Economics

The methodology of economics

The functions of an economic system

Money, income, and the price level

Subfields of economics

Organization and growth of the profession

BIBLIOGRAPHY

References to specific topics in economics will be found throughout this article. For articles giving an overview of some of the major fields of economics, seeEconometrics; Economic growth; Economic thought; History, article oneconomic history; Income and employment theory; International trade; andWelfare economics. For guides to major fields not summarized in single articles, see the entries underAgriculture; Industrial organization; Money; Public finance; andLabor economics.

Economics, according to a widely accepted definition, is the study of the allocation of scarce re-sources among unlimited and competing uses. It is the social science that deals with the ways in which men and societies seek to satisfy their material needs and desires, since the means at their disposal do not permit them to do so completely.

Much of the work of the discipline can be fitted into this framework, and no other comes so close to accommodating all of it. However, the framework has a serious shortcoming: it does not encompass the problem of depression, or the inadequacy of aggregate demand. Most modern market economies experience periods in which large quantities of resources are idle—particularly labor and plant capacity—so that the principal question is not in what way to use them, but how to put them to any use at all. The distinction between the problems of allocating resources among uses and of achieving their full use corresponds very roughly to the distinction between the two main branches of economics: microeconomics and macroeconomics. The latter, however, includes some aspects of money and the general level of prices that also have important implications for resource allocation.

Decisions about resource allocation are made in their simplest form within the household, in the familiar process of “making ends meet,” or budgeting; the original meaning of economics was the practice of economy at the household level. What is now called economics was at first called political economy, to draw attention to its broader theater of action.

The concept of scarcity is crucial to an under-standing of resource allocation. Almost all resources are scarce under most circumstances, in the sense that if they were available without cost, more would be used than could be supplied. Even air, the classic example of a limitless resource, can become scarce. Pure air is now the exception in crowded urban areas and air pollution can be prevented only at substantial costs. Water is free in many places but scarce and costly in and or densely populated areas [seeWater resources]. Goods, such as sand or dirt, that may be free in their original location have costs when they are transported to the places at which they are needed.

The counterpart of pervasive scarcity is the unlimited extent of material wants. The overwhelming majority of the world’s population would always like a little more (often a lot more) income and consumption than it has, almost regardless of the current level. The exceptions to this generalization are of two kinds—ascetics (a rare breed in modern societies) and the minute fraction of the world’s population so wealthy that it need never, so to speak, consult the price column of the restaurant menu. Even among the very wealthy, with no desire to increase their consumption, there are some who seek to increase their incomes as a game or as a means of augmenting their power.

Economics as a social science does not examine what people ought to want, as distinguished from what they do want. The first question lies largely in the realm of ethics, aesthetics, or religion. Nevertheless, much writing by professional economists makes assumptions, explicit or implicit, about the proper goals of economic activity. Such writing can be considered economic philosophy rather than economic science narrowly defined. The former is often called normative economics and the latter positive economics. It is a positive statement to say that, other things being equal, a fall in the price of milk will increase its consumption—and the validity of such a statement can be tested against evidence. It is a normative statement to say that therefore the price of milk should be lowered. The second statement is not subject to disproof by evidence and implies that the speaker has personal or social values according to which the consumption of milk is “better” or more important than competing alternatives. If such values are widely shared, they may form an appropriate basis for social policy, but the validity of the values themselves nevertheless remains beyond the reach of scientific confirmation or testing.

The goals of economic activity are often subsumed under the heading “utility,” a construct embracing all of the satisfactions to be obtained through consumption, production, and related behavior [seeUtility]. It is generally assumed that the objective of economic activities is to maximize utility, subject to the limitations of resources, and that utility will be increased by the increased consumption of goods and services. In principle, utility can also be increased by such intangible factors as beautiful scenery, pleasant working conditions, amiable companions, or political power. However, such desiderata are seldom explicitly introduced into economic analysis, for a variety of reasons—some are not subject to measurement, some cannot be produced through economic activity—and when they are specified in detail almost all are very differently evaluated by different people. Moreover, some lie in the domains of other social science disciplines whose methods are better suited to analyze them. The assumption that the principal goal of economic activity is to produce goods and services, while clearly an oversimplification, is nevertheless useful in a wide variety of problems and can be modified in special cases, as seems appropriate.

In a dictatorship the utility to be maximized is that of the dictator; in a slave society it is that of the slave owners rather than the slaves. In free societies it is usually assumed that each person seeks to maximize his own utility and in general will be the best judge of how to do so.

An improved method of raising beef increases utility for beef-eating Americans or Argentines, although not for vegetarians; however, the explanation of such cultural, religious, or taste differences in assessing the value of additional output is not the economist’s task. The national output includes bread and circuses, cathedrals and billboards, vitamins and poisons. The economist can study the forces affecting the market price or cost of each and under some circumstances can also say that a market price does not correctly reflect the underlying values of consumers and producers. Like any other citizen, he has personal opinions based on values that transcend market values, but if he cloaks these with the authority of his discipline, he arrogates wisdom.

The economic value of a particular good will not ordinarily depend on the use to which it is put— the price of a stick of dynamite is the same whether it is used to mine coal or to blow up a bridge.

Almost all societies would judge the value of the outcome to be positive in the first case and negative in the second, but the standards by which this judgment is made are not provided by economists in their scientific capacities.

The methodology of economics

The purpose of science is to achieve understanding either for its own sake—the satisfaction of “idle” curiosity—or as a basis for prediction and control. Although both elements are present in economics, the latter is particularly evident. [SeePrediction and forecasting, economic.] The predictions sought generally refer to the aggregate behavior of sizable groups of people and not to the behavior of individuals. In most economic inquiries it is sufficient to reach such conclusions as that in a given market the consumption of milk increases 1 per cent in response to a 2 per cent reduction in its price; the economist ordinarily does not care whether this occurs because each family increases its consumption 1 per cent or because half the families increase their consumption 2 per cent and the other half not at all. (This indifference will disappear if the division of families into two groups is nonrandom; for example, it might be valuable to know that low-income families increase their consumption more than high-income families.) An economist almost never attempts to predict the consumption behavior of a particular individual in response to a price change. In some economic studies, data are used in which the observations refer to individuals; such studies as yet typically fail to explain a major part of the variance in individual behavior.

The focus on aggregates makes it possible to summarize the accumulation of economic knowledge in statements of observed regularities, or “laws,” that do not apply to individuals considered singly. The preceding example about milk is a special case of the “law of demand”—the quantities of a commodity or service purchased move inversely with its price, other things being equal. This law is not contradicted by the discovery that some consumers stop buying a commodity whose price falls, because it no longer confers social distinction on the user (the so-called snob effect), so long as such behavior does not dominate the market for any commodity.

Partly because of the focus of economics on large-group behavior, economists can seldom use the method of laboratory experiment. (The few exceptions lie chiefly on the borderlines between economics and psychology; for example, subjects are given money to spend, gamble, or use in similar economic games.) The use of laboratory experiment is not, of course, a requisite of a science. Among natural sciences much of astronomy and meteorology are similarly disadvantaged. In economics the place of the laboratory experiment is largely taken by other methods of testing hypotheses, in which variables extraneous to the hypothesis being tested can, within limits, be held under statistical, rather than physical, control.

The use of statistical control of extraneous variables corresponds to the common theoretical device of “holding other things constant” in analyzing the functional relationship between two variables. For example, the statement that the consumption of milk increases in response to a fall in price can be represented as a demand curve, a downward sloping line on a graph whose vertical axis measures the price of milk and whose horizontal axis measures the rate of consumption. [SeeDemand and supply.] This relationship assumes that other factors affecting milk consumption, such as consumer income and tastes, do not change. A change in one of these factors will cause the demand curve to shift. A more complicated relationship, which expresses the rate of consumption as a function of both price and income, is often more useful and can be estimated statistically. Such a three-dimensional demand surface is hard to show graphically and is therefore less common in elementary expositions.

A more complete analysis of the market for milk would include the conditions of supply as well as of demand. The relationship between the price of milk and the quantity supplied (generally positive, or upward sloping) is known as the supply schedule or the supply curve. Together the supply and demand curves determine the quantity sold and the price. For given supply and demand conditions, the position so determined is a stable equilibrium position, and quantity and price will tend to return to it if the market is subjected to a small accidental disturbance. [SeeEconomic equilibrium.] However, if the disturbance changes the underlying conditions of demand or supply, the market will move to a different equilibrium position. For ex-ample, if the taste for milk changed so that people wanted it more than before, the result would prob-ably be a permanently higher consumption of milk, perhaps at a higher price.

The method that confines analysis to comparisons of the initial and final equilibrium positions of a market or system of markets is known as the method of comparative statics because it is not concerned with the path of the adjustment through time—that is, with such questions as whether milk consumption expands first quickly and then slowly in response to some initial impetus or expands at a steady rate. Dynamic analysis is concerned with the time path of movement. [SeeStatics and dynamics in economics.] For example, in a study of hyperinflation the time pattern of response to a previous increase in the price level is a crucial attribute of a satisfactory theory. Although “static” is sometimes used as a term of reproach and “dynamic” as one of praise, the choice between dynamic and static analysis must rest on the nature of the problem, with no general presumption that one is superior. Dynamic analysis requires additional knowledge about human behavior—knowledge that is not always available, for it involves knowing not only how people respond to economic stimuli, but at what rate.

As the foregoing observations suggest, economics makes extensive use of quantitative data and has a large body of abstract theory that can be extended and explored for consistency through the use of formal logic. For this reason economists began to use mathematics and statistics earlier and more intensively than most other social scientists. [The use of such methods in economics is discussed inEconometrics.]

The functions of an economic system

We now turn to an overview of the substance of economics and in particular to the central problem of resource allocation. This will be approached through a classification of the functions of an economy devised by Knight (1933). Of his five functions, we shall consider four, designated here as: (a) determining the composition of output; (b) organizing production; (c) distributing the product (or income); and (d) providing for the future. (The fifth concerns the allocation of a fixed stock of goods over short periods of time.) Later we shall turn to the discussion of money, the price level, and the level of employment, which, as noted earlier, lie largely outside the resource-allocation framework.

Determining the composition of output

Modern societies determine what to produce in two basic ways—through political or governmental decisions and through the use of markets. These methods can be combined in varying proportions. Even in a country as noted for the use of markets as the United States, many important classes of goods and services—such as schools, roads, police protection, and national defense—are provided wholly or largely outside the market system in the sense that consumers pay for them through taxes rather than by the direct purchase of the services. The nonmarket sector is much larger in such socialist countries as the Soviet Union, and their reliance on the market to guide production decisions is usually weaker where markets are used. However, even the Soviet Union has a few legal private markets, particularly for perishable farm produce. The activities in which government services are provided without explicit charge are not coextensive with the government sector of an economy—for example, government post offices sell mail services to users by means of postage stamps (though not always at prices that cover costs), much as private businesses sell their services.

In the market sector, consumer preferences are transmitted to producers through decisions to purchase the goods and services offered for sale. (Producers may also use survey techniques or experimental markets to test consumer acceptance of new products [seeMarket research].) When consumers want more of a product that is sold on a free market, its price will tend to rise and its production will become more profitable. Existing producers will increase their output and new producers may enter the market. Conversely, if consumer desires for a product weaken, prices and output will tend to fall. [SeeDemand and supply] Although prices are in general the best signals to producers of changes in the pattern of demand, consumer preferences can also be transmitted through markets in which prices are fixed. In such markets, decreases in demand are indicated by unsold inventories of goods or by idle capacity to perform services; increases in demand are indicated by the disappearance of inventories and by queues. Most markets for consumer goods in socialist economies operate in this fashion, as do those monopolistic markets in capitalist economies in which prices are administered by sellers.

In socialist economies, decisions about the quantities of resources to devote to consumer goods are made centrally through government planning. Once these decisions are made, the planners have an incentive to heed market signals of surpluses and shortages and to allocate resources to particular products or to change product prices so as to achieve maximum consumer satisfaction with the allotted resources. However, the mechanisms for doing this in planned economies are not yet very successful. [SeeCommunism, economic organization of; andPlanning, economic, article Oneastern europe.]

An economy in which all markets were fully responsive to changes in consumer tastes would exemplify consumer sovereignty [seeConsumer sovereignty]. Complete consumer sovereignty under free enterprise would require the absence of monopolies, so that consumers could be provided with that amount of each commodity whose costs of production they were just willing to pay. (A monopoly would be able to restrict output below this level to obtain a price in excess of costs.) In equilibrium such a system would have the property, given the distribution of income, that the composition of output could not be changed without reducing the satisfaction of one or more consumers. Informative advertising would be permissible, or even desirable, but advertising that persuades without informing represents a departure from consumer sovereignty [seeAdvertising, article oneconomic aspects]. In principle, consumer sovereignty would be possible in a socialist economy if planners were willing to abide by decision rules that simulated the behavior of competitive markets.

The pattern of production resulting from consumer sovereignty depends not only on consumer tastes but also on the distribution of income and wealth. If income and wealth were redistributed more equally, there would be less production of goods and services consumed largely by the highest income groups (Cadillacs, domestic service) and by the lowest (potatoes, bus rides). Theoretically, there is less equality in decision making through the market than through democratic political processes, for in political elections each person has one vote, while in the market his “voting power” is proportional to his expenditures. The actual contrast is less sharp, for there are concentrations of political power as well, and not every citizen has equal influence on the outcome of political decisions.

An important advantage of a market system is that it characteristically provides for the tastes of minorities. It is often worthwhile for producers to make a product wanted by only a few people, provided that these few are willing to pay a little more than the price of a standard commodity. Consider, for example, the large number of different varieties, sizes, and shapes of bread offered for sale in a big city with a diverse population. By contrast, the provision of goods or services by governments has tended toward standardization and uniformity. Some critics of market economies view this variety as wasteful and argue that the efficiencies of standardization outweigh the importance of minor differences in tastes.

The market system also offers strong incentives to producers to develop new or improved products, in the hope that these will gain consumer acceptance and prove profitable. Innovation in consumer goods is a more conspicuous feature of market economies than of planned economies, although neither system can guarantee that innovations which would succeed will always be forthcoming.

Organizing production

Production is the combination of resources (factors of production) to produce desired output. Early in the history of economics the concept of production was associated with making physical products. Agriculture, mining, manufacture, and construction were considered productive activities, whereas transportation, trade, and such services as education were not. This distinction has long been abandoned. It is now recognized that transportation and trade add to the value of commodities by making them available where they are wanted and that furnishing services can contribute as much to the satisfaction of consumers as furnishing commodities [seeInternal trade].

