economic historians have described Hesiod as the "first economist". However, the word Oikos,
the Greek word from which the word economy derives, was used for issues
regarding how to manage a household (which was understood to be the
landowner, his family, and his slaves) rather than to refer to some normative societal system of distribution of resources, which is a more recent phenomenon. Xenophon, the author of the Oeconomicus, is credited by philologues for being the source of the word economy. Joseph Schumpeter described 16th and 17th century scholastic writers, including Tomás de Mercado, Luis de Molina, and Juan de Lugo, as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary, interest, and value theory within a natural-law perspective.
Two groups, who later were called "mercantilists" and
"physiocrats", more directly influenced the subsequent development of
the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism
was an economic doctrine that flourished from the 16th to 18th century
in a prolific pamphlet literature, whether of merchants or statesmen. It
held that a nation's wealth depended on its accumulation of gold and
silver. Nations without access to mines could obtain gold and silver
from trade only by selling goods abroad and restricting imports other
than of gold and silver. The doctrine called for importing inexpensive
raw materials to be used in manufacturing goods, which could be
exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.
Physiocrats, a group of 18th-century French thinkers and writers, developed the idea of the economy as a circular flow
of income and output. Physiocrats believed that only agricultural
production generated a clear surplus over cost, so that agriculture was
the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing
and trade at the expense of agriculture, including import tariffs.
Physiocrats advocated replacing administratively costly tax collections
with a single tax on income of land owners. In reaction against copious
mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire, which called for minimal government intervention in the economy.
Adam Smith (1723–1790) was an early economic theorist. Smith was harshly critical of the mercantilists but described the
physiocratic system "with all its imperfections" as "perhaps the purest
approximation to the truth that has yet been published" on the subject.
The publication of Adam Smith's The Wealth of Nations in 1776 is considered to be the first formalisation of economic thought.
The publication of Adam Smith's The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline." The book identified land, labour, and capital as the three factors of
production and the major contributors to a nation's wealth, as distinct
from the physiocratic idea that only agriculture was productive.
Smith discusses potential benefits of specialisation by division of labour, including increased labour productivity and gains from trade, whether between town and country or across countries. His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the functions of firm and industry" and a "fundamental principle of economic organization." To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource-allocation theory—that, under competition,
resource owners (of labour, land, and capital) seek their most
profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment).
In an argument that includes "one of the most famous passages in all economics," Smith represents every individual as trying to employ any capital they
might command for their own advantage, not that of the society, and for the sake of profit, which is necessary at some level for
employing capital in domestic industry, and positively related to the
value of produce. In this:
He generally, indeed, neither
intends to promote the public interest, nor knows how much he is
promoting it. By preferring the support of domestic to that of foreign
industry, he intends only his own security; and by directing that
industry in such a manner as its produce may be of the greatest value,
he intends only his own gain, and he is in this, as in many other cases,
led by an invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it was no
part of it. By pursuing his own interest he frequently promotes that of
the society more effectually than when he really intends to promote it.
The ReverendThomas Robert Malthus (1798) used the concept of diminishing returns to explain low living standards. Human population,
he argued, tended to increase geometrically, outstripping the
production of food, which increased arithmetically. The force of a
rapidly growing population against a limited amount of land meant
diminishing returns to labour. The result, he claimed, was chronically
low wages, which prevented the standard of living for most of the
population from rising above the subsistence level. Economist Julian Simon has criticised Malthus's conclusions.
While Adam Smith emphasised production and income, David Ricardo
(1817) focused on the distribution of income among landowners, workers,
and capitalists. Ricardo saw an inherent conflict between landowners on
the one hand and labour and capital on the other. He posited that the
growth of population and capital, pressing against a fixed supply of
land, pushes up rents and holds down wages and profits. Ricardo was also
the first to state and prove the principle of comparative advantage, according to which each country should specialise in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production. It has been termed a "fundamental analytical explanation" for gains from trade.
Coming at the end of the classical tradition, John Stuart Mill
(1848) parted company with the earlier classical economists on the
inevitability of the distribution of income produced by the market
system. Mill pointed to a distinct difference between the market's two
roles: allocation of resources and distribution of income. The market
might be efficient in allocating resources but not in distributing
income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that
the "real price of every thing ... is the toil and trouble of acquiring
it". Smith maintained that, with rent and profit, other costs besides
wages also enter the price of a commodity. Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of any market economy to settle in a final stationary state made up of a constant stock of physical wealth (capital) and a constant population size.
