The idea of want can be examined from many perspectives. In secular societies want might be considered similar to the emotion desire , which can be studied scientifically through the disciplines of psychology or sociology . Alternatively want can be studied in a non-secular, spiritual, moralistic or religious way, particularly by Buddhism but also Christianity, Islam and Judaism.
126-449: In economics , a want is something that is desired. It is said that every person has unlimited wants, but limited resources (economics is based on the assumption that only limited resources are available to us). Thus, people cannot have everything they want and must look for the most affordable alternatives. Wants are often distinguished from needs . A need is something that is necessary for survival (such as food and shelter ), whereas
252-453: A contractual tool, remittances have a potential for recipients to further incentivize emigration by serving as a resource to alleviate the migration process. Whereas some studies suggest that parent countries can benefit from the emigration of skilled workers, generally it is emigration of unskilled and semi-skilled workers that is of economic benefit to countries of origin, by reducing pressure for employment creation. Where skilled emigration
378-403: A correlation between country size and the share of exports made up of goods in the production of which there are scale economies. The study further suggested that internationally traded goods fall into three categories, each with a different type of comparative advantage: There is a strong presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude
504-525: A country's development of a new technology is seen as contributory factor in one study. Other researchers have found research and development expenditure, patents issued, and the availability of skilled labor, to be indicators of the technological leadership that enables some countries to produce a flow of such technological innovations and have found that technology leaders tend to export hi-tech products to others and receive imports of more standard products from them. Another econometric study also established
630-702: 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
756-451: 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. During
882-420: 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
1008-462: A minimum, and a simple life of hard and decent work should be maintained, as described in the Protestant work ethic . From an economic-sociological point of view this might be understood as more value and energy being placed upon production instead of consumption . Economics Economics ( / ˌ ɛ k ə ˈ n ɒ m ɪ k s , ˌ iː k ə -/ ) is a social science that studies
1134-417: A model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital (referred to as factor endowments). The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labour-intensive products. The theorem proved to be of very limited predictive value, as
1260-449: 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
1386-467: 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. Other schools or trends of thought referring to a particular style of economics practised at and disseminated from well-defined groups of academicians that have become known worldwide, include the Freiburg School ,
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#17328011053961512-488: A partially offsetting negative contribution, and that in the developed countries globalisation and technological change were equally responsible. Globalisation is seen as contributing to economic welfare by most economists – but not all. Professor Joseph Stiglitz of the School of International and Public Affairs, Columbia University has advanced the infant industry case for protection in developing countries and criticised
1638-597: A proportion of the value their work had created. Marxian economics was further developed by Karl Kautsky (1854–1938)'s The Economic Doctrines of Karl Marx and The Class Struggle (Erfurt Program) , Rudolf Hilferding 's (1877–1941) Finance Capital , Vladimir Lenin (1870–1924)'s The Development of Capitalism in Russia and Imperialism, the Highest Stage of Capitalism , and Rosa Luxemburg (1871–1919)'s The Accumulation of Capital . At its inception as
1764-409: 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
1890-469: 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
2016-409: 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
2142-452: 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
2268-435: 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
2394-525: A study of infant industry protection in Turkey reveals the absence of any association between productivity gains and degree of protection, such as might be expected of a successful import substitution policy. Another study provides descriptive evidence suggesting that attempts at import substitution industrialisation since the 1970s have usually failed, but the empirical evidence on the question has been contradictory and inconclusive. It has been argued that
2520-442: 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
2646-566: A want is simply something that a person would like to have. Some economists have rejected this distinction and maintain that all of these are simply wants, with varying levels of importance. By this viewpoint, wants and needs can be understood as examples of the overall concept of demand . Examples of wants that people would like to have is financial monitoring , saving time , higher paying job , more comfort , healthier diet , physical fitness , spirituality , friendship , companionship and safety . While in modern secular societies "want"