Specialization and exchange and the division of labor are central concepts in the economics of production [seeSpecialization and exchange]. In undeveloped economies, much production is carried out by individuals and small groups (families, tribes, communities) which consume their own output. For example, in the early colonial period in North America, families usually grew or caught most of their own food, built their own houses, and made their own cloth, clothing, furniture, soap, and candles. In modern economies, most workers are specialized in the production of a particular commodity or service and usually perform a specialized task within the production process. Specialization increases output because workers acquire specialized skills and save time that would otherwise be spent in switching from one activity to another. Specialization usually enlarges the scale of production, and large-scale production justifies the use of expensive specialized tools and machinery. Moreover, the production of each good can be carried on in the most suitable locations. Although within some limits the division of labor undoubtedly increases output, it is sometimes argued that it deprives the worker of the satisfaction of creating a complete product and of variety in job content, thereby also diluting standards of craftsmanship and contributing to industrial unrest.

The possibility of specialization rests on the principle of relative advantage, which states that it is advantageous for a productive activity to be carried on by an inferior producer, provided that the superior producers are even more superior at doing something else. To take a familiar example, suppose that a doctor can mow his lawn in an hour, and the best gardener he can hire takes two hours. It will nevertheless pay him to hire the gardener at $2 an hour if he can earn $5 in an additional hour of medical practice. (We assume that the doctor attaches less than $1 an hour of recreational value to lawn mowing.) The principle just illustrated also underlies the specialization of production among nations and is therefore the cornerstone of the theory of international trade. [SeeInternational trade, article onTheory.]

Efficient production involves combining resources so as to minimize the cost of the output. We are all accustomed to partial measures of efficiency that relate useful output to the use of a single input— for example, miles per gallon of gasoline as a measure of the efficiency of an automobile. Partial measures of efficiency or productivity, such as output per man-hour, are also found in economics, but economists are usually more interested in the efficiency with which all resources together are used. A measure of this is “total factor productivity”— that is, useful output divided by the total input of economic resources, weighted by their respective prices or costs. [SeeProductivity.] This measure reflects the condition that it pays to conserve one factor by increasing the use of a second only if the added costs of the second factor are less than the value of the savings of the first. For example, an automobile that runs more miles per gallon is economically inefficient if the added cost of the better engine exceeds the cost of the gasoline saved over its lifetime, both valued at the same point in time.

Economists have long thought of resources, or inputs, in three traditional categories: land, labor, and capital. Land consists of the natural properties of soil, minerals, and climate; labor, of the current services (mental and physical) of humans; and capital, of such things as structures, machines, vehicles, livestock, inventories, and improvements to land such as clearing and terracing [seeCapital; Land; National wealth; Agriculture, article onCapital]. There is, however, nothing sacred about this particular trinity. The traditional factors are often very difficult to separate, as in the case of land and improvements to it. The factors can be more finely subdivided (for example, management can be distinguished from labor), or the scheme can be extended to recognize additional inputs, such as entrepreneurship [seeEntrepreneurship]. Humans can also be regarded as embodying investment made through education and training [seeCapital, human].

The relation between the combination of inputs in a production process and the resulting output is like a recipe in which labor, capital, and other classes of inputs replace such ingredients as butter, eggs, and milk. Such recipes are called production functions. [SeeProductionandEconomies of scale.] Cookbook recipes usually call for constant proportions of the various ingredients; in economic production, however, the proportions of inputs are generally varied in response to changes in factor prices so as to subst’lute less expensive for more expensive inputs. Although the possibility of substitution among factors may be limited by technology, it is often much greater than might at first be supposed. Steel mills in the United States, where labor is expensive, and in India, where labor is cheap, may use very similar basic production processes, yet Indian mills will find it economical to use much more labor and less capital in such auxiliary operations as materials handling.

For some purposes, the cost of an input is adequately represented by its market price. For others, one must turn to the more fundamental concept of opportunity cost, or alternative cost, which states that the cost of employing a unit of a factor of production in any activity is the output lost by the failure to employ that unit in its best alternative use. For example, the cost to the economy of changing the use of a tract of land on the outskirts of a city from farming to residences is represented by its value as farmland, which in turn depends on its contribution to farm output. However, if there were several residential or industrial development plans in each of which the value of the land was higher than in farming, the cost of using it in any one plan would be its highest value in any of the others. [SeeCost.]

Difficult problems arise when some of the outputs or inputs in a production process have no market value or when some of the costs of productive activity are not borne by the enterprise engaged in it. The evaluation of a proposal to convert farm-land near a city into a free public recreation area is essentially a question of judging whether the benefits exceed the costs. Production costs imposed on parties not engaged in the production process are exemplified by air and water pollution from industrial wastes, especially where the losses are so widely diffused that individual lawsuits to recover damages are impractical. [SeeExternal economies and diseconomies.] The presence of benefits or costs with no market valuation often leads to government regulation or intervention (such as the zoning of land or the prohibition of child labor) in the production processes of market economies.

In the classical period of economics, until about 1870, it was held that the cost of production determined the price or value of a commodity [seeValue, labor theory of]. The beginning of the neoclassical period is marked by the recognition that value is jointly determined by cost and by demand. The costs of producing a commodity often rise as total output is expanded and as resources less suited to its production are drawn into use. In such cases, an increase in demand requires the expansion of production into areas of higher costs and therefore causes an increase in price. However, changes in price can also arise on the supply side through changes in the underlying cost conditions, including changes in the supply of productive resources or in the technology of production, and through changes in the extent of monopoly power.

Once resources have been committed to a particular kind of production, they often cannot be easily withdrawn. For example, only a small fraction of the original construction cost of a railroad line could be retrieved as scrap value or from sale of the right of way. The remaining original construction costs, often called fixed costs or sunk costs, become irrelevant to day-to-day decisions about pricing and the nature of service. It will pay for the line to continue in operation if a pattern of prices and service is possible in which revenues cover current operating costs and interest on salvage value. Financial losses to the owners of specialized fixed capital are not social losses, and are not really costs, since such capital has no alternative use. As specialized capital equipment wears out, the costs of replacing it become relevant to decisions concerning the abandonment or continuation of the activity in which it is used. Analogous problems arise in the case of labor with specialized training.

The period within which some costs are fixed is called the short run; in the long run, all costs can be changed by changes in inputs. The length of the short run in chronological time varies with the nature of the production process and the durability of the capital goods used. It may be a hundred years for a hydroelectric project and a few weeks for an establishment making inexpensive cotton dresses.

Decisions about the organization of production also involve determining the lowest-cost location of productive facilities. Some kinds of facilities are located where raw materials are accessible (iron and steel mills, for example). Some activities take place close to sources of low-cost power (aluminum reduction and production of electrochemicals), others close to important markets for the product (automobile assembly), and still others where suitable labor is available or inexpensive (manufacture of garments). [SeeSpatial economics.]

Distributing income

The third basic function of an economy is to distribute income. In a society based on subsistence agriculture most income is distributed in kind; each family consumes largely the products of its own labor and land. In complex economies most income is distributed in money, representing generalized purchasing power or command over all goods and services offered for sale. The dominant use of money-income payments results from both specialization in production and the increasing variety of things consumed. The producer uses money income to purchase small quantities of many products, not necessarily including the one that he himself makes.

Income is the net value of production during a period—the amount available for consumption or net saving after initial wealth or capital has been maintained. In other words, income is the maximum amount that an economy (or an individual) could consume during a period without becoming poorer. If actual consumption is less than this, there has been saving during the period, and wealth has increased.

The functional classification of income depends on the kind of productive services furnished by the income recipient [seeIncome distribution, article onfunctional share]. Wages and salaries are the return for furnishing labor services, interest is the return for furnishing capital, and rent, in one sense of the term, is the return for furnishing land [seeWages; Interest; Rent]. (These categories are less neat in income statistics than in theory; a landlord who receives rent for a building, for example, is furnishing both land and capital.) The income share called profit is hard to identify with a particular factor of production. Much of what is called profit in both business and national accounts is a return to equity capital and corresponds to interest in economic theory. Some accounting profit represents a return to positions of monopoly power, sometimes called rent in another sense of the term. The residual, or “pure,” profit is regarded by some economists as the return to entrepreneurship or to innovation and by others as a return (either positive or negative) for taking noninsurable risks. [SeeProfit.]

Certain streams of payments to individuals, called transfer payments, do not correspond to any current contribution to production, but are claims of one set of individuals against the income of another. Public assistance is one example. The sum of wages and salaries, rent, interest, and profits exhausts the national income, and transfer payments arise from a secondary redistribution of these shares.

The basic principle of income distribution in a private enterprise economy is that individuals should receive as income the value of their contribution to production, including both the value of their labor and of the services of any productive land or capital that they own. This system gives each person an incentive to use his resources fully and where their contribution to the value of output is greatest. In practice, differences between the contribution of a factor to production and the income it receives can be caused by some kinds of imperfections in the markets for productive services. The income distribution is also modified by transfer payments, which are received largely by low-income groups; by the provision of free government services; and by taxes, particularly progressive personal income taxes. For most capitalist countries, these modifications seem to work on balance in the direction of greater equality of incomes.

The distribution of incomes in capitalist societies has long been criticized by socialists and reformers as too unequal. The best known competing principle is that of Marx: “From each according to his abilities, to each according to his needs.” No large, complex economy has ever operated on this principle for more than brief periods, although it may operate in certain religious orders and cooperative communities. Attempts to apply the Marxian principle have broken down because of two problems, assessing needs and maintaining incentives to work and to save.

The main difference between the principles of income distribution in contemporary capitalist and socialist countries lies in the treatment of nonlabor income. In both types of economies, workers are paid approximately in accordance with the value of their work. In the socialist countries, however, almost all productive capital is owned by the state, so that personal income from property is negligible. (In the Soviet Union some private income arises from interest on savings deposits and government bonds and from the private ownership of livestock by collective-farm families.) In capitalist economies, property income is much less equally distributed than labor income. It does not follow, however, that the distribution of income, as a whole, is more equal in socialist countries. In developed capitalist countries, labor income is the great bulk of total income; a somewhat less equal distribution of labor income in socialist than in capitalist countries could therefore offset the effect of the property share on the equality of total incomes and probably does offset much of it. However, there appears to be no counterpart in socialist economies to the very highest incomes under capitalism.

The distribution of income among persons is not only unequal but asymmetrical. Almost all income distributions are markedly skewed to the right; a concentration of individuals below the mean is balanced by a long “tail” much above the mean. Since natural abilities were long assumed to be symmetrically distributed and most income was seen as a return to various abilities, the skewness of real-world income distributions motivated much work by economists and statisticians. [SeeIncome distribution, article onsize; andSize distributions in economics.]

The major social problem related to the personal distribution of income is poverty, an older and more pressing concern of economists and sociologists. In economies at a low level of development, most peasants and unskilled workers are considered poor. In the highly advanced economies, relatively few families with employed male heads are considered poor; poverty is largely a problem of the aged, the disabled, the long-term unemployed, and households with female heads. However, there are exceptions. For example, in the United States there are a substantial number of poor farm families and poor Negro families headed by employed men. [SeePovertyandConsumers, article’onconsumption levels and standards.]

The definition of poverty has varied with time and place. In the United States in the mid-1960s, a widely accepted definition was that families with incomes below $3,000 a year were poor; about one-fifth of all families fell below this mark. In earlier times or in underdeveloped countries, the standard of living embodied in this definition would be viewed as comfortable or even luxurious. If the accepted poverty line moves upward as fast as average income, the elimination of poverty becomes exceedingly difficult. But however elusive the definition of poverty, the social problem is real and serious. Low income is a major factor contributing to crime, disease, and ignorance, which in their turn can give rise to new generations of the poor.

Policies to combat poverty fall in three general categories: public assistance or relief, rehabilitation and retraining, and the regulation of product and factor prices. Economists have tended to criticize the simplest forms of direct relief, once on the ground that they raised the natural rate of increase of poor populations and more recently on the ground that they weaken the incentive to work. Education, rehabilitation, and retraining have been preferred because they attack and sometimes eliminate a fundamental cause of poverty—the small actual or potential contribution of low-income workers to production. For the aged or disabled, social insurance is increasingly viewed as the best approach to assuring a decent minimum standard of living [seeAging, article onEconomic aspects].

Greater equality of income is also an announced objective of numerous public policies that directly alter product or factor prices. For example, agricultural price and income policies in many countries raise the incomes of farm families, which are usually lower than those of urban families. Such policies may increase the income of the favored sector, but often not that of the poorest families within it. Such policies also tend to restrict output or distort the allocation of resources, so that the choice is between a given national income unequally shared and a smaller one somewhat more equally shared. Indeed, the result is sometimes to lower income without increasing equality at all. [SeeAgriculture, article onprice and income policies; Subsidies.]

The demand for equalization policy is especially strong in times of war or disaster, when there is a general disposition to prevent the rich from bidding up the prices of goods in short supply. To achieve “fair shares” or “equality of sacrifice,” the role of money in the distribution of income is often supplemented by the direct rationing of certain scarce items on a per capita basis or to users whose needs are judged to be greatest. Such policies also have substantial efficiency costs, which may reduce the income available for distribution. [SeePrices, article Onprice control and rationing.]

Providing for the future

The fourth major function of any economy is to provide for the future through the conservation of natural resources, the maintenance or replacement of existing stocks of physical capital, and the net accumulation of capital. Increases in the stock of human skills and in the fund of accessible knowledge also are important in providing for the future.

The views of economists on conservation often clash with those of others, including natural scientists [seeConservation, article oneconomic aspects]. Two main kinds of conservation problems can be identified, the first of which arises when a resource, such as wild game or fish, cannot be owned. No hunter has an incentive to spare an animal today so that he may take it in the future, for if he fails to act now, the game may be taken by someone else. Conservation under these conditions requires such government controls as closed seasons and bag limits. Interesting economic problems arise in defining the optimum size of the population to be conserved.

Less severe policy problems arise where resources can be owned, as can land and solid minerals. (Oil and natural gas are an intermediate case.) If the owners of such a resource believe that it is becoming scarce and that few substitutes will be available, they have an incentive to conserve it in order to gain from the eventual rise in its price. The higher the cost of holding this asset, including the rate of return on alternative forms of wealth, the weaker will be this incentive. Nevertheless, overexploitation of resources can occur in such cases because of ignorance on the part of resource owners or because the interest rate confronting them does not correctly reflect the social cost of capital.