Marxist (later, Marxian) economics descends from classical economics and it derives from the work of Karl Marx. The first volume of Marx's major work, Das Kapital, was published in 1867. Marx focused on the labour theory of value and theory of surplus value. Marx wrote that they were mechanisms used by capital to exploit labour. The labour theory of value held that the value of an exchanged
commodity was determined by the labour that went into its production,
and the theory of surplus value demonstrated how workers were only paid a
proportion of the value their work had created.
At its inception as a social science, economics was defined
and discussed at length as the study of production, distribution, and
consumption of wealth by Jean-Baptiste Say in his Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth
(1803). These three items were considered only in relation to the
increase or diminution of wealth, and not in reference to their
processes of execution. Say's definition has survived in part up to the present, modified by
substituting the word "wealth" for "goods and services" meaning that
wealth may include non-material objects as well. One hundred and thirty
years later, Lionel Robbins noticed that this definition no longer sufficed, because many economists were making theoretical and philosophical inroads in other areas of human activity. In his Essay on the Nature and Significance of Economic Science, he proposed a definition of economics as a study of human behaviour, subject to and constrained by scarcity, which forces people to choose, allocate scarce resources to competing
ends, and economise (seeking the greatest welfare while avoiding the
wasting of scarce resources). According to Robbins: "Economics is the
science which studies human behavior as a relationship between ends and
scarce means which have alternative uses". Robbins' definition eventually became widely accepted by mainstream economists, and found its way into current textbooks. Although far from unanimous, most mainstream economists would accept
some version of Robbins' definition, even though many have raised
serious objections to the scope and method of economics, emanating from
that definition.
A body of theory later termed "neoclassical economics" formed
from about 1870 to 1910. The term "economics" was popularised by such
neoclassical economists as Alfred Marshall and Mary Paley Marshall as a concise synonym for "economic science" and a substitute for the earlier "political economy". This corresponded to the influence on the subject of mathematical methods used in the natural sciences.
Neoclassical economics systematically integrated supply and demand
as joint determinants of both price and quantity in market equilibrium,
influencing the allocation of output and income distribution. It
rejected the classical economics' labour theory of value in favour of a marginal utility theory of value on the demand side and a more comprehensive theory of costs on the supply side. In the 20th century, neoclassical theorists departed from an earlier
idea that suggested measuring total utility for a society, opting
instead for ordinal utility, which posits behaviour-based relations across individuals.
In microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics.
Neoclassical economics studies the behaviour of individuals, households, and organisations (called economic actors, players, or agents), when they manage or use scarce
resources, which have alternative uses, to achieve desired ends. Agents
are assumed to act rationally, have multiple desirable ends in sight,
limited resources to obtain these ends, a set of stable preferences, a
definite overall guiding objective, and the capability of making a
choice. There exists an economic problem, subject to study by economic
science, when a decision (choice) is made by one or more players to attain the best possible outcome.
Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field. The book focused on determinants of national income in the short run
when prices are relatively inflexible. Keynes attempted to explain in
broad theoretical detail why high labour-market unemployment might not
be self-correcting due to low "effective demand"
and why even price flexibility and monetary policy might be unavailing.
The term "revolutionary" has been applied to the book in its impact on
economic analysis.
Immediately after World War II, Keynesian was the dominant economic
view of the United States establishment and its allies, Marxian
economics was the dominant economic view of the Soviet Union
nomenklatura and its allies.
Monetarism appeared in the 1950s and 1960s, its intellectual leader being Milton Friedman.
Monetarists contended that monetary policy and other monetary shocks,
as represented by the growth in the money stock, was an important cause
of economic fluctuations, and consequently that monetary policy was more
important than fiscal policy for purposes of stabilisation. Friedman was also skeptical about the ability of central banks to
conduct a sensible active monetary policy in practice, advocating
instead using simple rules such as a steady rate of money growth.
Monetarism rose to prominence in the 1970s and 1980s, when
several major central banks followed a monetarist-inspired policy, but
was later abandoned because the results were unsatisfactory.