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#17328011053962772-493: A wide range of non-tariff barriers that are similar in effect to quotas, some of which are subject to WTO agreements. A recent example has been the application of the precautionary principle to exclude innovatory products. The economics of international finance does not differ in principle from the economics of international trade, but there are significant differences of emphasis. The practice of international finance tends to involve greater uncertainties and risks because
2898-405: A wish to determine the consequences of such restrictions. The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardo's Theory of Comparative Advantage and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade analysis, on
3024-421: 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
3150-438: Is also applied to such diverse subjects as crime , education , the family , feminism , law , philosophy , politics , religion , social institutions , war , science , and the environment . 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 Greek οἰκονομία ( oikonomia ) which
3276-786: Is concentrated in specific highly skilled sectors, such as medicine, the consequences are severe and even catastrophic in cases where 50% or so of trained doctors have emigrated. The crucial issues, as recently acknowledged by the OECD, is the matter of return and reinvestment in their countries of origin by the migrants themselves: thus, government policies in Europe are increasingly focused upon facilitating temporary skilled migration alongside migrant remittances. Unlike movement of capital and goods, since 1973 government policies have tried to restrict migration flows, often without any economic rationale. Such restrictions have had diversionary effects, channeling
3402-412: Is considered a purely economic, social-scientific or objectively psychological reality of human existence, many religious or spiritual traditions prescribe or advise with lessons on want and wanting, which might alternatively be termed " desire ". Buddhism is perhaps the most common example of a religious tradition that offers wisdom and advice about the concept of want and wanting or "desire". The second of
3528-486: Is more widely employed. Also, the consensus among economists concerning its principal issues is narrower and more open to controversy than is the consensus about international trade. A major change in the organisation of international finance occurred in the latter years of the twentieth century, and economists are still debating its implications. At the end of the Second World War , the national signatories to
3654-537: Is often described as a corollary of the H–O theorem, was an early example. In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the price of the other factor will fall (rise). In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it. Another corollary of
3780-435: Is one of the mechanisms by which the business cycle is transmitted from country to country. Empirical research confirms that the greater the trade linkage between countries the more coordinated are their business cycles. Globalisation can also have a significant influence upon the conduct of macroeconomic policy. The Mundell–Fleming model and its extensions are often used to analyse the role of capital mobility (and it
3906-413: 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
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4032-598: 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 is occasionally referred as orthodox economics whether by its critics or sympathisers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalise earlier analysis, such as econometrics , game theory , analysis of market failure and imperfect competition , and
4158-402: Is used to denote a new industry which has prospects of gaining comparative advantage in the long-term, but which would be unable to survive in the face of competition from imported goods. This situation can occur when time is needed either to achieve potential economies of scale , or to acquire potential learning curve economies. Successful identification of such a situation, followed by
4284-448: The terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries. Their findings have been confirmed by a number of subsequent studies, although it has been suggested that the effect may be due to quality bias in the index numbers used or to the possession of market power by manufacturers. The Prebisch/Singer findings remain controversial, but they were used at
4410-647: The Bretton Woods Agreement had agreed to maintain their currencies each at a fixed exchange rate with the United States dollar ($ ), and the United States government had undertaken to buy gold on demand at a fixed rate of $ 35 per ounce. In support of those commitments, most signatory nations had maintained strict control over their nationals’ use of foreign exchange and upon their dealings in international financial assets. But in 1971
4536-552: The Four Noble Truths of Buddhism is that desire or wanting is a cause for most of the suffering experienced in life. When we want and desire, we create suffering that can never be alleviated, because as detailed in secular economics wants are "unlimited", and hence unfulfilled wants can cause suffering, in unlimited amount. Challenges to this dilemma might include anti-consumerism or Buddhist economics . In Christianity, particularly Protestantism , want should be kept to