A larger part of the problem of providing for the future is that of maintaining and increasing physical capital. Capital is increased through saving, much of which is undertaken by individuals to provide for personal contingencies, such as illness and old age, and to accumulate wealth to bequeath to descendants or others. Saving is also undertaken because it yields income (interest), which corresponds to the productivity of capital in production. If the rate of interest is 6 per cent, refraining from consuming $100 of income this year will make possible consumption of $106 next year; alternatively it will make possible the consumption of an income stream of $6 in perpetuity. The return on capital provides both an incentive to accumulate and an incentive to refrain from using up present capital.

Investment provides capital for a growing population and also increases the amount of capital per person available to raise output per head. With unchanging technology the return on capital would tend to fall as the best investment opportunities were used up; however, this tendency is offset by technological changes that create new investment opportunities. The theoretical problems involved in measuring the stock of capital and discovering the principles that determine its yield are among the most difficult in economics. [SeeCapital.]

Determining the optimum rate of investment in a growing economy also raises difficult problems, which have received increasing attention in mathematical economic theory [seeInterestandEconomic growth, article onmathematical theory]. The crucial elements in this analysis are the rate of growth of population, the rate of return on capital, the rate of technological change, and the weights to be attached to the satisfaction of present and future generations.

Society requires many kinds of capital. One important way of classifying these distinguishes capital used in production from that used directly in consumption, such as houses, private automobiles, and home appliances [seeConsumers, article onconsumer assets]. A second important classification distinguishes the capital used in the production of a particular product, such as livestock, machinery, or factories, from capital—such as roads, water supply systems, communications facilities—that enters indirectly into the production of many products. The latter, called social overhead capital, is often publicly owned. [SeeCapital, social overhead.] Adequate provision for overhead facilities may be prerequisite to investment in the production of specific products.

Investment in new physical capital or the acquisition of existing physical assets by individuals, corporations, or governments often requires the investor to raise funds externally by borrowing or issuing shares. In the public mind the resulting financial assets, such as mortgages, bonds, and stocks, are more often identified with capital than are the underlying physical assets. Savings are made available for investment when financial assets are purchased by individual savers or by financial institutions, such as savings banks and insurance companies, in which savers hold their funds. [SeeFinancial intermediaries.]

A third important way of providing for the future is through technological change, including the discovery of new products and processes. Technological change in its broadest sense involves a wide range of activities: the growth of fundamental scientific knowledge through basic research, the invention of machines and methods, the dissemination and diffusion of knowledge through education, and the introduction of new methods in particular applications. An increased stock of knowledge is a more important legacy to succeeding generations than an enlarged stock of physical capital. New technology is usually incorporated, or “embodied,” in the stock of physical capital and in the skills of the labor force. [SeeInnovation; Research and development; Agriculture, article onProductivity and technology.]

Money, income, and the price level

So far our discussion of the functions of the economy has proceeded with little reference to money, yet all but the simplest economies would grind to a halt without this essential lubricant. Some specialization and exchange can take place with the aid of barter, the direct exchange of one commodity or service for another. However, barter requires that each party wants the exact kind and quantity of goods offered by the other, which would happen only by coincidence. Money, by freeing exchange from this coincidence of double demand, permits specialization to be greatly extended. The use of money as a medium of exchange therefore appears very early in economic development; money also furnishes the unit of account and, with other assets, serves as a store of value. [See the general article onMoney.]

Early money consisted of scarce commodities of various kinds, especially precious metals, and the minting of metals into coins was one of the earliest economic functions of the state. In modern economies, banknotes and other paper currency have replaced coins, except in small transactions. These notes were originally redeemable in gold or silver; this has now become uncommon. Paper currencies were once thought to derive their value only from their convertibility into metallic money; however, experience has not supported this belief. It is now clear that money derives its value from its usefulness as a medium of exchange and that irredeemable paper currencies can have stable or even rising value if their issue is restricted.

The largest part of money in developed economies consists of bank deposits, usually transferable by check. Banks, through their lending operations, can create and destroy money in the form of bank notes and deposits. Recognition of this has led to their regulation by central banks (usually agencies of the government) as a means of controlling the quantity of money and thus affecting its value. [SeeBankingandBanking, central.]

The value of money may be defined as the reciprocal of an index number of the general level of prices [seeIndex numbers, article onpractical applications]. Changes in the price level are important because not all individual prices are equally affected and relative prices and resource allocation are therefore influenced. In particular, changes in the price level affect the distribution of real wealth and income; a sustained rise in prices, or inflation, enriches net debtors at the expense of net creditors because the debt is stated in nominal or monetary units rather than in terms of command over real goods. A sustained fall in prices, or deflation, has the opposite effect. [SeeInflation and deflation.]

One of the best developed theories of the value of money is the quantity theory [seeMoney, article onquantity theory]. The demand for money, or cash balances, arises because money lowers the cost of making transactions. Recent formulations of the quantity theory express this demand as a function of real income or wealth, the expected rate of change of prices, the interest rate, and other variables. This function is thought to be reasonably stable in the long run, in which case the general level of prices is largely determined by changes in the quantity of money. Inflation results from sustained increases in the money supply relative to real income, and deflation from sustained decreases.

Changes in the demand for money under conditions of constant supply can often be inferred from the turnover rate of the money supply, usually called the velocity of circulation [seeMoney, article onvelocity of circulation]. A decreased desire to hold money would lead to a rise in velocity as holders sought to dispose of excess balances; an increased desire to hold money would lower velocity.

A decrease in the stock of money or its failure to grow as fast as productive capacity can cause, or contribute to, a fall in aggregate demand, output, and employment. Similarly, increases in aggregate demand brought about by increases in the stock of money or by other means will cause increases in output and employment when there is unused productive capacity. Once capacity is fully used, further increases in aggregate demand only raise the price level. Since capacity output will not be reached at the same moment in all branches of the economy, an intermediate zone exists in which increases in demand will increase output and prices simultaneously. However, behavior in this zone need not be symmetrical for increases and decreases in demand. A decrease in demand is likely at first to reduce output with little effect on prices.

As this suggests, money is a crucial element in economic fluctuations—the business cycle or the alternation of periods of prosperity and depression and of rising or falling prices—which have been one of the most conspicuous features of modern capitalist economies [seeBusiness cycles]. Economists have long studied the sequence of events in business cycles—the amplitudes of fluctuations, the length of expansions and contractions, and the leads and lags of turning points of series at cyclical peaks and troughs. Such observations have helped in the formation of theories of the causes of business cycles. Special attention has naturally been given to the causes of depression and widespread unemployment [seeEmployment and unemployment].

Interest in the construction of such macroeconomic theories was heightened by the great depression of the 1930s and in particular by the work of John Maynard Keynes. Central to Keynes’s thinking was the concept of deficiency of aggregate demand. If income receivers spent their entire incomes on consumption, such a deficiency could not arise; however, a portion of income is saved, and Keynes held that this portion rises as income rises. [See Consumption function.] Still, no problem arises if desired investment equals saving. All savings will then be spent in the purchase of new investment goods, and the flow of income will continue undiminished. But Keynes argued that this equality need not hold—unfavorable investment opportunities and high interest rates can lead to a reduction in desired investment and an excess of saving. [See Investment.] Under these circumstances, aggregate demand will fall short of productive capacity, real income will drop until saving is equal to desired investment, and there will be persistent unemployment. In Keynes’s view, governments should then create the required demand through an excess of government expenditures over tax receipts.

Until Keynes, orthodox economists had argued that unemployment was caused primarily by excessive wage rates and could be alleviated by wage cuts. Keynes assumed that in modern capitalist economies wages do not fall when output falls. In any case, his emphasis on the adequacy of demand led him to counsel against wage cuts. Wages, he pointed out, are incomes as well as costs, and their reduction could lower employment by diminishing the purchasing power of wage earners and their expenditures on consumption.

A crucial relationship in the Keynesian system is that between the quantity of money and the rate of interest, which takes a form that prevents the interest rate from falling below some minimum level. This “liquidity trap” implies that expansion of the money supply during a depression will fail to lower interest rates and therefore will not stimulate investment. [SeeLiquidity preference; for a discussion of the full Keynesian model, seeIncome and employment theory.]

During the 1930s, concern about aggregate demand stimulated work on systems of national income accounting that record the income and expenditures of the whole economy by sector [seeNational income and product accounts]. The simultaneous development of macroeconomic theory and macroeconomic accounting, among other forces, has led to a fundamental change in the attitude of governments toward depression and unemployment. It is now generally accepted that governments can, and should, act to maintain aggregate demand at levels as close as possible to productive capacity, although there are still important disagreements about the best ways of doing this under particular circumstances. The principal possibilities are to increase the quantity of money and hold down or reduce interest rates through expansionary policies of the central bank, to reduce taxes, and to increase government expenditure. [SeeMonetary policyandFiscal policy.] Opposite measures can be used to control inflation resulting from an excess of aggregate demand over capacity. The use of tax reductions or of increases in government expenditures as means of combatting deficient demand implies that the budgets of central governments should be in deficit in times of less than full employment.

Subfields of economics

The theory of resource allocation (microeconomic theory) and the theory of money, income, and the price level (macroeconomic theory) are the core of economics, whose outlines have been sketched above. Surrounding this core are several specialized fields. The mention of these here must be extremely brief, especially for fields described in single articles elsewhere in the encyclopedia.

Mathematical economic theory applies mathematical tools to theoretical problems in economics. Econometrics applies advanced statistical tools to empirical problems in economics. [For a survey of both fields, seeEconometrics.] Scientists in these fields have an international association, the Econometric Society.

The history of economic thought is the study of the work of past economists and their influence on one another, on other disciplines, and on the world of affairs. In this encyclopedia several schools of economics are discussed as such [seeEconomic thought]. However, the article on economic thought does not discuss the English and American classical and neoclassical schools, whose ideas are reflected in many substantive articles and whose leading figures are discussed in biographies [seeSmith, Adam; Ricardo; Millin the classical period;Marshall; Edgeworth; Jevons; Clark, John Bates, in the neoclassical period;Knight; Robertson; Pigouin more recent years]. Similarly, the Keynesian school of economics is included not under economic thought, but under substantive entries and biographies [seeKeynes, John Maynard; Hansen].

Economic history applies economic analysis to problems that are outside the recent past, although such problems often have implications for the present and future [seeHistory, article onEconomic history]. There has been a strong recent movement toward the application of econometric methods to economic history. Interest in the field has been stimulated by concern about the economies of underdeveloped nations and by the lessons those nations can learn from the economic history of developed areas. Economic historians have an active international association and several specialized journals. Closely related to economic history is the rapidly expanding field of economic development, which covers both the theory of growth and the more practical application of economics to the problems of less developed areas [seeEconomic growth].

Most other specialized fields in economics deal with problems of particular parts or aspects of the economy and the institutions peculiar to them.

Industrial organization considers problems arising from the structure of firms, industries, and markets. The firm is the entity that engages in production in the private sector of the economy. In simple economies, firms are owned by individuals or groups of partners, but large-scale economic activity is now carried out principally by corporations—firms that can be owned by many shareholders, who have no liability for corporate debts beyond the possible loss of value of their shares. Shareholders typically have little control over the affairs of the corporation; effective control is in the hands of professional managers. [SeeCorporation.]

An industry is the set of firms or establishments carrying out some branch of economic activity, although the boundaries of such a branch are not always easy to define usefully. A market in its simplest meaning is a place at which transactions are made; more broadly, it is the whole web of relationships between buyers and sellers. [SeeMarkets and industries.] The boundaries of markets, like those of industries, are often difficult to define.

A central concern of the field of industrial organization is the changes that take place in the character of markets as the number of buyers and sellers increases and as collusion among buyers or sellers becomes more difficult. At one extreme lies monopoly [seeMonopoly]. In principle, a monopoly is a market with only one seller, although all sellers are affected to some degree by competition from other markets. A monopolist in aluminum production, for example, would face the competition of other metals in some uses of his product. Markets dominated by a few sellers (oligopolies) raise interesting theoretical problems concerning interaction and collusion among the sellers, which are often approached through game theory [seeOligopoly]. At the other extreme are competitive markets with many sellers and buyers who do not collude [seeCompetition].

With given technology, competition promotes economic efficiency; monopoly or oligopoly tend to produce restriction of output and higher prices.

However, it is sometimes argued that monopoly is indispensable to technological progress. The advocates of this controversial view contend that very large corporations are necessary for innovation because modern research is too expensive to be carried on by small competitive firms [seeResearch and development].

Other topics considered in the field of industrial organization include processes that change the structure of industry and the government regulation of industry structure, output, and prices [seeAntitrust legislation; Mergers; Regulation of industry].

Agricultural economics is concerned with the efficient use of resources in agriculture, the technology of food and fiber production, the distribution of farm products, and the income and welfare of farm populations [seeAgriculture]. Agricultural economists also study the migrations from rural areas that result from the high rate of natural increase of farm populations and the displacement of labor by improved farm technology. The organization of agricultural production differs sharply between different parts of the world—the family farm owned or rented by the operator, the large collective farm and state farm of the Soviet Union, the tropical plantation employing wage workers. The form of organization has important implications for efficiency and welfare. [SeeLand tenure; Communism, economic organization of; Plantations.]

Labor economics is both a branch of economics and of the interdisciplinary field of industrial relations. Although most of this broader field was once occupied by economists, it has increasingly attracted sociologists, psychologists, political scientists, and lawyers. Labor economists are therefore tending to specialize in the analysis of wages, hours of work, and employment [seeWages; Labor force, article onhours of work; Employment and unemployment]. They share with demographers an interest in labor force participation and also study government regulation of working conditions and the provision of social insurance and other wage supplements [seeAging, article onEconomic aspects; Labor force, article OnParticipation; Unemployment insurance; Workmen’s compensation].

A central institution in this field is the labor union—an association of workers formed to improve wages and working conditions through collective bargaining or political action [seeLabor relationsandLabor unions]. Although labor economists concentrate on the impact of unions on wages and employment, they are still concerned with the growth and internal functioning of unions.

Public finance applies economic analysis to the activities of the state and their impact on the private economy, particularly on the level of income and employment [seeBudgeting; Debt, public; Fiscal policy]. A major part of the field is the study of tax systems, including the effect of taxes on income distribution: whether they fall proportionally on all levels of income, are regressive (take a larger share of the lower incomes), or are progressive (take a larger share of the higher incomes) [seeTaxation]. Other studies of taxes deal with the effect of alternative tax systems on incentives to work, to save, and to use resources efficiently. Another part of the field deals with government expenditures—with determining the kinds of economic activity most appropriate to the state and devising criteria for deciding which particular public projects are worth undertaking [seePublic expenditures].