During the 1980s, a group of researchers appeared being called New Keynesian economists, including among others George Akerlof, Janet Yellen, Gregory Mankiw and Olivier Blanchard.
They adopted the principle of rational expectations and other
monetarist or new classical ideas such as building upon models employing
micro foundations and optimizing behaviour, but simultaneously
emphasised the importance of various market failures for the functioning of the economy, as had Keynes. Not least, they proposed various reasons that potentially explained the empirically observed features of price and wage rigidity, usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.
After decades of often heated discussions between Keynesians,
monetarists, new classical and new Keynesian economists, a synthesis
emerged by the 2000s, often given the name the new neoclassical synthesis.
It integrated the rational expectations and optimizing framework of the
new classical theory with a new Keynesian role for nominal rigidities
and other market imperfections like imperfect information in goods, labour and credit markets. The monetarist importance of monetary policy in stabilizing the economy and in particular controlling inflation was recognised as
well as the traditional Keynesian insistence that fiscal policy could
also play an influential role in affecting aggregate demand. Methodologically, the synthesis led to a new class of applied models, known as dynamic stochastic general equilibrium
or DSGE models, descending from real business cycles models, but
extended with several new Keynesian and other features. These models
proved useful and influential in the design of modern monetary policy
and are now standard workhorses in most central banks.
After the 2008 financial crisis
After the 2008 financial crisis,
macroeconomic research has put greater emphasis on understanding and
integrating the financial system into models of the general economy and
shedding light on the ways in which problems in the financial sector can
turn into major macroeconomic recessions. In this and other research
branches, inspiration from behavioural economics has started playing a more important role in mainstream economic theory. Also, heterogeneity among the economic agents, e.g. differences in income, plays an increasing role in recent economic research.
Beside the mainstream development of economic thought, various alternative or heterodox economic theories have evolved over time, positioning themselves in contrast to mainstream theory. These include:
Austrian School, emphasizing human action, property rights and the freedom to contract and transact to have a thriving and successful economy. It also emphasises that the state should play as small role as possible
(if any role) in the regulation of economic activity between two
transacting parties. Friedrich Hayek and Ludwig von Mises are the two most prominent representatives of the Austrian school.
Ecological economics like environmental economics studies the interactions between human economies and the ecosystems in which they are embedded, but in contrast to environmental economics takes an oppositional
position towards general mainstream economic principles. A major
difference between the two subdisciplines is their assumptions about the
substitution possibilities between human-made and natural capital.
Feminist economics
emphasises the role that gender plays in economies, challenging
analyses that render gender invisible or support gender-oppressive
economic systems. The goal is to create economic research and policy analysis that is
inclusive and gender-aware to encourage gender equality and improve the
well-being of marginalised groups.
Mainstream economic theory relies upon analytical economic models.
When creating theories, the objective is to find assumptions which are
at least as simple in information requirements, more precise in
predictions, and more fruitful in generating additional research than
prior theories. While neoclassical economic theory constitutes both the dominant or orthodox theoretical as well as methodological framework, economic theory can also take the form of other schools of thought such as in heterodox economic theories.
Sometimes an economic hypothesis is only qualitative, not quantitative.
Expositions of economic reasoning often use two-dimensional
graphs to illustrate theoretical relationships. At a higher level of
generality, mathematical economics is the application of mathematical methods to represent theories and analyse problems in economics. Paul Samuelson's treatise Foundations of Economic Analysis
(1947) exemplifies the method, particularly as to maximizing
behavioural relations of agents reaching equilibrium. The book focused
on examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data.
Economic theories are frequently tested empirically, largely through the use of econometrics using economic data. The controlled experiments common to the physical sciences are difficult and uncommon in economics, and instead broad data is observationally studied;
this type of testing is typically regarded as less rigorous than
controlled experimentation, and the conclusions typically more
tentative. However, the field of experimental economics is growing, and increasing use is being made of natural experiments.
Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size, economic significance, and statistical significance
("signal strength") of the hypothesised relation(s) and to adjust for
noise from other variables. By such means, a hypothesis may gain
acceptance, although in a probabilistic, rather than certain, sense.
Acceptance is dependent upon the falsifiable
hypothesis surviving tests. Use of commonly accepted methods need not
produce a final conclusion or even a consensus on a particular question,
given different tests, data sets, and prior beliefs.