4662-728: The School of Lausanne , the Stockholm school and the Chicago school of economics . During the 1970s and 1980s mainstream economics was sometimes separated into the Saltwater approach of those universities along the Eastern and Western coasts of the US, and the Freshwater, or Chicago school approach. Within macroeconomics there is, in general order of their historical appearance in
4788-433: 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
4914-467: The neoclassical model of economic growth for analysing long-run variables affecting national income . 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,
5040-818: The production , distribution , and consumption of goods and services . Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyses what is viewed as basic elements within economies , including individual agents and markets , their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyses economies as systems where production, distribution, consumption, savings , and investment expenditure interact, and factors affecting it: factors of production , such as labour , capital , land , and enterprise , inflation , economic growth , and public policies that have impact on these elements . It also seeks to analyse and describe
5166-415: The societal to the microeconomic level: 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
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5292-417: The transmission of the benefits of technological innovation. An OECD study has suggested that there are further dynamic gains resulting from better resource allocation, deepening specialisation, increasing returns to R&D, and technology spillover. The authors found the evidence concerning growth rates to be mixed, but that there is strong evidence that a 1 per cent increase in openness to trade increases
5418-400: 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
5544-469: The 1950s, Milton Friedman had claimed that if there were any resulting instability, it would mainly be the consequence of macroeconomic instability, but an empirical analysis in 1999 found no apparent connection. Neoclassical theory had led them to expect capital to flow from the capital-rich developed economies to the capital-poor developing countries - because the returns to capital there would be higher. Flows of financial capital would tend to increase
5670-486: The 1970s and 1980s, when several major central banks followed a monetarist-inspired policy, but was later abandoned because the results were unsatisfactory. A more fundamental challenge to the prevailing Keynesian paradigm came in the 1970s from new classical economists like Robert Lucas , Thomas Sargent and Edward Prescott . They introduced the notion of rational expectations in economics, which had profound implications for many economic discussions, among which were
5796-459: The 20th century, and some other trade restrictions were also removed. The restrictions that remain are nevertheless of major economic importance: among other estimates, the World Bank estimated in 2004 that the removal of all trade restrictions would yield benefits of over $ 500 billion a year by 2015. The largest of the remaining trade-distorting policies are those concerning agriculture. In
5922-529: The European Union made use of equivalent arrangements known as voluntary restraint agreements (VRAs) or voluntary export restraints (VERs) which were negotiated with the governments of exporting countries (mainly Japan)—until they too were banned. Tariffs have been considered to be less harmful than quotas, although it can be shown that their welfare effects differ only when there are significant upward or downward trends in imports. Governments also impose
6048-541: The H-O theorem and explores the effects upon trade of a range of factors, including technology and scale economies. It makes extensive use of econometrics to identify from the available statistics, the contribution of particular factors among the many different factors that affect trade. One example of such an econometric model is the gravity equation. The contributions of differences of technology have been evaluated in several such studies. The temporary advantage arising from
6174-465: The H–O theorem is Samuelson's factor price equalisation theorem which states that as trade between countries tends to equalise their product prices, it tends also to equalise the prices paid to their factors of production. Those theories have sometimes been taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. (But, as noted below, that conclusion depends upon
6300-425: The OECD countries government payments account for 30 per cent of farmers’ receipts and tariffs of over 100 per cent are common. OECD economists estimate that cutting all agricultural tariffs and subsidies by 50% would set off a chain reaction in realignments of production and consumption patterns that would add an extra $ 26 billion to annual world income. Quotas prompt foreign suppliers to raise their prices toward
6426-679: The Russian government default of 1998 (which brought down the Long-Term Capital Management hedge fund) and the 2007-8 sub-prime mortgages crisis. The symptoms have generally included collapses in asset prices, increases in risk premiums, and general reductions in liquidity. Measures designed to reduce the vulnerability of the international financial system have been put forward by several international institutions. The Bank for International Settlements made two successive recommendations (Basel I and Basel II ) concerning
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#17328011053966552-427: The United States government announced that it was suspending the convertibility of the dollar, and there followed a progressive transition to the current regime of floating exchange rates in which most governments no longer attempt to control their exchange rates or to impose controls upon access to foreign currencies or upon access to international financial markets. The behaviour of the international financial system