International economics extends economic analysis to the world economy. A country’s transactions with other countries are summarized in its balance of payments [seeInternational monetary economics, article onbalance of payments]. Some of these transactions are trade in commodities and current services, which reflects specialization among countries in production [seeInternational trade]. Economists study both the actual pattern of trade and the theoretical conditions underlying it; the theory of international trade is perhaps the best developed body of theory in any subfield of economics. The effect of tariffs or quotas on the world economy and on the nation imposing them is a central problem in international trade theory. [SeeInternational trade controls.]

Other international transactions are financial, such as the construction of branch plants in one country by companies owned in another and the flow of liquid capital through securities purchases [for examples, seeInternational monetary economics, article onprivate international capital movements]. Conditions of international trade and capital flows are greatly affected by the relations between the values of various national currencies, now a frequent subject of study and of international discussion [seeInternational monetary economics, articles Onexchange ratesandinternational monetary organization].

The preceding list of the fields of economics is not complete. Among the additional fields often set apart by professional associations, specialized journals, or special courses of instruction are consumer economics, comparative economics, welfare economics, and regional economics. Space limitations preclude any discussion of these here, though they are covered elsewhere in the encyclopedia. [SeeConsumers; Capitalism; Communism, economic organization of; Economic growth; Welfare economics; Spatial economics.]

Organization and growth of the profession

Economics has grown rapidly in recent years, as measured either by the membership of professional associations or by the volume of professional literature. The American Economic Association was founded in 1885 and the Royal Economic Society (then the British Economic Association) in 1890. The former had fewer than 200 members in 1886; it passed the 2,000 mark in 1912. The largest increases, however, occurred between 1940 and 1962, during which time the American Economic Association grew from just over 3,000 members to more than 11,000. In 1959 there were about 5,000 fellows of the Royal Economic Society. As of 1964 there were 37 national economic associations affiliated with the International Economic Association, including 20 in Europe, 7 in Asia, and 6 in the Americas.

The growth of professional literature has been just as impressive. In 1961–1962 an Index of Economic Journals was published, covering only articles in English. It requires 270 pages to index the articles published in the 38 years between 1886 and 1924, and 533 pages for the 5 years between 1954 and 1959. The oldest journal covered is the Zeitschrift fur die gesamte Staatswissenschaft (Tübingen), founded in 1844. The next, the Quarterly Journal of Economics (Cambridge, Mass.), began in 1866. By 1900 there were seven—three in the United States, two in Germany, and one each in Britain and Sweden. The number of journals covered in 1961–1962 was 76, of which 29 were published in Europe, 24 in the United States and Canada, 19 in Asia, and 4 in Africa. The Index omits many more journals that publish no material in English.

Most economists are teachers in colleges and universities, although employment in business and government is increasing. Within universities most economists are in departments of economics, but in the United States there are also many on the faculties of schools of business, both graduate and undergraduate. Economists in business schools have worked closely with statisticians and applied mathematicians on problems of business decision theory and operations research.

Economists employed in business are sometimes engaged largely in descriptive statistics and public relations and have had little professional training. A growing number of business firms, however, employ economists with graduate training to do economic analysis.

Perhaps the fastest growing use of economists, almost everywhere, is in government—at all levels from municipalities to international organizations, but particularly in national governments. Economists are involved in a large number of different government functions. Many are involved in collecting and analyzing statistics and preparing statistical estimates such as national income accounts and prices indexes. Economists in central banks and treasuries or ministries of finance are engaged in formulating and executing monetary and fiscal policies. Still others in such agencies as budget bureaus or ministries of defense may be making cost–benefit analyses of public works projects or weapons systems. One of the most important roles of government economists is in central planning organizations, ranging from the very large and powerful central planning agencies of the communist countries, through the highly influential planning agencies of France and the Netherlands, to the largely advisory bodies like the Council of Economic Advisers in the United States.

An example may suggest the impact of changes in economic thought on government policy in the past three decades. In 1932, at the depths of the great depression, when the unemployment rate was over 20 per cent, the United States sharply increased the rates of a number of excise taxes and introduced several new ones in an effort to reduce the budget deficit. Shortly afterward John Maynard Keynes was to argue that such a policy would prolong a depression. In 1964 the United States reduced income taxes sharply in the face of a budget deficit because the unemployment rate of 5.7 per cent was unacceptably high, and it is probably not accidental that unemployment soon began to fall.

The contrast between these opposite policies illustrates strikingly the influence, in this instance a salutary one, of economic thought on policy. This influence is an important force drawing students into the discipline, but it also imposes on economists obligations to develop skills and judgment commensurate with their responsibilities.

Albert Rees

BIBLIOGRAPHY

works on the methodology of economics

Friedman, Milton (1953) 1959 Essays in Positive Economics. Univ. of Chicago Press. → See especially Chapter 1.

Keynes, John N. (1891) 1955 The Scope and Method of Political Economy. 4th ed. New York: Kelley.

Knight, Frank H. (1933) 1951 The Economic Organization. New York: Kelley. → A paperback edition was published in 1966 by Harper.

Koopmans, Tjalling 1957 Three Essays on the State of Economic Science. New York: McGraw-Hill. → Makes considerable use of mathematics.

Machlup, Fritz 1963 Essays on Economic Semantics. Edited by Merton H. Miller. Englewood Cliffs, N.J.: Prentice-Hall.

Robbins, Lionel (1932) 1937 An Essay on the Nature and Significance of Economic Science. 2d ed., rev. & enl. London: Macmillan.

general textbooks and journal references

American Economic Association 1961–1965 Index of Economic Journals. 6 vols. Homewood, III.: Irwin.

Bach, George L. (1954) 1966 Economics: An Introduction to Analysis and Policy. 5th ed. Englewood Cliffs, N.J.: Prentice-Hall.

Lipsey, Richard G.; and Steiner, Peter O. 1966 Economics. New York: Harper.

Samuelson, Paul A. (1948) 1964 Economics: An Introductory Analysis. 6th ed. New York: McGraw-Hill.

Stigler, George J. (1942) 1960 The Theory of Price. Rev. ed. New York: Macmillan. → First published as The Theory of Competitive Price.

Stonier, Alfred W.; and Hague, Douglas C. (1953) 1964 A Textbook of Economic Theory. 3d ed. New York: Wiley.

ECONOMICS.

The term economics, from the Greek oikonomika, means a science or art of managing the household. In modern usage, it refers to the efficient allocation of scarce resources in the production, distribution, and consumption of goods and services to satisfy various desires. As a branch of knowledge, economics or economic science is the study of how to efficiently use limited resources—natural resources (land), capital, labor, entrepreneurship, and information—to achieve maximum satisfaction of human material wants. Like other social sciences, economics studies human behavior but focuses on maximizing satisfaction or benefit as efficiently as possible or at minimum cost in the production, distribution, and consumption of goods and services. Hence, economics deals with decision making, theory, and management of the economy or economic systems. The decision makers or economic units of the economic system are households, businesses, and government.

Microeconomics is the branch of economics that deals with individual or specific economic units such as an individual industry, firm, or household and their interactions. In 1817, David Ricardo (1772–1823) wrote on the forces that determine the functional distribution of income and the theories of value and price, and it was from these theories that microeconomic theory originated. Microeconomics in the early twenty-first century includes the theory of consumer behavior, theory of production, and the theory of markets. It deals with such topics as prices of a specific product, the number of workers employed in a specific firm, the revenue or income of a particular firm or household, and the expenditures of a specific firm, government entity, or family. Microeconomic analysis focuses mostly on optimization and equilibrium analysis.

Macroeconomics deals with the aggregate economy and the behavior of its major units—households, businesses, government, and the foreign sector. Developed in the 1930s, macroeconomics was practically invented by the English economist John Maynard Keynes (1883–1946) in his attempt to develop an answer to the Great Depression. Keynes argued that the Great Depression was a problem of insufficient aggregate demand and that if the private economy could not generate sufficient demand, it was the government's responsibility to do so. Macroeconomics focuses on such issues as growth, recessions, inflation, unemployment, and government policy and deals with such topics as total output or gross domestic product (GDP), total employment, total income, aggregate expenditure, and general level of prices.

Historical Development

Although economics originally referred to the management of the affairs of the household (oikonomia in Greek), its meaning evolved into political economy—"[t]he financial branch of the art or business of government" (Milgate et al., eds., vol. 2, p. 58)—then into how to make a country wealthy, and finally into a social science that studies the production, distribution, and consumption of commodities.

The economic problem or the objective of the economic arrangement, be it in a primitive hunting and gathering society or in the most sophisticated modern industrial society, is that of provision—how to use scarce resources to produce goods and services and how to appropriately distribute the product. This problem has remained basically unchanged in human history. Over time, what has differed or changed are the modes of economic organization that correspond to the cultural arrangements in human societies. But the existence of the economic problem is different from an analysis of the economic problem. Organized economic systems existed in ancient Egypt, the great African empires of Western Sudan, the Aztec and Incan civilizations of the Americas, and the Assyrian and Babylonian theocracies. But according to Joseph Schumpeter, there is no trace of analytic effort until Greece. Even the beginning of the analytic effort did not become systematic until the eighteenth century. Hence, as a field of study, economics is relatively young, and only emerged as a full-fledged separate discipline following the publication of Adam Smith's The Wealth of Nations in 1776.

In Western civilization wealth was the primary and original concern of economics, and in economics the questions about wealth concerned the means of acquiring, maintaining, and increasing it. Wealth was seen by Aristotle not as an end, but as a means of achieving ethical and political ends. Whereas the treatment of wealth in the noneconomic fields of religion, history, politics, and the like focused mostly on its distribution and its effect on affluence, poverty, and the state, the approach of the economists was to focus on the means to wealth.

In addition to the attempts to understand the sources of wealth, pioneer economists sought to understand human nature and the sources of value. Human nature has been viewed both in the traditional conservative view as natural and pre-ordained and in the critical liberal view as socially determined. The traditional conservative view from the Middle Ages through slavery in the Americas and the industrial revolution sees ideas, drives, and practices as natural, inherent, God-given, or innate. Hence, the classical and neoclassical economists believed that capitalism was natural and eternal and consumer preferences were given, since individuals were born with them in the same manner that the conservative religious leaders believed that serfdom was natural and the American conservative southerners believed that slavery was ordained by God. Critical economists or the liberal view originating from Karl Marx (1818–1883), Thorstein Veblen (1857–1929), and John Maynard Keynes focused more on the evolution and transformation of economic systems and their impact on people's ideas and preferences. This premise was based on the belief that ideas and preferences are shaped by the society in which people live (Hunt and Sherman).

With all its accomplishments, economics is plagued with a crisis of identity and dissension and disagreements on how it should be taught, how it should be practiced, and how it should be used. Furthermore, the field of economics has been slow in reintegrating itself into the social sciences to become, once again, more problem-driven and more eclectic. Indeed the shift to abstraction and quantification that was started by David Ricardo continued until relatively recently and is at the source of the dispute about the usefulness of economics in modern society. Many economists complain about an undue attention paid to esoteric models, and the tendency by some economists, mostly of the orthodox school, to provide a uniquely economic answer to such social questions as the causes of growth and why some countries are underdeveloped.

Undeniably, as the twentieth century drew to a close, there was a greater recognition of the importance of noneconomic factors in explaining major economic questions and problems. For instance, mainstream economics has come to acknowledge the importance of history, political conditions, sociocultural factors, the environment, geography, and international variables in explaining such economic problems as lack of growth, underdevelopment, inequality, and poverty. This recognition notwithstanding, the field of economics has still not seriously focused on the critical and endemic problems that plague the world. For instance, despite being the least developed continent in the world representing arguably the most daunting economic challenge in modern history, Africa has been all but ignored by economics. This is amazing in light of the fact that the field's supposedly central preoccupation is the problems of income, growth, distribution, and human welfare.

Notable contributions to the field of economics include Richard Cantillon's Essay on the Nature of Commerce (1755), Adam Smith's Wealth of Nations (1776), Karl Marx's Das Capital (1867), Thorstein Veblen's The Theory of the Leisure Class (1899), and John Maynard Keynes's General Theory of Employment, Interest, and Money (1936). Before the publication of the Wealth of Nations, there were other schools of thought whose main preoccupation was wealth creation and the organization of the economy, most prominently, mercantilism and physiocracy.

Mercantilism or bullionism.

Mercantilism or bullionism is a loose economic school of thought whose basic belief is that a nation's wealth originated from gold and silver bullion and other forms of treasure. The mercantilist ideas were spread in an uncoordinated three-hundred-year effort, mostly through the English pamphlet writers of the seventeenth and eighteenth centuries, a period marked by significant shortages of gold and silver bullion in Europe. Mercantilism believed in trade regulation, industrial promotion, imposition of protective duties on imports of manufactures, encouragement of exports, population growth, and low wages. This belief in regulating wealth was grounded in the conviction that favorable balance of trade leads to national prosperity.

Mercantilists assumed that the total wealth of the world was fixed and reasoned that trade would lead to a zero-sum game. Consequently, they surmised that any increase in the wealth and economic power of one nation was necessarily at the expense of other nations. Hence, they emphasized balance of trade as a means of increasing the wealth and power of a nation.

Physiocracy.

The term Physiocracy (the order or rule of nature) developed for less than two decades as a reaction against the doctrines and restrictive policies of mercantilism. Founded on a doctrine of noninterference, the physiocratic ideas were first enunciated by the Frenchman François Quesnay (1694–1774). Quesnay argued that only agriculture can produce net output (produit net ). According to Physiocracy, the farmers and landowners were considered to be the productive classes whereas the merchants and industrialists were not. The Physiocrats believed in natural laws, the free enterprise system, and the free operation of the natural order of things. Quesnay also developed the famous Tableau Economique (economic table) in an attempt to establish a general equilibrium through a basic input-output model. The main ideas of Physiocracy that were promoted by the intellectual disciples of Quesnay—a group of French social reformers—came directly or indirectly from his Tableau Economique. Another important contributor to Physiocracy is Anne-Robert-Jacques Turgot (1727–1781), whose Reflections on the Formation and the Distribution of Wealth (1769–1770) was one of the most important general treatises on political economy written before Smith's Wealth of Nations.

Major Theories

The study of economics is driven by theories of economic behavior and economic performance, which have developed along the lines of the classical ideas, the Marxist idea, or a combination of both. In the process, various models were developed, each trying to explain such economic phenomena as wealth creation, value, prices, and growth from a separate intellectual and cultural setting, each considering certain variables and relationships more important than others. Within the aforementioned historical framework, economics has followed a trajectory that is characterized by a multiplicity of doctrines and schools of thought, usually identifiable with a thinker or thinkers whose ideas and theories form the foundation of the doctrine.