Experimental economics has promoted the use of scientifically controlledexperiments. This has reduced the long-noted distinction of economics from natural sciences because it allows direct tests of what were previously taken as axioms. In some cases these have found that the axioms are not entirely correct.
In behavioural economics, psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his and Amos Tversky's empirical discovery of several cognitive biases and heuristics. Similar empirical testing occurs in neuroeconomics.
Another example is the assumption of narrowly selfish preferences
versus a model that tests for selfish, altruistic, and cooperative
preferences. These techniques have led some to argue that economics is a "genuine science".
Microeconomics examines how entities, forming a market structure, interact within a market to create a market system.
These entities include private and public players with various
classifications, typically operating under scarcity of tradable units
and regulation. The item traded may be a tangible product such as apples or a service such as repair services, legal counsel, or entertainment.
Various market structures exist. In perfectly competitive markets, no participants are large enough to have the market power
to set the price of a homogeneous product. In other words, every
participant is a "price taker" as no participant influences the price of
a product. In the real world, markets often experience imperfect competition.
Forms of imperfect competition include monopoly (in which there is only one seller of a good), duopoly (in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition (in which there are many sellers producing highly differentiated goods), monopsony (in which there is only one buyer of a good), and oligopsony
(in which there are few buyers of a good). Firms under imperfect
competition have the potential to be "price makers", which means that
they can influence the prices of their products.
In partial equilibrium
method of analysis, it is assumed that activity in the market being
analysed does not affect other markets. This method aggregates (the sum
of all activity) in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across all markets. This method studies both changes in markets and their interactions leading towards equilibrium.
In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity or a service for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defence, smallpox vaccinations, etc.) or private goods, and "guns" vs "butter".
Inputs used in the production process include such primary factors of production as labour services, capital (durable produced goods used in production, such as an existing factory), and land (including natural resources). Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car.
Economic efficiency measures how well a system generates desired output with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs. A widely accepted general standard is Pareto efficiency, which is reached when no further change can make someone better off without making someone else worse off.
The production–possibility frontier (PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case, an economy
can produce just two goods (say "guns" and "butter"). The PPF is a
table or graph (as at the right) that shows the different quantity
combinations of the two goods producible with a given technology and
total factor inputs, which limit feasible total output. Each point on
the curve shows potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.
Scarcity is represented in the figure by people being willing but unable in the aggregate to consume beyond the PPF (such as at X) and by the negative slope of the curve. If production of one good increases along the curve, production of the other good decreases, an inverse relationship.
This is because increasing output of one good requires transferring
inputs to it from production of the other good, decreasing the latter.
The slope of the curve at a point on it gives the trade-off
between the two goods. It measures what an additional unit of one good
costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. Along the PPF, scarcity implies that choosing more of one good in the aggregate entails doing with less of the other good. Still, in a market economy, movement along the curve may indicate that the choice of the increased output is anticipated to be worth the cost to the agents.
By construction, each point on the curve shows productive efficiency in maximizing output for given total inputs. A point inside the curve (as at A), is feasible but represents production inefficiency (wasteful use of inputs), in that output of one or both goods could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment during a business-cyclerecession or economic organisation of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it does not produce a mix of goods that consumers prefer over other points.
Much applied economics in public policy
is concerned with determining how the efficiency of an economy can be
improved. Recognizing the reality of scarcity and then figuring out how
to organise society for the most efficient use of resources has been
described as the "essence of economics", where the subject "makes its
unique contribution."
Specialisation is considered key to economic efficiency based on theoretical and empirical
considerations. Different individuals or nations may have different
real opportunity costs of production, say from differences in stocks of human capital per worker or capital/labour ratios. According to theory, this may give a comparative advantage in production of goods that make more intensive use of the relatively more abundant, thus relatively cheaper, input.
Even if one region has an absolute advantage
as to the ratio of its outputs to inputs in every type of output, it
may still specialise in the output in which it has a comparative
advantage and thereby gain from trading with a region that lacks any
absolute advantage but has a comparative advantage in producing
something else.
It has been observed that a high volume of trade occurs among
regions even with access to a similar technology and mix of factor
inputs, including high-income countries. This has led to investigation
of economies of scale and agglomeration
to explain specialisation in similar but differentiated product lines,
to the overall benefit of respective trading parties or regions.