6678-404: The United States led in 2008 to banking failures and credit shortages in other developed countries, and sudden reversals of international flows of capital have often led to damaging financial crises in developing countries. And, because of the incidence of rapid change, the methodology of comparative statics has fewer applications than in the theory of international trade, and empirical analysis
6804-417: The activities and conduct of banks and other credit agencies, but in the 1980s many governments pursued a policy of deregulation in the belief that the resulting efficiency gains would outweigh any systemic risk s. The extensive financial innovations that followed are described in the article on financial economics . One of their effects has been greatly to increase the international inter-connectedness of
6930-407: 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
7056-479: 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
7182-493: The assets that are traded are claims to flows of returns that often extend many years into the future. Markets in financial assets tend to be more volatile than markets in goods and services because decisions are more often revised and more rapidly put into effect. There is the share presumption that a transaction that is freely undertaken will benefit both parties, but there is a much greater danger that it will be harmful to others. For example, mismanagement of mortgage lending in
7308-443: 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
7434-468: The availability of physical, social and human capital . Economic theory indicates that the movement of a skilled worker from a place where the returns to skill are relatively low to a place where they are relatively high should produce a net gain, although it would tend to depress the wages of skilled workers in the recipient country). There have been many econometric studies intended to quantify those gains. A Copenhagen Consensus study suggests that if
7560-411: The benefits are likely to be delayed, and vulnerability to interruptions of capital flows is likely to be increased. Although the majority of developed countries now have "floating" exchange rates , some of them – together with many developing countries – maintain exchange rates that are nominally "fixed", usually with the US dollar or the euro. The adoption of a fixed rate requires intervention in
7686-655: The case against import substitution industrialisation is not that it is bound to fail, but that subsidies and tax incentives do the job better. It has also been pointed out that, in any case, trade restrictions could not be expected to correct the domestic market imperfections that often hamper the development of infant industries. Economists’ findings about the benefits of trade have often been rejected by government policy-makers, who have frequently sought to protect domestic industries against foreign competition by erecting barriers, such as tariffs and import quotas , against imports. Average tariff levels of around 15 per cent in
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#17328011053967812-517: 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
7938-583: The conditions imposed for help by the International Monetary Fund. Professor Dani Rodrik of Harvard has noted that the benefits of globalisation are unevenly spread, and that it has led to income inequalities, and to damaging losses of social capital in the parent countries and to social stresses resulting from immigration in the receiving countries. An extensive critical analysis of these contentions has been made by Martin Wolf , and
8064-540: The costs of transport. It is a process that has ancient origins , which has gathered pace in the last fifty years, but which is very far from complete. In its concluding stages, interest rates, wage rates and corporate and income tax rates would become the same everywhere, driven to equality by competition, as investors, wage earners and corporate and personal taxpayers threatened to migrate in search of better terms. In fact, there are few signs of international convergence of interest rates, wage rates or tax rates. Although
8190-488: The design of modern monetary policy and are now standard workhorses in most central banks. After the 2007–2008 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
8316-416: The developed countries, competition between employers in developing countries can be expected eventually to bring wages into line with their employees' marginal products . Any remaining international wage differences would then be the result of productivity differences, so that there would be no difference between unit labour costs in developing and developed countries, and no downward pressure on wages in
8442-515: The developed countries. There has also been concern that international trade could operate against the interests of developing countries. Influential studies published in 1950 by the Argentine economist Raul Prebisch and the British economist Hans Singer suggested that there is a tendency for the prices of agricultural products to fall relative to the prices of manufactured goods; turning
8568-458: The developing countries it has increased macroeconomic volatility. It is estimated to have resulted in net welfare gains worldwide, but with losers as well as gainers. . Increased globalisation has also made it easier for recessions to spread from country to country. A reduction in economic activity in one country can lead to a reduction in activity in its trading partners as a result of its consequent reduction in demand for their exports, which