Classical economics.

Classical economic doctrine descended from Adam Smith and developed in the nineteenth century. It asserts that the power of the market system, if left alone, will ensure full employment of economic resources. Classical economists believed that although occasional deviations from full employment result from economic and political events, automatic adjustments in market prices, wages, and interest rates will restore the economy to full employment. The philosophical foundation of classical economics was provided by John Locke's (1632–1704) conception of the natural order, while the economic foundation was based on Adam Smith's theory of self-interest and Jean-Baptiste Say's (1767–1832) law of the equality of market demand and supply.

Classical economic theory is founded on two maxims. First, it presupposes that each individual maximizes his or her preference function under some constraints, where preferences and constraints are considered as given. Second, it presupposes the existence of interdependencies—expressed in the markets—between the actions of all individuals. Under the assumption of perfect and pure competition, these two features will determine resource allocation and income distribution. That is, they will regulate demand and supply, allocation of production, and the optimization of social organization.

Led by Adam Smith and David Ricardo with the support of Jean-Baptiste Say and Thomas Robert Malthus (1766–1834), the classical economists believed in Smith's invisible hand, self-interest, and a self-regulating economic system, as well as in the development of monetary institutions, capital accumulation based on surplus production, and free trade. They also believed in division of labor, the law of diminishing returns, and the ability of the economy to self-adjust in a laissez-faire system devoid of government intervention. The circular flow of the classical model indicates that wages may deviate, but will eventually return to their natural rate of subsistence.

Marxist economics.

Because of the social cost of capitalism as proposed by classical economics and the industrial revolution, socialist thought emerged within the classical liberal thought. To address the problems of classical capitalist economics, especially what he perceived as the neglect of history, Karl Marx (1818–1883), a German economic, social, and political philosopher, in his famous book titled Das Kapital or Capital (1867–1894) advanced his doctrine of dialectical materialism. Marx's dialectics was a dynamic system in which societies would evolve from primitive society to feudalism to capitalism to socialism and to communism. The basis of Marx's dialectical materialism was the application of history derived from Georg Wilhelm Friedrich Hegel (1770–1831), which maintained that history proceeds linearly by the triad of forces or dialectics called thesis, antithesis, and synthesis. This transition, in Marx's view, will result from changes in the ruling and the oppressed classes and their relationship with each other. He then envisaged conflict between forces of production, organization of production, relations of production, and societal thinking and ideology.

Marx predicts capitalist cycles that will ultimately lead to the collapse of capitalism. According to him, these cycles will be characterized by a reserve army of the unemployed, falling rate of profits, business crises, increasing concentration of industry into a few hands, and mounting misery and alienation of the proletariat. Whereas Adam Smith and David Ricardo had argued that the rational and calculating capitalists in following their self-interest promote social good, Marx argued that in rationally and purposefully pursuing their economic advantage, the capitalists will sow the seeds of their own destruction.

The economic thinking or school of economic thought that originated from Marx became known as Marxism. As the chief theorist of modern socialism and communism, Marx advocated fundamental revolution in society because of what he saw as the inherent exploitation of labor and economic injustice in the capitalist system. Marxist ideas were adopted as the political and economic systems in the former Soviet Union, China, Cuba, North Korea, and other parts of the world.

The neo-Marxist doctrines apply both the Marxist historical dimension and dialectics in their explanation of economic relationships, behavior, and outcome. For instance, the dependency theory articulates the need for the developing regions in Africa, Latin America, and Asia to rid themselves of their endemic dependence on more advanced countries. The dependency school believes that international links between developing (periphery) and industrialized (center) countries constitute a barrier to development through trade and investment.

Neoclassical economics.

The period that followed Ricardo, especially from 1870 to 1900, was full of criticism of classical economic theory and the capitalist system by humanists and socialists. The period was also characterized by the questioning of the classical assumption that laissez-faire was an ideal government policy and the eventual demise of classical economic theory and the transition to neoclassical economics. This transition was neither spontaneous nor automatic, but it was critical for the professionalization of economics.

Neoclassical economics is attributed with integrating the original classical cost of production theory with utility in a bid to explain commodity and factor prices and the allocation of resources using marginal analysis. Although David Ricardo provided the methodological rudiments of neoclassical economics through his move away from contextual analysis to more abstract deductive analysis, Alfred Marshall (1842–1924) was regarded as the father of neoclassicism and was credited with introducing such concepts as supply and demand, price-elasticity of demand, marginal utility, and costs of production.

Neoclassical or marginalist economic theories emphasized use value and demand and supply as determinants of exchange value. Likewise neoclassicals, William Stanley Jevons (1835–1882) in England; Karl Menger (1840–1925) in Austria; and Léon Walras (1834–1910) in Switzerland, independently developed and highlighted the role of marginal utility (and individual utility maximization), as opposed to cost of production, as the key to the problem of exchange valuation. Neoclassical models assume that everyone has free access to information they require for decision making. This assumption made it possible to reduce decision making to a mechanical application of mathematical rules for optimization. Hence, in the neoclassical view, people's initial ability to maximize the value of output will, in turn, affect productivity and determine allocation of resources and income distribution. Neoclassical economics is grounded in the rejection of Marxist economics and on the belief that the market system will ensure a fair and just allocation of resources and income distribution.

Since its emergence, neoclassical economics has become the dominant economic doctrine in the study and teaching of economics in the West, especially in the United States. A host of economic theories have emerged from neoclassical economics: neoclassical growth theory, neoclassical trade theory, neoclassical theory of production, and so on. In the neoclassical growth theory, the determinants of output growth are technology, labor, and capital. The neoclassical growth theory stresses the importance of savings and capital accumulation together with exogenously determined technical progress as the sources of economic growth. If savings are larger, then capital per worker will grow, leading to rising income per capita and vice versa. The neoclassical thinking can be expressed as the Solow-Swan model of the production function type Y F (N, K ) which is expanded to ΔY /Y = ΔA /A + ΔN /N + ΔK /K where Y represents total output, N and K represent the inputs of labor and capital, and A represents the productivity of capital and labor, and ΔY /Y, ΔA /A, ΔN /N, and K / K represent changes in these variables, respectively.

The Solow-Swan model asserts that because of the diminishing marginal product of inputs, sustained growth is possible only through technological change. The notion of diminishing marginal product is rooted in the belief that as more inputs are used to produce additional output under a fixed technology and fixed resource base, additional output per unit of input will decline (diminishing marginal product). This belief in the stationary state and diminishing marginal product led neoclassical economics to believe in the possibility of worldwide convergence of growth.

Known also as the neoliberal theory, neoclassical economics asserts that free movement of goods (free trade), services, and capital unimpeded by government regulation will lead to rapid economic growth. This, in the neoclassical view, will increase global output and international efficiency because the gains from division of labor according to comparative advantage and specialization will improve overall welfare. Even modern trade models (such as the Hecksche-Ohlin) are based on the neoclassical trade theory, which assumes perfect competition and concludes that trade generally improves welfare by improving the allocation of factors of production across sectors of the economy.

Rational expectation.

Rational expectation is the economic doctrine that emerged in the 1970s that asserts that people collect relevant information about the economy and behave rationally—that is, they weigh costs and benefits of actions and decisions. Rational expectation economics believes that because people act in response to their expectations, public policy will be offset by their action. Also known as the "new classical economics," the rational expectation doctrine believes that markets are highly competitive and prices adjust to changes in aggregate demand. The extent to which people are actually well informed is questionable and prices tend to be sticky or inflexible in a downward direction because once they go up, prices rarely come down. In the rational expectation doctrine, expansionary policies will increase inflation without increasing employment because economic actors—households and businesses—acting in a rational manner will anticipate inflation and act in a manner that will cause prices and wages to rise.

Monetarism.

Like rational expectations theory, monetarism represents a modern form of classical theory that believes in laissez-faire and in the flexibility of wages and prices. Like the classical theorists before them, they believe that government should stay out of economic stabilization since, in their view, markets are competitive with a high degree of macroeconomic stability. Such policies as expansionary monetary policy will, in their view, only lead to price instability. The U.S. economist Milton Friedman, who received the Nobel Prize in 1976, is widely regarded as the leader of the Chicago school of monetary economics.

Institutionalism.

Institutional economics focuses mainly on how institutions evolve and change and how these changes affect economic systems, economic performance, or outcomes. Both Frederick Hayek and Ronald Coase, major contributors to the Institutionalist School in the tradition of Karl Marx and Joseph Schumpeter, look at how institutions emerge. Hayek examines the temporal evolution and transformation of economic institutions and concludes that institutions result from human action. Hence, he suggests the existence of a spontaneous order in which workable institutions survive while nonworkable ones disappear. Coase believes that institutions are created according to rational economic logic when transaction costs are too high. Other notable contributors to institutionalism include Thorstein Veblen, Clarence Ayers, Gunnar Myrdal, John R. Commons, Wesley Cair Mitchell, and John Kenneth Galbraith.

The New Institutionalism, represented mostly by Douglas North, Gordon Tullock, and Mancur Olson, uses the classical notions of rationality and self-interest to explain the evolution and economic impact of institutions. It considers such issues as property rights, rent-seeking, and distributional coalitions and argues that institutional transformation can be explained in terms of changes in property rights, transaction costs, and information asymmetries.

Themes

As an academic discipline, economics encompasses a wide variety of themes that represent its historical and contemporary intellectual development. Some of the discipline's major themes include economic methodology, development economics, Endogenous Growth theory, feminist economics, environmental economics, monetarist economics, and econometrics.

Economic methodology.

Economic methodology refers to the method of economic investigation. It mirrors and derives from economic theory and has come to be known as the formulation and testing of hypotheses of cause-and-effect relationship. Like the field itself, which is very much in dispute, economic methodology has evolved and transformed in time from a more formal scientific approach in which methodology was emphasized to a period of lesser emphasis on scientific methodology. Before the formalization of economic theory, economists employed discourse to state and test theories and hypotheses. This heuristic approach did not permit hypothesis to be tested in a manner acceptable as scientific.

In time, economics adopted the use of the scientific method to either formulate economic laws, theories, or principles or to ascertain their validity. The process involves observing facts, making assumptions and hypothesizing about facts, testing hypotheses (to compare outcomes with predictions), accepting or rejecting hypotheses, systematically arranging and interpreting facts to draw generalizations and establish laws, theories, or principles, and often formulating policies, addressing economic problems, or achieving specific economic goals.

At the two levels of microeconomics and macroeconomics, economic methodology can either be inductive or deductive, quantitative or qualitative, positive or normative. Economists express economic theory in terms of equations and relationships between economic variables in algebraic form and make inferences using mathematical operations. Over time, the economics discipline has witnessed an intensified mathematization of economic methodology and an increased role of abstraction and esoteric modeling that has, in effect, made it inaccessible to the untrained.

In this regard, econometrics, especially linear regression analysis, mathematical economics, game theory, and the like have played a great role. There has also been a move away from the scientific methodology involving data collection, hypothesis, analysis, and theory to an emphasis on modeling.

The 1960s and 1970s saw enormous advances in formal statistical testing and logical positivism and Popperian falsification, mostly in an attempt to establish one correct method of economics. Karl Raimund Popper (1902–1994) is one of the most influential philosophers of the twentieth century who produced influential works and political philosophy, particularly The Logic of Scientific Discovery (1959). Falsification is "a methodological standpoint that regards theories and hypotheses as scientific if and only if their prediction are at least in principle falsifiable, that is, if they forbid certain acts/states/events from occurring" (Blaug, 1992, p. xiii).

Development economics.

Development economics or the economics of development is the application of economic analysis to the understanding of the economies of developing countries in Africa, Asia, and Latin America. It is the subdiscipline of economics that deals with the study of the processes that create or prevent economic development or that result in the improvement of incomes, human welfare, and structural transformation from a predominantly agricultural to a more advanced industrial economy. The subfield of development economics was born in the 1940s and 1950s but only became firmly entrenched following the awarding of the Nobel Prize to W. Arthur Lewis and Theodore W. Schultz in 1979. Lewis provided the impetus for and was a prime mover in creating the subdiscipline of development economics.

As a subfield concerned with "how standards of living in the population are determined and how they change over time" (Stern), and how policy can or should be used to influence these processes, development economics cannot be considered independently of the historical, political, environmental, and sociocultural dimensions of the human experience. Hence development economics is a study of the multidimensional process involving acceleration of economic growth, the reduction of inequality, the eradication of poverty, as well as major changes in economic and social structures, popular attitudes, and national institutions.

Development economics covers a variety of issues, ranging from peasant agriculture to international finance, and touches on virtually every branch in economics: micro and macro, labor, industrial organization, public finance, resource economics, money and banking, economic growth, international trade, etc., as well as branches in history, sociology, and political science. It deals with the economic, social, political, and institutional framework in which economic development takes place.

The study of economic development has been driven by theories of economic development, which have developed along the lines of the classical ideas, the Marxist idea, or a combination of both. Some approaches have focused on the internal causes of development or underdevelopment, while others have focused on external causes. Economic growth—increase in output and income—has been used as a substitute for development and, in some cases, has been treated as synonymous with development. Economic growth and economic development have been mostly studied by means of cross-country econometric analysis.

Development economics has an assortment of theories and models to inform its teaching and research—neoclassical, Marxist, demand-driven, balanced growth, unbalanced growth, stages of growth, structuralist, dependency, neoclassical, and endogenous—each trying to explain development from a separate intellectual and cultural setting, each considering certain variables and relationships more important than others. Kaushik Basu identifies three major surges in economic growth theory in this century: the Harrod Domar model and the responses it orchestrated, the neoclassical response to Harrod Domar led by Solow (1956), and the works of Lucas (1986) and Romer (1988) that gave rise to the theory of endogenous growth.

Endogenous growth theory.

Proponents of the endogenous growth theory focus on technological progress and innovation and believe that technological change is endogenous, not exogenous, as neoclassical economics claims. Originally developed by Frankel, and then Lucas and Romer, endogenous growth theory argues that in addition to the accumulation of capital, technical progress is not exogenous but is planned and produced through research and development efforts. It recognizes the role of private sector and free market enterprise as the engine of growth, but suggests an active role of public policy in promoting economic development. In sum, in endogenous growth economics, several factors come together to determine the level of output in a country: government policy, economic behavior, and technology, which are determined by the expenditure on research and development, the rate of accumulation of factors of production—land, labor, capital, entrepreneurship, and savings. One could summarize the entire focus as being to explain the existence of increasing returns to scale and divergent long-term growth patterns among countries.