The general theory of specialisation applies to trade among individuals, farms, manufacturers, service providers, and economies. Among each of these production systems, there may be a corresponding division of labour with different work groups specializing, or correspondingly different types of capital equipment and differentiated land uses.
An example that combines features above is a country that
specialises in the production of high-tech knowledge products, as
developed countries do, and trades with developing nations for goods
produced in factories where labour is relatively cheap and plentiful,
resulting in different in opportunity costs of production. More total
output and utility thereby results from specializing in production and
trading than if each country produced its own high-tech and low-tech
products.
Theory and observation set out the conditions such that market prices of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) low-cost inputs go to producing low-cost outputs. In the process, aggregate output may increase as a by-product or by design. Such specialisation of production creates opportunities for gains from trade whereby resource owners benefit from trade in the sale of one type of output for other, more highly valued goods. A measure of gains from trade is the increased income levels that trade may facilitate.
The supply and demand
model describes how prices vary as a result of a balance between
product availability and demand. The graph depicts an increase in demand
from D1 to D2 and the resulting increase in price and quantity required to reach a new equilibrium point on the supply curve (S).
Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. The theory of supply and demand is an organizing principle for
explaining how prices coordinate the amounts produced and consumed. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting power.
For a given market of a commodity, demand
is the relation of the quantity that all buyers would be prepared to
purchase at each unit price of the good. Demand is often represented by a
table or a graph showing price and quantity demanded (as in the
figure). Demand theory describes individual consumers as rationally
choosing the most preferred quantity of each good, given income,
prices, tastes, etc. A term for this is "constrained utility
maximisation" (with income and wealth as the constraints on demand). Here, utility
refers to the hypothesised relation of each individual consumer for
ranking different commodity bundles as more or less preferred.
The law of demand
states that, in general, price and quantity demanded in a given market
are inversely related. That is, the higher the price of a product, the
less of it people would be prepared to buy (other things unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect). In addition, purchasing power from the price decline increases ability to buy (the income effect). Other factors can change demand; for example an increase in income will shift the demand curve for a normal good
outward relative to the origin, as in the figure. All determinants are
predominantly taken as constant factors of demand and supply.
Supply is the relation between the price of a good and the
quantity available for sale at that price. It may be represented as a
table or graph relating price and quantity supplied. Producers, for
example business firms, are hypothesised to be profit maximisers,
meaning that they attempt to produce and supply the amount of goods
that will bring them the highest profit. Supply is typically represented
as a function relating price and quantity, if other factors are
unchanged.
That is, the higher the price at which the good can be sold, the
more of it producers will supply, as in the figure. The higher price
makes it profitable to increase production. Just as on the demand side,
the position of the supply can shift, say from a change in the price of a
productive input or a technical improvement. The "Law of Supply" states
that, in general, a rise in price leads to an expansion in supply and a
fall in price leads to a contraction in supply. Here as well, the
determinants of supply, such as price of substitutes, cost of
production, technology applied and various factors inputs of production
are all taken to be constant for a specific time period of evaluation of
supply.
Market equilibrium
occurs where quantity supplied equals quantity demanded, the
intersection of the supply and demand curves in the figure above. At a
price below equilibrium, there is a shortage of quantity supplied
compared to quantity demanded. This is posited to bid the price up. At a
price above equilibrium, there is a surplus of quantity supplied
compared to quantity demanded. This pushes the price down. The model
of supply and demand predicts that for given supply and demand curves,
price and quantity will stabilise at the price that makes quantity
supplied equal to quantity demanded. Similarly, demand-and-supply theory
predicts a new price-quantity combination from a shift in demand (as to
the figure), or in supply.
People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through firms. The most obvious kinds of firms are corporations, partnerships and trusts. According to Ronald Coase, people begin to organise their production in firms when the costs of doing business becomes lower than doing it on the market. Firms combine labour and capital, and can achieve far greater economies of scale (when the average cost per unit declines as more units are produced) than individual market trading.
In perfectly competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price. Industrial organisation
generalises from that special case to study the strategic behaviour of
firms that do have significant control of price. It considers the
structure of such markets and their interactions. Common market
structures studied besides perfect competition include monopolistic
competition, various forms of oligopoly, and monopoly.
