Economics is an amazing science. It covers more ground than any other discipline because whenever we work with money or make a decision, we’re participating in economics.
I’m fond of using exercises to help organize thoughts and illustrate points. The following exercise was an attempt to describe economics in one word. Because it only works once if I do it I solicited the help of my friends on Twitter. The following are their responses, click their links and be sure to follow them:
What my dear Twitter friends did not know was that I was using them to illustrate a point: most of us don’t know what economics is. The list of suggestions ranges from the specific to the sarcastic, and this reflects our attitudes towards economics. Our perception of economics has been manipulated by media coverage of 5 or 10 select economists that specialize in the macroeconomy. The macroeconomy is things like unemployment and GDP. Ben Bernanke is a macroeconomist.
There are whole other realms of economics that will never get national coverage. For example, let’s say you’re starting up a business making your new product, widgets. You need to know the industrial make-up of your suppliers and buyers to know where you’ll have the most bargaining power. You need to know your competitors or whether or not new competitors can move in and take over your industry. You need to know how many widgets you must make to break even and at what price. This has traces of finance, negotiation, accounting, and supply chain management; it’s all economics. The academics studying these things are economists just as much as Bernanke. This is just one of many realms of economics.
The financial crisis and resulting recession have not only made economics a more well-known science, but also branded it with a scarlet letter. Economists are smart cookies and have caught on to this. Perhaps the best example is the fact that this year’s winner of the highest award in economics goes to two folks who have focused their careers on subjects other than finance and the macroeconomy. The highest award is not a Nobel Prize, though it is called one. Its official name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. There were two winner which split the $1.4 million prize; Elinor Ostrom for her work on shared resources, and Oliver Williamson’s contributions are marginally significant to the large companies.
I didn’t mean to pick on my Twitter friends above. In fact, taken collectively, it does a decent job of covering economics. I was hoping someone would take my idea so I could feature them, but great minds don’t think alike. My one-word description is “assumptions”. A lot of economic theory relies on assumptions. Assume the market is a monopoly, assume inflation is steady, this model works assuming prices don’t spike etc… It allows economists to simplify complicated subjects. I’m mostly picking on economists because using these assumptions they are able to make accurate predictions of the market. We just only ever hear about when they get it wrong.