Feminist economics.

Feminist economics is the branch of economics that advances a theory of economic equality of the sexes and deals with gender equality or the elimination of gender subordination. Feminist economics originated from the organized feminist activities and movement whose influence became more visible in the 1970s and 1990s on behalf of women's rights and interest. It continues to exert an increasing influence on the field of economics by questioning the existing paradigms, approaches, and assumptions.

Through journals and feminist publications, feminist economists criticize what they refer to as the social construction of economics as a discipline, in particular neoclassical orthodoxy. They highlight what they consider to be the androcentric (male-centered) nature of conventional economic thinking, question its wisdom, and reveal biases in conventional microeconomic models. Feminist economists question the nature and functioning of the markets and the classical market society, especially with regard to economic rationality and maximizing behavior. They also highlight the absence of power relations and unequal exchanges, gender, and race in mainstream economic analysis. They question the focus on choices in mainstream analysis and advocate focusing, instead, on provisioning, which, in their view, would account for such social issues as poverty and income inequality. Feminist economics also indicts the lack of emphasis on women's economic role and the noninclusion of domestic and other unpaid work in national income accounts and statistics.

Environmental economics.

Environmental economics is the branch of economics that deals with the application of economic tools and principles to the understanding and analysis of environmental issues and to solving environmental problems. Environmental economics draws from both microeconomics and macroeconomics, focusing on individual decisions that have environmental consequences and changes in institutions and policies to achieve desirable environmental goals.

A major preoccupation of environmental economics is the question of externalities or spillovers, especially negative externalities or spillover costs of human action. The cost of and responses to pollution, emissions, and other negative externalities as well as population, natural resources, energy, water, agriculture, forests, and wildlife are issues considered in environmental economics. Likewise, environmental economics deals with economic dimensions of problems of both regional and global pollutants, including acid rain, ozone depletion, and global warming.

Environmental economics involves the valuation of the environment and natural resources as well as the assessment of environmental damage, management, and regulation of environmental risk, and the markets for the environment. Environmental economics takes account of sustainable development and the impact on the environment of trade, transport, deforestation, water pollution, and climatic change. It also involves analysis of the costs and benefits of the environment.

Mathematics and economics.

Mathematical economics involves the use of formal and abstract analysis to develop hypotheses and analyze economic relationships. It refers to the application of mathematical techniques to the formulation of hypotheses and building economic models. The introduction of mathematics into economics by the Frenchman Antoine Augustin Cournot (1801–1877) in 1838 marked the beginning of a steady course that led to the emergence of mathematical economics. The antecedents of Léon Walras in 1874–1877 and Vilfredo Pareto in 1896–1897 were also essential in advancing mathematical economics. Henceforth, geometrical figures became conventional in economic literature and so did differential calculus and linear algebra. Game theory—the application of mathematics to the analysis of competitive situations and actions—has become a popular aspect of mathematical economics following the publication of The Theory of Games and Economic Behavior in 1944 by John von Neumann and Oskar Morgenstern.

Econometrics.

Econometrics is the application of mathematical and statistical techniques to the testing of hypotheses and quantifying of economic theories and the solution of economic problems. Econometrics combines mathematical economics as it is applied to model-building and the hypothesis-formulation and statistical analysis involving data collection, analysis, and hypothesis-testing. The emergence of econometrics has provided economists with a tool for analyzing macroeconomic models for forecasting, simulation, and economic policy.

As the most widely used tool for empirical analysis and for constructing theories, econometrics provides a method that allows the expression of economic theory using statistical data or using statistical data to estimate economic theory. Estimation methods range from Ordinary Least Squares to panel data and time series analysis.

New methodological approaches have been developed to address some of the weaknesses of the traditional methodology. For instance, there is more emphasis on rigorous diagnostic testing, including coefficient, residual, and stability tests as well as Unit Root and Johansen tests for cointegration and Granger Causality test. Cointegration analysis of time series to determine whether a group of nonstationary series are cointe-grated is an important development in empirical modeling. Improvements in multiple regression analysis often involving tests of correlation and causality as well as linear and nonlinear regression methods have proved to be important for the development of econometrics.

Global Organization and Orientation

Between the two world wars, two important phenomena affected the organization and orientation of economics in the world. The first was the Bolshevik Revolution of 1917 and the exceptionally rapid industrialization of the Soviet Union. The second was the Great Depression of the 1930s. The former led to the development of the Marxist-Stalinist economic system and state-directed development, collectivization, and the establishment of a command economy. The Great Depression led to a declining faith in the classical (laissez-faire) self-regulating free market capitalism, and the emergence of government interventionism, following the publication, by John Maynard Keynes in 1936, of The General Theory of Money, Interest, and Employment.

The new field of development economics was born in the 1940s and 1950s with W. Arthur Lewis providing the impetus for and being a prime mover in creating the subdiscipline. The new Keynesian macroeconomics and development economics advocated widespread government intervention in the economic process. Likewise, the powerful and far-reaching movements of the developing countries in Africa, Asia, and Latin America in the 1940s gave rise to the rejection of free-market capitalism in those regions. In the 1940s and 1950s, economists advocated for a dominant role of the state and comprehensive national development planning was recommended as a way to eliminate the "vicious circle of poverty" and underdevelopment. The advocacy for dirigisme was founded on the notion of market segmentation and failures as well as on information asymmetries and resource constraints. Disappointing results after World War II forced a serious questioning and tempering of this development dirigisme.

As a social science, economics is subject to ideological manipulation. Aside from the orthodox (mainstream) and heterodox spheres, in the neoclassical intellectual tradition, there has been a split since the late nineteenth century as can be seen in the case of its liberal and conservative wings. Led by Paul Samuelson, liberal thinking is associated with advocacy for government intervention to correct market imperfections and market failures while conservatism or neoclassicism led by Milton Friedman is associated with a more pronounced advocacy for laissez-faire.

Impact of Influential Economic Ideas

Throughout the history of nations, economic ideas, notably those of Adam Smith, Karl Marx, and John Maynard Keynes, have had a profound influence on politics and society. Economics has influenced the emergence of political systems, political ideology, and the societal organization of production and distribution. The political and economic systems of democratic capitalism and socialism owe their existence to the ideas of Adam Smith and his followers and Karl Marx, respectively. Recognizing this fact, Keynes, in a famous passage from chapter 24 of General Theory of Employment, Interest, and Money, states: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

Adam Smith's invisible hand of competitive markets, self-interest, and division of labor gave rise to the American style of individualistic market capitalism. Smith's notion of the natural tendency of an economic system to establish equilibrium through the pursuit of self-interest and competitive markets became the foundation of liberal economics in the nineteenth century. Likewise, Marx's analysis of capitalism, his prediction of its ultimate demise, and the triumph of socialism and communism became the foundation for the socialist economic systems of the former Soviet Union and other Eastern European, African, and Asian countries. His idea of the inevitability of the historical evolution of societies from primitive society to feudalism to capitalism to socialism, and ultimately to communism due to the internal conflicts resulting from the exploitation of workers, led to socialist ideas of centralization, planning, and public ownership of resources.

The commitment by governments to macroeconomic policies that ensure full employment and economic growth; the establishment of social security systems; and even deposit insurance guarantees in the banking system are all by-products of influential economic ideas of Keynes. Keynes argued that the answer to the existence of the Great Depression was insufficient aggregate demand and recommended increase in public demand by the government as a means of increasing total demand and output. Since then, discretionary macroeconomic stabilization has become a policy goal of many countries.

Much of the distinction between political conservatism and liberalism is based on economics and in this regard, the differentiation lies on the belief of the role of government versus the market and what type of government intervention, if any, will bring about the most optimum outcomes. In the United States, for instance, liberal politicians tend to favor government spending over lower taxes, while conservative politicians tend to favor tax reductions over government spending as fiscal policy measures against economic recessions.

See also Capitalism ; Communism ; Conservatism ; Liberalism ; Marxism ; Socialism .

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Emmanuel Nnadozie

Economics

DIVISION OF LABOR IN ECONOMICS

ECONOMIC THEORY

APPROACHES TO ECONOMICS

FROM CLASSICALISM TO MARGINALISM

MAINSTREAM ECONOMICS

KEYNESIAN ECONOMICS

BIBLIOGRAPHY

The theory of the division of labor is at least two and a half millennia old. The practice of the division of labor undoubtedly has a much longer history. Both the theory and the practice stress that joint activity is more productive compared with individual or isolated activity, and both apply to different spheres of work: work within a factory or group and work among firms (e.g., between factories). The division of labor is therefore a principal mode of coordination for all such disparate but connected activity.

The theory of the division of labor has different facets to it, in that it applies to both physical labor and intellectual labor. As an object of study and a tool of analysis, it is at the foundation of substantially all of economics. Moreover, the practice of economics itself makes use of, and thus reflects, the division of labor. This, perhaps more than any other factor, explains the importance of economics.

The combination of human psychology and the division of labor also help explain two major features of human behavior: selective perception and status emulation. Each of the major skill groups (or crafts or trades) that work more or less together to produce a pin, a truck, or a house tends to think that its contribution is the most valuable. Individuals acquire their status based on how they perform in their own domain of work, and they seek to emulate those already successful in that domain. The same is true in economics insofar as it too is erected upon the principle of the division of labor. It is no accident that the division of labor, selective perception, and status emulation were also among the major themes of Adam Smith’s Wealth of Nations (1776).

DIVISION OF LABOR IN ECONOMICS

The division of labor within economics takes place along a number of axes, with their respective spheres interacting in a recursive manner. The existence of a multiplicity of practices on each axis is due both to the multifaceted nature of the economy and its study (economics) and to the different positions or standpoints that economists can take. Each such standpoint, and its correlative body of practice, is accompanied by selective perception and status emulation, for the practitioner of each type laud its attributes and pursues success defined in its terms.

One axis is that of the criteria by which economists produce knowledge. One of these criteria is deduction, which, when correctly practiced, produces conclusions that are valid, given the premises and the system of logic, but necessarily true. Another is induction, which produces conclusions that may or may not be true, depending on the entirety of practice. This is the field of epistemology, or methodology, which is also practiced along twin axes in another respect. Given the variety of credentials that a proposition may have, two uses of those credentials may be made: The prescriptive use postulates that one and only one set of credentials produces acceptable knowledge, while the credentialist use affirms that every proposition has its own set of credentials and that the individual is free to accept or reject it. These modes of use tend to be at the heart of competing practices, each yielding status emulation.

A second axis has to do with the fundamental substantive paradigms that tend to govern all work in economics. This axis constitutes the ontology of economics. Among the different paradigmatic possibilities are the fundamental theories of a surplus; constrained maximization (maximization subject to constraints, such as cost or legal prohibitions or requirements); productivity or exploitation; culture; and the attainment of a level of welfare and the structure of its distribution. Paradigms are among the most important elements in the social construction of economics.

A third axis concerns the fundamental problem of economics. Among the multiplicity of contenders for this designation are: the organization and control of the economic system, the efficient (or optimum) allocation of resources, economic growth, maximization of welfare, distribution of income (and wealth), and the ordinary business of life in terms of earning a living.

A fourth axis, somewhat related to the third, concerns the organization and control of the economic system itself. A central focus here is the institution of private property, while institutions such as the market, the development of the division of labor itself, and the system of social control are also relevant. One composite approach is that of the “market plus framework,” in which markets exist on the basis of the framework of social controls. The identity of the framework tends to be reduced to legal and moral rules, inclusive of custom, education, religion, and various forms or sources of law. In this model, markets are not given, they are socially constructed by the interactions of the institutions that form and operate through them. At the very least, markets—and indeed the economic system itself—depend upon the legal foundations of those in control of the state (or those who create the laws of property, contract, tort, etc.) and the strategic behavior of firms and other economic agents.

ECONOMIC THEORY

The conventional assumptions of economic theory, in its static form, have tended to include (1) perfect competition and perfect knowledge (and therefore perfect foresight); (2) given and unchanging technology, resources, tastes, population, and structure of rights; and (3) individual agents that operate independent of each other, that are mobile, and that calculate rationally in order to maximize the satisfaction (or utility) derivable from their real incomes. One or more of these assumptions can be modified, thereby engendering an array of further possibilities, such as a variety of noncompetitive conditions, imperfect information, asymmetrical information, interdependent tastes, changes in the distribution and content of rights, behavior that is less than maximizing, and changes in technology, resources, tastes, and population. Such modifications may or may not add realism, but they do tend to introduce dynamic elements.

The conduct of economics, like that of any intellectual discipline, inevitably involves some type of abstraction, such as the reduction of the number of variables in a model down to the ones deemed most important. This makes the enterprise more manageable. That being the case, economics involves both the study of actual economies and the analysis of conceptual, abstract economies. Closely related is the research protocol stipulating epistemological credentials. At one end of a spectrum is the capacity to produce unique determinate optimal equilibrium results; at the other, to produce an array of possibilities at the conditions governing their realization.

APPROACHES TO ECONOMICS

The history of economics is very much a story of schools of thought. There have been multiple schools of thought, together constituting a heterogeneous discipline, and each school has itself been heterogeneous. This heterogeneity is the result of a combination of a multifaceted economy and different positions or standpoints from which the economy can be studied. There is nothing about the economy or the training of economists that requires that one and only one variable, point of entry, or perspective be used. Accordingly, in every period in the history of the field there has been more than one school of economic thought. A particular school may endeavor to cover the entirety of economics, or it may examine only one or more parts thereof. Economics as a whole is itself further heterogeneous, and because each school typically can be formulated differently, each school is itself heterogeneous. All of this comes under the heading of “theoretical pluralism,” which differs from the ontological or paradigmatic pluralism and the epistemological or methodological pluralism described above. And all of these approaches can be rendered further complex and heterogenous by introducing normative premises of one kind or another, such as accepting existing institutions or the status quo distributions of income and wealth.

Theoretical pluralism also takes another form. Every topic in economics is characterized by particular theories. Consider the following: competition, equilibrium, business cycles, income distribution, consumption, supply of money, commodity demand, capital, investment, the entrepreneur, optimization, money, interest rates, imperialism, economic growth, supply of labor, technology, externalities, incidence of taxation, the origin of the division of labor, and the economic role of government. Each has multiple theories, even multiple groups of theories, that attempt to describe or explain the object of their respective author’s attention.