8694-506: 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
8820-492: The domestic level of the importing country. That relieves some of the competitive pressure on domestic suppliers, and both they and the foreign suppliers gain at the expense of a loss to consumers, and to the domestic economy, in addition to which there is a deadweight loss to the world economy. When quotas were banned under the rules of the General Agreement on Tariffs and Trade (GATT), the United States, Britain and
8946-601: The economic policies promoted by the International Monetary Fund (IMF) have had a major influence, especially upon the developing countries. The IMF was set up in 1944 to encourage international cooperation on monetary matters, to stabilise exchange rates and create an international payments system. Its principal activity is the payment of loans to help member countries to overcome balance of payments problems , mainly by restoring their depleted currency reserves. Their loans are, however, conditional upon
9072-469: 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. 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,
9198-407: The effects of international trade upon wage earners in developed countries. Samuelson's factor price equalisation theorem indicates that, if productivity were the same in both countries, the effect of trade would be to bring about equality in wage rates. As noted above, that theorem is sometimes taken to mean that trade between an industrialised country and a developing country would lower the wages of
9324-486: The emigrants, and by the increased skill and education with which some of them return. One study introduces a further offsetting factor to suggest that the opportunity to migrate fosters enrolment in education thus promoting a "brain gain" that can counteract the lost human capital associated with emigration. However, these factors can be counterweighed on their turn depending on the intentions that remittances are used for. As evidence from Armenia suggests, instead of acting as
9450-536: The financial markets and to create an international financial system with the characteristics known in control theory as "complex-interactive". The stability of such a system is difficult to analyse because there are many possible failure sequences. The internationally systemic crises that followed included the equity crash of October 1987, the Japanese asset price collapse of the 1990s the Asian financial crisis of 1997
9576-688: The first large-scale macroeconometric model , applying the Keynesian thinking systematically to the US economy . 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
9702-540: The following decades, many economists followed Keynes' ideas and expanded on his works. John Hicks and Alvin Hansen developed the IS–LM model which was a simple formalisation of some of Keynes' insights on the economy's short-run equilibrium. Franco Modigliani and James Tobin developed important theories of private consumption and investment , respectively, two major components of aggregate demand . Lawrence Klein built
9828-467: The foreign exchange market by the country's central bank, and is usually accompanied by a degree of control over its citizens’ access to international markets. Some governments have abandoned their national currencies in favour of the common currency of a currency area such as the " Eurozone " and some, such as Denmark, have retained their national currencies but have pegged them at a fixed rate to an adjacent common currency. On an international scale,
9954-509: The global economy . Other broad distinctions within economics include those between positive economics , describing "what is", and normative economics , advocating "what ought to be"; between economic theory and applied economics ; between rational and behavioural economics ; and between mainstream economics and heterodox economics . Economic analysis can be applied throughout society, including business , finance , cybersecurity , health care , engineering and government . It
10080-436: The great majority of migration flows into illegal migration and "false" asylum-seeking . Since such migrants work in unskilled industries for lower wages and often zero social insurance costs, the gain from labour migration flows is actually higher than the minimal gains calculated for legal flows; accompanying side-effects are significant, however, and include political damage to the idea of immigration, lower unskilled wages for
10206-424: 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
10332-445: The host population, and increased policing costs alongside lower tax receipts. The term globalization has a variety of meanings, but in economic terms it refers to the move that is taking place in the direction of complete mobility of capital and labour and their products, so that the world's economies are on the way to becoming totally integrated. The driving forces of the process are reductions in politically imposed barriers and in
10458-463: 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,
10584-562: The inappropriate enforcement of those policies and for failing to warn recipient countries of the dangers that can arise from the volatility of capital movements. From the time of the Great Depression onwards, regulators and their economic advisors have been aware that economic and financial crises can spread rapidly from country to country, and that financial crises can have serious economic consequences. For many decades, that awareness led governments to impose strict controls over