Managerial economics applies microeconomic analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as operations research and programming and from statistical methods such as regression analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimise
business decisions, including unit-cost minimisation and profit
maximisation, given the firm's objectives and constraints imposed by
technology and market conditions.
Uncertainty in economics is an unknown prospect of gain or loss, whether quantifiable as risk or not. Without it, household behaviour would be unaffected by uncertain employment and income prospects, financial and capital markets would reduce to exchange of a single instrument in each market period, and there would be no communications industry. Given its different forms, there are various ways of representing uncertainty and modelling economic agents' responses to it.
Game theory is a branch of applied mathematics that considers strategic interactions between agents, one kind of uncertainty. It provides a mathematical foundation of industrial organisation,
discussed above, to model different types of firm behaviour, for
example in a solipsistic industry (few sellers), but equally applicable
to wage negotiations, bargaining, contract design, and any situation where individual agents are few enough to have perceptible effects on each other. In behavioural economics, it has been used to model the strategies agents choose when interacting with others whose interests are at least partially adverse to their own.
Some market organisations may give rise to inefficiencies associated with uncertainty. Based on George Akerlof's "Market for Lemons" article, the paradigm
example is of a dodgy second-hand car market. Customers without
knowledge of whether a car is a "lemon" depress its price below what a
quality second-hand car would be. Information asymmetry
arises here, if the seller has more relevant information than the buyer
but no incentive to disclose it. Related problems in insurance are adverse selection, such that those at most risk are most likely to insure (say reckless drivers), and moral hazard, such that insurance results in riskier behaviour (say more reckless driving).
Both problems may raise insurance costs and reduce efficiency by driving otherwise willing transactors from the market ("incomplete markets").
Moreover, attempting to reduce one problem, say adverse selection by
mandating insurance, may add to another, say moral hazard. Information economics, which studies such problems, has relevance in subjects such as insurance, contract law, mechanism design, monetary economics, and health care. Applied subjects include market and legal remedies to spread or reduce
risk, such as warranties, government-mandated partial insurance, restructuring or bankruptcy law, inspection, and regulation for quality and information disclosure.
Pollution can be a simple example of market failure; if costs of production are not borne by producers but are by the environment, accident victims or others, then prices are distorted.An environmental scientist sampling water
The term "market failure"
encompasses several problems which may undermine standard economic
assumptions. Although economists categorise market failures differently,
the following categories emerge in the main texts.
Information asymmetries and incomplete markets
may result in economic inefficiency but also a possibility of improving
efficiency through market, legal, and regulatory remedies, as discussed
above.
Natural monopoly, or the overlapping concepts of "practical" and "technical" monopoly, is an extreme case of failure of competition as a restraint on producers. Extreme economies of scale are one possible cause.
Public goods
are goods which are under-supplied in a typical market. The defining
features are that people can consume public goods without having to pay
for them and that more than one person can consume the good at the same
time.
Externalities
occur where there are significant social costs or benefits from
production or consumption that are not reflected in market prices. For
example, air pollution may generate a negative externality, and
education may generate a positive externality (less crime, etc.).
Governments often tax and otherwise restrict the sale of goods that have
negative externalities and subsidise or otherwise promote the purchase
of goods that have positive externalities in an effort to correct the
price distortions caused by these externalities. Elementary demand-and-supply theory predicts equilibrium but not the
speed of adjustment for changes of equilibrium due to a shift in demand
or supply.
In many areas, some form of price stickiness
is postulated to account for quantities, rather than prices, adjusting
in the short run to changes on the demand side or the supply side. This
includes standard analysis of the business cycle in macroeconomics.
Analysis often revolves around causes of such price stickiness and
their implications for reaching a hypothesised long-run equilibrium.
Examples of such price stickiness in particular markets include wage
rates in labour markets and posted prices in markets deviating from perfect competition.
Policy options include regulations that reflect cost–benefit analysis or market solutions that change incentives, such as emission fees or redefinition of property rights.
Welfare economics uses microeconomics techniques to evaluate well-being from allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyses social welfare, however measured,
in terms of economic activities of the individuals that compose the
theoretical society considered. Accordingly, individuals, with
associated economic activities, are the basic units
for aggregating to social welfare, whether of a group, a community, or a
society, and there is no "social welfare" apart from the "welfare"
associated with its individual units.