FROM CLASSICALISM TO MARGINALISM

Several questions come to mind when considering why a school of economic thought arises and flowers. The rise of marginal utility economics in the 1870s is a suggestive case in point. “Marginal utility” is the change in utility associated with a change in consumption level. The term also refers to a utilitarian-calculus approach to economic analysis and decision-making. “Classical economics” refers to a group of economic thinkers who wrote after Adam Smith. The school commences with Thomas Robert Malthus, and David Ricardo and also consists of John R. McCoulloch, William Nassau Senior, and James Bill. The approach was largely finished with the work of John Stuart Mill and John Elliott Cairnes.

Among the factors that explain its existence are the following: (1) the deficiencies of classical economics, including its neglect of psychological valuation as an important demand-side aspect of value theory, its focus on economic classes and labor theory (including cost-of-production theory), and its perceived weaknesses as a defense of capitalism; (2) the logical continuation of earlier writings on utility analysis; (3) the growth of static and positivistic theory (laws of the coexistence of variables) challenging Hegelian and other historical theory (the laws of the succession of variables)—or of the study of being rather than becoming; (4) a reaction to Marxism’s emphasis on exploitation and the transient character of capitalism as part of an attack on socialist theory in general; and (5) the emergence of academic economics and its tendency to deal with trivia unsuitable for reformers. Academic economics included the use of mathematics, which was attractive insofar as it enabled economics to resemble physics, and because it effectuated a reduction of variables to the neoclassical model of demand and supply.

Among these varied explanations for the rise of the marginal utility approach, one finds ironic incongruities, such as positivism’s emphasis on the objective analysis of confirmable materials rather than metaphysical, unconfirmable general theories of history, and the marginal utility school’s criticism that classicism’s broad conclusions were based on a small structure of knowledge wrapped up in a few theorems. Both of these positions were in conflict with key features of the marginal utility school’s subjectivism.

MAINSTREAM ECONOMICS

There has also been a more or less amorphous mainstream of economics, yielding a combination of schools, some more or less orthodox and others more or less heterodox. The mainstream has run from the classical economics of Adam Smith (1723–1790), David Ricardo (1772–1823) and Thomas Robert Malthus (1766–1834), through the early versions of neoclassical economics formulated by Carl Menger (1840–1921) and Alfred Marshall (1842–1924), to the modern formulation by a group led by Paul A. Samuelson (b. 1915). Differences within each school (and between schools) arose along the different axes identified above. These differences were often identified in terms of a school’s central problem or focus. The mainstream changed from a grand macroeconomic story of production, growth, and distribution to an equally imposing story of subjectively acting individual economic units and their interaction in markets, along with the resultant allocation of resources. Under the name of “neoclassical economics,” the mainstream developed a variety of technical identifications of its central problem, many of them mutually reinforcing, such as the mechanics of utility, the operation of the price system, the working of the free enterprise system, the operation of pure markets, the mechanics of the pure theory of choice, constrained maximization decision making, the allocation of resources, and the mechanics of welfare. Schools of economic thought have tended to define themselves in terms of a central problem; the two most common have been explaining how people make their living and explaining how the economy is organized and controlled. Because the assumptions that characterized the core of mainstream neoclassicism could be changed, a further variety of sub-schools emerged within general neoclassicism. Varieties of theories of noncompetitive conditions, uncertainty, changing tastes, rights, institutions, ideology, technology, and population developed, each offering a more or less distinctively different picture of the economy.

Among the alternatives to the mainstream has been “institutional economics.” The central problem here is literally the organization and control of the economy, though with several different foci. One focus was the legal foundations of the economic system; another was the system of cultural beliefs by which people organized and instituted their economic relations, and with which they explained those relations to themselves. Common to both foci was power. The key figures of institutional economics have been Thorstein Veblen (1857–1929), Walton Hamilton (1881–1958), John R. Commons (1862–1945), and John Kenneth Galbraith (1908–2006).

KEYNESIAN ECONOMICS

In the middle third of the twentieth century, nurtured in part by reactions to the Great Depression, the focus of macroeconomics changed from growth in classical terms and the allocation of resources to the determination of the level of income. The key figure of the new macroeconomics was John Maynard Keynes (1883–1946), who argued that classical doctrines to the contrary notwithstanding, the level of income, resulting from factors governing the level of aggregate spending, was not necessarily at the full employment level. This was important not just because variations in spending were involved in the business cycle and in unemployment, but also because so many people depended on employment for their livelihood. In time, Samuelson combined neoclassical microeconomic price and resource-allocation theory with Keynesian macroeconomic income-determination theory to produce the “neoclassical synthesis.”

Thus, in combination with the further differentiating sources outlined above, one could practice economics in numerous different ways. Indeed, it could be argued that neoclassicism, or the neoclassical synthesis, was no longer the undifferentiated hegemon atop the mainstream, and today there are countless variations and combinations of treatments of topics that make up economics. This is true of all of the numerous topics that have had different but useful approaches formulated for them. Macroeconomics, for example, has had a variety of interpretations of what Keynes said and what he intended to say, plus a variety of post-Keynesian theories, not to mention new classical, real, new Keynesian, and other business-cycle theories. Microeconomics has a variety of treatments of how prices and resource allocation are determined; macroeconomics has a variety of treatments of the causes of instability; and both have in common a variety of treatments of uncertainty.

The foregoing does not exhaust the variety of ways in which economists do economics. Some economists study the performance of economic agents as if the agents were engaged in some type of cooperative or noncooperative game. That form of economics was instrumental in developing the strategy of mutual assured destruction (MAD) by the United States and the Soviet Union during the cold war, a strategy which worked to prevent World War III despite its seeming barbarous quality, mainly because the two sides thought more alike than not. Economists who do game theory are among the hordes who practice mathematical economics, a research language and mode of analysis that has been increasingly dominant since the 1960s. Other economists (and psychologists working on economic problems), have enriched the meaning of “rationality” and its attendant motivational attributes. Much of the work of economists is devoted to the description, explanation, and interpretation of what the economy is all about—as should be evident from what has been written above. Many economists self-consciously work at constructing or applying the normative, subjective, and ideological justification for market economies; many others work at its critique. Indeed, it has been said that much of the history of economics has been driven by attempts to influence the distributions of income, wealth, and opportunity in society, as well as by the control and use of government as a political means to economic ends. Which brings this discussion to such combined fields as economic sociology, law and economics, economic anthropology, economic psychology, economic history, and the history of economic thought—fields that are rich in and of themselves.

SEE ALSO Austrian Economics; Austro-Marxism; Capitalism; Capitalism, Managerial; Chicago School; Competition; Economics, Classical; Economics, Institutional; Economics, Islamic; Economics, Keynesian; Economics, Neoclassical; Economics, Neo-Ricardian; Economics, New Classical; Economics, New Keynesian; Economics, Post Keynesian; Institutionalism; Libertarianism; Macroeconomics; Marginalism; Market Economy; Marx, Karl; Microeconomics; Smith, Adam; Stockholm School

BIBLIOGRAPHY

Colander, David C., Richard P. F. Holt, and J. Barkley Rosser. 2004. The Changing Face of Economics: Conversations with Cutting-Edge Economists. Ann Arbor: University of Michigan Press.

Ingrao, Bruna, and Giorgio Israel. 1990. The Invisible Hand: Economic Equilibrium in the History of Science. Cambridge, MA: MIT Press.

Medema, Steven G., and Warren J. Samuels, eds. 1996. Foundations of Research in Economics: How Do Economists Do Economics? Brookfield, VT: Edward Elgar.

Shackle, George L. S. 1967. The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939. New York: Cambridge University Press.

Weintraub, E. Roy. 2002. How Economics Became a Mathematical Science. Durham, NC: Duke University Press.

Warren J. Samuels

Economy and Society

The economy and cultural factors

The economy and solidary groupings

Role differentiation and stratification

The economy and political factors

BIBLIOGRAPHY

The discipline of economics commonly focuses on only one aspect of social life—how people employ scarce resources to produce, distribute, and exchange goods and services for consumption. Economists acknowledge that there are other aspects—political, legal, educational, for instance— and that these aspects influence economic life significantly. However, they usually assume that, for purposes of economic analysis, these influences are constant and thus do not modify economic processes; or, as it is often put, tastes and institutions are “given.” By thus limiting the number of variables they study, economists have been able to advance their science, but they have also greatly oversimplified the relations between economic and other types of social variables.

The field of economic sociology relaxes, as it were, these stringent assumptions about the relations between economic and other types of social variables and explicitly focuses on explaining variations in the ways these different types of variables impinge on one another. For example, in studying wages the economist concentrates mainly on the features of the market that influence and are influenced by wage levels, whereas the sociologist inquires into a wider range of causes and consequences. If management, for instance, persistently tinkers with wage levels, the sociologist may find out that this strengthens informal cliques of workmen and inclines them to subvert the authority of management; or it may foster the formation of a labor union or excite activity on the part of an existing one. Both these social consequences may then themselves “feed back” and influence the level of wages.

Economic sociology. The relations between economic and other social variables may be studied at three levels. At the most concrete level, the economic sociologist applies the standard tools of sociology to the study of roles and organizations that specialize in economic activities. He may, for example, study the sources of recruitment, career patterns, life styles, and role strains of skilled workers in an industrial firm; or he may study the organization of the firm itself, analyzing the status systems, power and authority relations, patterns of deviance, cliques and coalitions, and the relations among these phenomena.

At the second level, the economic sociologist analyzes the relations between economic structures and other structures. The work of Max Weber, especially, exemplifies this level of analysis. In particular, Weber was preoccupied with the conditions under which industrial capitalism of the modern Western type could arise and flourish. Initially, he was careful to distinguish between industrial capitalism and other forms, such as finance capitalism and colonial capitalism; industrial capitalism refers to the systematic and rational organization of production itself. Having identified industrial capitalism, Weber sought to identify the historical conditions most conducive to its rise and continuing existence. One of his most famous arguments is that the rise of ascetic Protestantism, especially Calvinism, established social and psychological conditions conducive to this particular form of capitalism (1904–1905). Another well-known argument developed by Weber is that bureaucracy provides the most rational form of social organization for perpetuating industrial capitalism (1922). He also found in the political-legal complex, especially in property laws and monetary systems, many other institutional structures conducive to industrial capitalism.

Weber never developed his economic sociology into a full theoretical system. Rather, he remained at the level of generating historical insights about the pattern of institutional structures surrounding important economic phenomena. Even so, it is possible to see his distinctive contribution to economic sociology. Unlike traditional economists, Weber was not interested in the regularities produced within the capitalist system of production (regularities such as the business cycle); instead, he was interested in establishing the important institutional conditions under which capitalist systems —and their regularities—came into being.

At the third, most abstract, level the economic sociologist considers the economic and other types of social variables as organized into analytic systems, which cut across concrete social structures, and he studies the relations among these systems. This approach is exemplified in the works of Talcott Parsons and Neil J. Smelser (see Parsons 1937; Parsons & Smelser 1956; Smelser 1963). The economic system, for example, consists of suppliers of factors of production, producers, and consumers, none of which should be identified with any particular social structure but all of which can be viewed, at this abstract level, as interacting with one another in a network of markets. Furthermore, the economic system interacts with other social systems. For example, the economy provides wage payments and consumer goods and services in exchange for the motivation and skills, so necessary for a viable labor force, that are generated by the “pattern-maintenance” social system, which includes familial, educational, and specialized-training structures.

The economy and cultural factors

By culture is meant that complex of existential and evaluational symbols which provide meaning and legitimacy to the conduct of social life. Concrete cultural items are cosmologies, values, ideologies, aesthetic productions, and scientific knowledge. The economic sociologist is concerned with the ways in which these symbols facilitate or inhibit various types of economic activity and the ways in which economic behavior leads to modifications of cultural symbols.

Little research has been conducted on the role of cultural factors within economic organizations. What has been done focuses mainly on problems of effective communication. One of the persistent problems of bureaucracies, for example, is the disruption that occurs when necessary information is altogether lacking, withheld, distorted in passage, or too slow in arriving. Numerous studies of industrial bureaucracy have uncovered typical points of distortion and omission: subordinates “cover up” information they do not wish their superiors to know, and foremen “soften” orders from above out of sympathy with workmen. [SeeOrganizations, article onorganizational intelligence.]

Stimulated mainly by the Marxian and Weberian traditions, sociologists have conducted a more substantial amount of research on the relations between economic organization and cultural symbols. Some research, such as that of Robert N. Bellah on Tokugawa Japan (1957), focuses directly on Weber’s problem concerning the ways in which religious beliefs stimulate or inhibit economic development. Other scholars have inquired into the relations between ideologies and economic activity. The most thorough study of ideologies as instruments of social control in industry is the comparative research of Reinhard Bendix (1956) on managerial ideologies as they have developed in four industrializing countries—Great Britain, the United States, Russia, and East Germany. Bendix’s main concern is with the justifications that managerial classes have generated in the process of inducing workers to submit to their authority. The effects of ideology in relieving role-strains are emphasized in a study of the American business creed by Francis Sutton and his associates (1956). These investigators attribute the tenacity of the free-enterprise ideology among businessmen to strains in their roles: for example, their own ambivalence toward the phenomenon of bigness in the American economy is smoothed over by a defiant reassertion of the values of traditional free enterprise. Ely Chinoy’s study of automobile workers (1955) also stresses the frustration-reducing elements of ideology, which often serves to rationalize the discrepancies between the expectations generated by the “American dream” of equality of opportunity and the actual life situations of the workers.

The economy and solidary groupings

Solidary groupings include families, friendship groups, and diffuse collectivities, such as neighborhood, racial, and ethnic groupings. Solidary groupings, which occupy an important place in the integrative system of society, are typically characterized by face-to-face interaction and close personal understandings and loyalties among members. The economic sociologist asks how these groupings influence, and are influenced by, economic behavior.

Industrial sociology

Recognition of the importance of solidary groupings within industrial organizations is closely associated with the rise of the “human-relations” approach in industrial sociology during the interwar period. Before the rise of this school, industrial sociology in the United States was mainly under the influence of the “scientific-management” approach associated with the name of Frederick W. Taylor. According to this approach, workers in industrial organizations can be treated primarily as isolated neurophysiological organisms with definite capacities and skills; their efficiency, moreover, is largely a product of such factors as speed of work, amount of effort expended, and amount of rest allowed for recovery of strength. The scientific-management school more or less ignored the social-psychological determinants of morale and efficiency.