10710-504: The international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and transaction. The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour. In that respect, it would appear to differ in degree rather than in principle from
10836-566: The introduction of economic measures by recipient governments that are considered by the Fund's economists to provide conditions favourable to recovery. Their recommended economic policies are broadly those that have been adopted in the United States and the other major developed countries (known as the " Washington Consensus ") and have often included the removal of all restrictions upon incoming investment. The Fund has been severely criticised by Joseph Stiglitz and others for what they consider to be
10962-621: The late 19th century rose to about 30 percent in the 1930s, following the passage in the United States of the Smoot–Hawley Tariff Act . Mainly as the result of international agreements under the auspices of the General Agreement on Tariffs and Trade (GATT) and subsequently the World Trade Organization (WTO), average tariff levels were progressively reduced to about 7 per cent during the second half of
11088-458: The level of GDP per capita by between 0.9 per cent and 2.0 per cent. They suggested that much of the gain arises from the growth of the most productive firms at the expense of the less productive. Those findings and others have contributed to a broad consensus among economists that trade confers very substantial net benefits, and that government restrictions upon trade are generally damaging. Nevertheless, there have been widespread misgivings about
11214-417: The level of investment in the developing countries by reducing their costs of capital, and the direct investment of physical capital would tend to promote specialisation and the transfer of skills and technology. However, the eventual outcome of these policies was not what had been expected. Theoretical considerations alone cannot determine the balance between those benefits and the costs of volatility, and
11340-423: The literature; classical economics , neoclassical economics , Keynesian economics , the neoclassical synthesis , monetarism , new classical economics , New Keynesian economics and the new neoclassical synthesis . International economics International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and
11466-449: 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
11592-437: 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
11718-416: The other hand, depends mainly upon empirical analysis . The theory of comparative advantage provides a logical explanation of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its exposition by David Ricardo the techniques of neo-classical economics have been applied to it to model
11844-615: The patterns of trade that would result from various postulated sources of comparative advantage. However, extremely restrictive (and often unrealistic) assumptions have had to be adopted in order to make the problem amenable to theoretical analysis. The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O) depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives
11970-503: The pessimistic analysis of Malthus (1798). John Stuart Mill (1844) delimited the subject matter further: 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. Alfred Marshall provided a still widely cited definition in his textbook Principles of Economics (1890) that extended analysis beyond wealth and from
12096-490: The possibility that it may be harmful to others. However (on assumptions that included constant returns and competitive conditions) Paul Samuelson has proved that it will always be possible for the gainers from international trade to compensate the losers. Moreover, in that proof, Samuelson did not take account of the gains to others resulting from wider consumer choice , from the international specialisation of productive activities - and consequent economies of scale, and from
12222-427: The presence of immigrants in its labour market results in only a small reduction in local wages. From the standpoint of a developing country, the emigration of skilled workers represents a loss of human capital (known as brain drain ), leaving the remaining workforce without the benefit of their support. That effect upon the welfare of the parent country is to some extent offset by the remittances that are sent home by
12348-487: 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
12474-409: 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
12600-429: 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, 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
12726-489: The question has had to be tackled by empirical analysis. A 2006 working paper from the International Monetary Fund offers a summary of the empirical evidence. The authors found little evidence either of the benefits of the liberalisation of capital movements, or of claims that it is responsible for the spate of financial crises. They suggest that net benefits can be achieved by countries that are able to meet threshold conditions of financial competence but that for others,
12852-633: The regulation of banks, and a coordinating group of regulating authorities, and the Financial Stability Forum , that was set up in 1999 to identify and address the weaknesses in the system, has put forward some proposals in an interim report. Elementary considerations lead to a presumption that international migration results in a net gain in economic welfare. Wage differences between developed and developing countries have been found to be mainly due to productivity differences which may be assumed to arise mostly from differences in