Macroeconomics, another branch of economics, examines the economy as a
whole to explain broad aggregates and their interactions "top down",
that is, using a simplified form of general-equilibrium theory. Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy.
Since at least the 1960s, macroeconomics has been characterised by further integration as to micro-based modelling of sectors, including rationality of players, efficient use of market information, and imperfect competition. This has addressed a long-standing concern about inconsistent developments of the same subject.
Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labour force growth.
Growth economics studies factors that explain economic growth – the increase in output per capita of a country over a long period of time. The same factors are used to explain differences in the level of output per capitabetween countries, in particular why some countries grow faster than others, and whether countries converge at the same rates of growth.
He therefore advocated active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilise output over the business cycle. Thus, a central conclusion of Keynesian economics is that, in some
situations, no strong automatic mechanism moves output and employment
towards full employment levels. John Hicks' IS/LM model has been the most influential interpretation of The General Theory.
Over the years, understanding of the business cycle has branched into various research programmes, mostly related to or distinct from Keynesianism. The neoclassical synthesis refers to the reconciliation of Keynesian economics with classical economics, stating that Keynesianism is correct in the short run but qualified by classical-like considerations in the intermediate and long run.
In contrast, the new Keynesian approach retains the rational expectations assumption, however it assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.
Thus, the new classicals assume that prices and wages adjust
automatically to attain full employment, whereas the new Keynesians see
full employment as being automatically achieved only in the long run,
and hence government and central-bank policies are needed because the
"long run" may be very long.
The amount of unemployment in an economy is measured by the
unemployment rate, the percentage of workers without jobs in the labour
force. The labour force only includes workers actively looking for jobs.
People who are retired, pursuing education, or discouraged from seeking work
by a lack of job prospects are excluded from the labour force.
Unemployment can be generally broken down into several types that are
related to different causes.
Classical models of unemployment occurs when wages are too high
for employers to be willing to hire more workers. Consistent with
classical unemployment, frictional unemployment occurs when appropriate
job vacancies exist for a worker, but the length of time needed to
search for and find the job leads to a period of unemployment.
Structural unemployment
covers a variety of possible causes of unemployment including a
mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment can occur when an economy is
transitioning industries and workers find their previous set of skills
are no longer in demand. Structural unemployment is similar to
frictional unemployment since both reflect the problem of matching
workers with job vacancies, but structural unemployment covers the time
needed to acquire new skills not just the short term search process.
While some types of unemployment may occur regardless of the
condition of the economy, cyclical unemployment occurs when growth
stagnates. Okun's law represents the empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.
Money is a means of final payment for goods in most price system economies, and is the unit of account
in which prices are typically stated. Money has general acceptability,
relative consistency in value, divisibility, durability, portability,
elasticity in supply, and longevity with mass public confidence. It
includes currency held by the nonbank public and checkable deposits. It
has been described as a social convention, like language, useful to one largely because it is useful to others. In the words of Francis Amasa Walker, a well-known 19th-century economist, "Money is what money does" ("Money is that money does" in the original).
As a medium of exchange,
money facilitates trade. It is essentially a measure of value and more
importantly, a store of value being a basis for credit creation. Its
economic function can be contrasted with barter
(non-monetary exchange). Given a diverse array of produced goods and
specialised producers, barter may entail a hard-to-locate double coincidence of wants as to what is exchanged, say apples and a book. Money can reduce the transaction cost
of exchange because of its ready acceptability. Then it is less costly
for the seller to accept money in exchange, rather than what the buyer
produces.
Monetary policy is the policy that central banks conduct to
accomplish their broader objectives. Most central banks in developed
countries follow inflation targeting, whereas the main objective for many central banks in development countries is to uphold a fixed exchange rate system. The primary monetary tool is normally the adjustment of interest rates, either directly via administratively changing the central bank's own interest rates or indirectly via open market operations. Via the monetary transmission mechanism, interest rate changes affect investment, consumption and net export, and hence aggregate demand, output and employment, and ultimately the development of wages and inflation.
Governments implement fiscal policy to influence macroeconomic
conditions by adjusting spending and taxation policies to alter
aggregate demand. When aggregate demand falls below the potential output
of the economy, there is an output gap
where some productive capacity is left unemployed. Governments increase
spending and cut taxes to boost aggregate demand. Resources that have
been idled can be used by the government.
For example, unemployed home builders can be hired to expand
highways. Tax cuts allow consumers to increase their spending, which
boosts aggregate demand. Both tax cuts and spending have multiplier effects where the initial increase in demand from the policy percolates through the economy and generates additional economic activity.
The effects of fiscal policy can be limited by crowding out.
When there is no output gap, the economy is producing at full capacity
and there are no excess productive resources. If the government
increases spending in this situation, the government uses resources that
otherwise would have been used by the private sector, so there is no
increase in overall output. Some economists think that crowding out is
always an issue while others do not think it is a major issue when
output is depressed.
Sceptics of fiscal policy also make the argument of Ricardian equivalence.
They argue that an increase in debt will have to be paid for with
future tax increases, which will cause people to reduce their
consumption and save money to pay for the future tax increase. Under
Ricardian equivalence, any boost in demand from tax cuts will be offset
by the increased saving intended to pay for future higher taxes.
Research has linked economic inequality to political and social instability, including revolution, democratic breakdown and civil conflict.Research suggests that greater inequality hinders economic growth and macroeconomic stability, and that land and human capital inequality reduce growth more than inequality of income. Inequality is at the centre stage of economic policy debate across the globe, as government tax and spending policies have significant effects on income distribution. In advanced economies, taxes and transfers decrease income inequality
by one-third, with most of this being achieved via public social
spending (such as pensions and family benefits.)
Public economics is the field of economics that deals with economic activities of a public sector, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost–benefit analysis of government programmes, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory,
models public-sector behaviour analogously to microeconomics, involving
interactions of self-interested voters, politicians, and bureaucrats.
Much of economics is positive, seeking to describe and predict economic phenomena. Normative economics seeks to identify what economies ought to be like.
Welfare economics is a normative branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society.
International trade studies determinants of goods-and-services flows
across international boundaries. It also concerns the size and
distribution of gains from trade. Policy applications include estimating the effects of changing tariff rates and trade quotas. International finance
is a macroeconomic field which examines the flow of capital across
international borders, and the effects of these movements on exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary globalisation.
Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour markets
function through the interaction of workers and employers. Labour
economics looks at the suppliers of labour services (workers), the
demands of labour services (employers), and attempts to understand the
resulting pattern of wages, employment, and income. In economics, labour is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. There are theories which have developed a concept called human capital
(referring to the skills that workers possess, not necessarily their
actual work), although there are also counter posing macro-economic
system theories that think human capital is a contradiction in terms.
Law and economics, or economic analysis of law, is an approach to
legal theory that applies methods of economics to law. It includes the
use of economic concepts to explain the effects of legal rules, to
assess which legal rules are economically efficient, and to predict what the legal rules will be. A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities.
Political economy is the interdisciplinary study that combines economics, law, and political science in explaining how political institutions, the political environment, and the economic system (capitalist, socialist, mixed) influence each other. It studies questions such as how monopoly, rent-seeking behaviour, and externalities should impact government policy. Historians have employed political economy
to explore the ways in the past that persons and groups with common
economic interests have used politics to effect changes beneficial to
their interests.
Gary Becker in 1974 presented an economic theory of social interactions, whose applications included the family, charity, merit goods and multiperson interactions, and envy and hatred. He and Kevin Murphy authored a book in 2001 that analysed market behaviour in a social environment.
The professionalisation of economics, reflected in the growth of
graduate programmes on the subject, has been described as "the main
change in economics since around 1900". Most major universities and many colleges have a major, school, or department in which academic degrees are awarded in the subject, whether in the liberal arts, business, or for professional study. See Bachelor of Economics and Master of Economics.
There are dozens of prizes awarded to economists each year for
outstanding intellectual contributions to the field, the most prominent
of which is the Nobel Memorial Prize in Economic Sciences, though it is not a Nobel Prize.
Contemporary economics uses mathematics. Economists draw on the tools of calculus, linear algebra, statistics, game theory, and computer science. Professional economists are expected to be familiar with these tools,
while a minority specialise in econometrics and mathematical methods.
Women's authorship share in prominent economic journals reduced
from 1940 to the 1970s, but has subsequently risen, with different
patterns of gendered coauthorship. Women remain globally under-represented in the profession (19% of authors in the RePEc database in 2018), with national variation.
_per_capita_in_2022_by_IMF.png)