12978-412: 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
13104-506: The share of foreign workers grew to 3% of the labour force in the rich countries there would be global benefits of $ 675 billion a year by 2025. However, a survey of the evidence led a House of Lords committee to conclude that any economic benefits of immigration to the United Kingdom are relatively small. Evidence from the United States also suggests that the economic benefits to the receiving country are relatively small, and that
13230-486: The so-called Lucas critique and the presentation of real business cycle models . 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
13356-444: 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
13482-406: The state or commonwealth with a revenue for the publick services. Jean-Baptiste Say (1803), distinguishing the subject matter from its public-policy uses, defined it as the science of production, distribution, and consumption of wealth . On the satirical side, Thomas Carlyle (1849) coined " the dismal science " as an epithet for classical economics , in this context, commonly linked to
13608-408: 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
13734-402: 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
13860-471: 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
13986-773: 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
14112-465: The temporary imposition of a barrier against imports can, in principle, produce substantial benefits to the country that applies it—a policy known as " import substitution industrialization ". Whether such policies succeed depends upon the governments’ skills in picking winners, with reasonably expectations of both successes and failures. It has been claimed that South Korea's automobile industry owes its existence to initial protection against imports, but
14238-402: The time—and have been used subsequently—to suggest that the developing countries should erect barriers against manufactured imports in order to nurture their own "infant industries" and so reduce their need to export agricultural products. The arguments for and against such a policy are similar to those concerning the protection of infant industries in general. The term " infant industry "
14364-401: The trade between remote regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been
14490-429: The unlikely assumption that productivity is the same in the two countries). Large numbers of learned papers have been produced in attempts to elaborate on the H–O and Stolper–Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns. Modern trade analysis moves away from the restrictive assumptions of
14616-585: The unskilled in the industrialised country. However, it is unreasonable to assume that productivity would be the same in a low-wage developing country as in a high-wage developed country. A 1999 study has found international differences in wage rates to be approximately matched by corresponding differences in productivity. (Such discrepancies that remained were probably the result of over-valuation or under-valuation of exchange rates, or of inflexibilities in labour markets.) It has been argued that, although there may sometimes be short-term pressures on wage rates in
14742-467: 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
14868-515: 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
14994-460: 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
15120-520: The world is more integrated in some respects, it is possible to argue that on the whole it is now less integrated than it was before the first world war, and that many middle-east countries are less globalised than they were 25 years ago. Of the moves toward integration that have occurred, the strongest has been in financial markets, in which globalisation is estimated to have tripled since the mid-1970s. Recent research has shown that it has improved risk-sharing, but only in developed countries, and that in
15246-467: Was also used by Paul Krugman to give a simple account of the Asian financial crisis ). Part of the increase in income inequality that has taken place within countries is attributable - in some cases - to globalisation. A recent IMF report demonstrates that the increase in inequality in the developing countries in the period 1981 to 2004 was due entirely to technological change, with globalisation making
15372-426: Was demonstrated by what came to be known as the " Leontief Paradox " (the discovery that, despite its capital-rich factor endowment, America was exporting labour-intensive products and importing capital-intensive products ) Nevertheless, the theoretical techniques (and many of the assumptions) used in deriving the H–O model were subsequently used to derive further theorems. The Stolper–Samuelson theorem , which
15498-421: 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 Reverend Thomas 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
15624-892: 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
15750-437: 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
15876-453: Was transformed. Exchange rates became very volatile and there was an extended series of damaging financial crises. One study estimated that by the end of the twentieth century there had been 112 banking crises in 93 countries, another that there had been 26 banking crises, 86 currency crises and 27 mixed banking and currency crises, many times more than in the previous post-war years. In making an influential case for flexible exchange rates in
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