In the mid-1920s, when the famous Hawthorne experiments on productivity began in the Western Electric Company in Chicago, the initial emphasis was on the effects of various nonsocial factors (lighting and rest periods, for example) on worker performance. During the course of the experiments, however, it became apparent to the investigators that these “physical” factors were not nearly so important in fostering high morale and productivity as various “human” factors, such as receiving status, being accepted in a meaningful primary group, and being allowed to express grievances to a patient and responsive authority. The investigators, in short, isolated the solidary grouping as a determinant of economic behavior (see Roethlisberger & Dickson 1939). Further experiments conducted in the Bank Wiring Room revealed that cliques of workmen could also affect productivity adversely by setting and enforcing their own informal standards of production rates, which were different from those established by management. These kinds of findings have given rise to a whole tradition of research on the diverse relations between the formal and informal organizations within a bureaucracy and on how these relations affect organizational functioning. [SeeOrganizations, article Ontheories of organizations.]

Family structure

Most research on the relations between economic organization and solidary groupings concerns the ways in which certain kinds of family structure may facilitate or inhibit economic activity. For example, primogeniture may facilitate the formation of an urban-industrial labor force, since this type of inheritance system ejects younger sons from the land and makes them possible candidates for other lines of employment; thus, research by Conrad M. Arensberg and Solon T. Kimball (1940) found that younger sons constituted many of the migrants in rural Ireland. On the other hand, certain types of family life may inhibit economic activity. David Landes (1951) has argued that the peculiar structure of the French business family has kept the typical firm small and has thus inhibited economic growth. In his study of the Chinese family (1949), Marion J. Levy isolated the factors of particularism, favoritism, and functional diffuseness as features of classical Chinese kinship that tended to inhibit industrialization.

With respect to the influence of urban-industrial life on the family, most research in the interwar period—for example, the work of Ernest W. Burgess and Harvey J. Locke (see Burgess et al. 1945) —was based on the assumption that urbanization and industrialization lead to the isolation and disintegration of the family. More recent research has challenged or modified this thesis. Talcott Parsons has argued that the urban-industrial complex does not cause the family to deteriorate but rather gives rise to a more highly specialized, and in some ways more effective, family system (Parsons et al. 1955). In a massively documented study, William J. Goode (1963) has attempted to demonstrate and explain the fact that the conjugal nuclear family is the more-or-less universal concomitant of modernization.

Studies of consumption

In one respect the economists’ traditional concern with personal consumption reflects a preoccupation with the relations between solidary groupings and the economy, since this type of consumption commonly refers to the demands made by the household sector on the production sector. Throughout most of the history of economic thought, scholars have postulated some rather simple psychological principles that are assumed to govern consumers’ behavior—principles such as the hedonistic calculus, diminishing marginal utility, or indifference-curve maps. Manifestly, however, as the work of Thorstein Veblen has so well demonstrated, social position and attitudes directly affect tastes and, by implication, make for variation in individual and aggregate consumption functions (Veblen 1899). In recent decades economists and sociologists have attempted to mobilize a number of social and psychological variables to explain differential consumption and saving patterns. James Duesenberry, for example, formally incorporates a principle of imitative spending into his theory of consumer behavior (1949). Milton Friedman posits age and composition of family as determinants of tastes, which in turn affect the consumption function (1957). George Katona, using the survey method, has undertaken to study consumer attitudes extensively and to predict consumer behavior from these attitudes (1951; 1960). Finally, sociologists and economists have produced a plethora of empirical studies showing how social-structural variables such as age, stage in family cycle, race, home-ownership status, and degree of urbanization determine spending and saving patterns. On the whole, these efforts have not produced a formally adequate theory of consumption that systematically incorporates social-structural variables. The closest approximation to such a theory is found in the work of Guy H. Orcutt and his associates (1961), who have introduced variables such as marital status and duration of marriage, as well as age, education, and race of head of household, into probability models of spending and saving behavior.

Role differentiation and stratification

From at least the time of Adam Smith, who paid particular attention to the division of labor as a determinant of the wealth of a nation, economists have recognized the importance of role differentiation in economic life. By and large, however, their concern has been restricted to the relations between the specialization of labor and economic variables, such as productivity, wage differentials, the distribution of the shares of income, and selected aspects of labor—management relations. Sociologists have introduced more and different kinds of variables into the analysis of occupations and, in particular, have focused explicitly on the organization of differentiated roles into stratified systems.

Economists’ versions of the attitudes and behavior of individuals in occupational roles generally follow the logic of supply and demand. They assume that the amount of work a person offers in the market is some function of the economic rewards available to him. While a number of different labor-supply functions have been advanced, most of these ignore the effects on the worker of social factors other than economic incentives. By contrast, sociologists conceive of roles (including occupational roles) as organized clusters of activities involving interaction with the physical, social, and cultural environments. These activities are structured and regulated by values, norms, and sanctions. Economic rewards and deprivations are important, but they constitute only one of several types of sanctions. Roles, furthermore, are subject to a number of types of strains, reactions to which influence the incumbent’s attitudes and behavior. In analyzing the foreman’s role in industry, for example, sociologists have discovered that his role is subject to considerable strains because it has been emasculated in past decades in two important ways: first, centralized management of control has made him less an independent authority over production and more an implementor of ready-made decisions; second, the centralization of the handling of grievances in the unions has relieved him of certain “human-relations” functions. The foreman, caught in a role that is simultaneously limited in function and beset by cross-pressures, often wavers between identification with management, with workers, and with other foremen (Leiter 1948). Contemporary sociological research has yielded similar types of descriptions and analyses of behavior in executive, professional, worker, and miscellaneous service roles.

Above and beyond wage conditions and level of prosperity, which are perhaps the most important determinants, economists and sociologists have un-covered a number of variables that influence labor turnover and absenteeism (for example, see Parnes 1954). Social factors influencing turnover are occupation (the average turnover of teachers, for instance, is much lower than that of factory workers); age (older workers tend to change jobs less often than younger workers); sex (women move in and out of the labor force more than men but probably do not move geographically and occupationally so much); and race (Negro men tend to change jobs more often than white men). Some of the conditions that affect absenteeism, besides wages, are distance of residence from plant; size of firm (which is undoubtedly related to morale); occurrence of holidays (absenteeism drops just before holidays); age (young men display absenteeism more than old); marital status (single men are absent more than married men); and arduousness of work (which encourages absenteeism). [SeeLabor Force, article onmarkets and mobility.]

Stratification systems

Much of the sociological research on role differentiation within economic organizations has concerned the relations between formal and informal organization (reviewed above). In addition, sociologists have studied status systems of industrial organizations and their relations to behavior. As a general rule, status in an organization is determined by the degree of skill, the level of authority and responsibility, and the level of remuneration of an occupational position. however, additional criteria that are imported from “outside” the workplace, such as age, sex, and racial or ethnic background, affect the status of the individual in the organization.

Because of the multiplicity of determinants of general status, individuals in organizations frequently experience a sense of ambiguity as to their actual status (Homans 1953). This leads to a focus on the symbolic aspects of status, such as the number of telephones or amount of floor space per office. Many conflicts in organizations revolve around the distribution of symbols rather than the distribution of the determinants of status underlying these symbols. Another characteristic of industrial organizations that arises from the multiplicity of determinants of status is the tendency toward “status crystallization”—that is, bringing all aspects of status roughly into line with one another. If an individual is paid much for performing a low-skill job, for example, dissatisfactions both for him and his fellow workers, as well as pressures to balance wage and skill levels, arise. This tendency for all aspects of status to be brought into line underlies many conflicts in industrial settings: for example, opposition to promoting a young executive too rapidly for his age and experience, to placing women in positions of authority, and to elevating Negroes to high-level jobs.

With respect to the relations between economic systems and stratification systems, two strands of research dominate the contemporary scene. The first, stemming from the Marxian tradition, concerns the degree to which specific types of economic systems appear to give rise to distinctive types of stratification systems. Alex Inkeles and Peter Rossi (1956), for instance, found that in a number of industrialized nations, occupations associated with industrial production (engineer, foreman, machine worker, etc.) were assigned very similar positions in the general prestige hierarchy of occupations. The second strand of research, stemming perhaps from an ideological preoccupation with equality of opportunity, concerns the degree to which rates of upward social mobility increase or decrease in industrial society. Basing their case on extensive comparative data, Seymour M. Lipset and Reinhard Bendix (1959) argued that rates of social mobility are very similar in all the industrial societies of the West and that these similarities are traceable to common features of the occupational structures of these societies. Additional research, the most conspicuous of which is the work of Natalie Rogoff (for example, 1953), concerns the degree to which opportunities for upward mobility are “closing” under conditions of advanced industrial development in the United States.

The economy and political factors

The term “political” here refers to the creation, institutionalization, and utilization of power in a social setting. Defined this broadly, the term encompasses the study of authority systems in organizations, the study of governments, and the study of competition and conflict among groups. The economic sociologist is concerned with studying the mutual relations between economic activities and these diverse political phenomena.

Most studies of authority systems within industrial firms involve the relations between the types of supervision (typically described in terms of an authoritarian-democratic dimension) and worker morale, productivity, and receptivity to innovations. The most common finding is that worker morale and productivity are higher under “employee-centered” leadership than under leadership oriented to technical standards of efficiency (Viteles 1953). Most of the experiments and field studies on supervision have been carried out in countries with democratic traditions, especially the United States and Great Britain; obviously, studies of societies with different political traditions might show different results.

Research on the political relations between economic organizations and other social units has advanced on a variety of fronts. Under the heading of “the economics of imperfect competition,” economists have studied a variety of political involvements of business firms: ways in which large firms are able to control, and perhaps dominate, prices and output under monopolistic conditions; ways in which wealth and power become concentrated in the economy; and ways in which government policies (e.g., antitrust policies) influence the structure and behavior of firms (for example, Mason 1959). Economists and sociologists have devoted a modest amount of research to the power relations between stockholders and managers and between consumers and business firms, but far more research has been done on the power relations and conflicts between business firms and labor unions. In particular, scholars have devoted much study to the causes of labor disputes (see Korn-hauser et al. 1954; Knowles 1952). Some causes have been fairly well established: strikes occur more frequently under conditions of prosperity, more frequently in isolated industries with homogeneous worker populations, and less frequently under totalitarian governments and in periods of national crisis.

Finally, much contemporary research and discussion focuses on the relations between business and government. This research is shrouded in ideological controversy and confused findings. One school of thought, advanced by the late C. Wright Mills (1956), argues that national political power in the United States has become increasingly concentrated in recent decades and that the holders of power and makers of important decisions are a small group of corporate executives and military officials; this view, however, has been challenged on both methodological and substantive grounds. The empirical research on economic controls over local politics also shows a mixed picture. For example, in a study of a Southern community, Floyd Hunter (1953) concluded that the major decisions were guided by a small group of economically dominant individuals. Other research—for example, that of Delbert Miller (1958) and Robert Schulze (1958)—indicates that the degree to which business groups dominate local politics varies considerably from community to community and over time.

Neil J. Smelser

[Directly related are the entriesEconomic Thought; Industrial relations; Industrialization; Systems Analysis, article onsocial systems. Other relevant material may be found inConsumers; Economy, dual; Peasantry; and in the biographies ofBarnard; Durkheim; Keynes, John Maynard; Le Play; Marshall; Marx; Pareto; Smith, Adam; Sombart; Weber, Max.]

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Nimkoff, M. F.; and Middleton, Russell 1960 Types of Family and Types of Economy. American Journal of Sociology 66:215–225.

Orcutt, Guy H. et al. 1961 Microanalysis of Socioeconomic Systems: A Simulation Study. New York: Harper.

Parnes, Herbert S. 1954 Research on Labor Mobility: An Appraisal of Research Findings in the United States. Bulletin No. 65. New York: Social Science Research Council.

Parsons, Talcott 1937 The Structure of Social Action: A Study in Social Theory With Special Reference to a Group of Recent European Writers. New York: McGraw-Hill.

Parsons, Talcott; and Smelser, Neil J. 1956 Economy and Society: A Study in the Integration of Economic and Social Theory. Glencoe, III.: Free Press.

Parsons, Talcott et al. 1955 Family, Socialization and Interaction Process. Glencoe, III.: Free Press.

Roethlisberger, Fritz J.; and Dickson, William J. (1939) 1961 Management and the Worker: An Account of a Research Program Conducted by the Western Electric Company, Hawthorne Works, Chicago. Cambridge, Mass.: Harvard Univ. Press. → A paper-back edition was published in 1964 by Wiley.

Rogoff, Natalie 1953 Recent Trends in Occupational Mobility. Glencoe, III.: Free Press.

Schulze, Robert O. 1958 The Role of Economic Dominants in Community Power Structure. American Socio-logical Review 23:3–9.

Smelser, Neil J. 1963 The Sociology of Economic Life. Englewood Cliffs, N.J.: Prentice-Hall.

Sutton, Francis X. et al. 1956 The American Business Creed. Cambridge, Mass.: Harvard Univ. Press.

Veblen, Thorstein (1899) 1953 The Theory of the Leisure Class: An Economic Study of Institutions. Rev. ed. New York: New American Library. → A paperback edition was published in 1959.

Viteles, Morris S. 1953 Motivation and Morale in Industry. New York: Norton. → A psychological approach.

Weber, Max (1904–1905) 1930 The Protestant Ethic and the Spirit of Capitalism. Translated by Talcott Parsons, with a foreword by R. H. Tawney. London: Allen & Unwin; New York: Scribner. → First published in German. The 1930 edition has been reprinted frequently.

Weber, Max (1922) 1957 The Theory of Social and Economic Organization. Edited by Talcott Parsons. Glencoe, III.: Free Press. → First published as Part 1 of Wirtschaft und Gesellschaft.

Economics

For a long time, economists for the most part considered issues of sex and gender to be irrelevant to their discipline. Economics was considered to be centrally concerned with markets, a realm from which women had historically been largely excluded. Male activity was treated as universal human economic behavior, whereas women's activities in homes and families were considered "noneconomic." This division of realms, it was long assumed, was dictated by the nature of biological sex differences. Beginning in the 1970s, some economists began to question this assumption, looking at the roles played by gender beliefs—social beliefs culturally constructed on top of a perception of biological sex differences—in creating observed outcomes, particularly regarding the division of home and market labor. By the 1990s, a second layer of critique had evolved, focusing on how the definition, models, and methods of the discipline itself bear a strong imprint of masculinist gender bias. The field of studies of sex and gender in economics has continued to develop and diversify, although it remains marginalized within the academic mainstream.

ECONOMICS OF LABOR MARKETS

The role of sex and gender in economics must be considered in relation to the core models of the discipline, as traditionally envisioned. In the neoclassical model of economics that dominates Anglo-American teaching and research, an individual is assumed to make rational decisions about participating in markets. When considering participating in a labor market, an individual is assumed to determine the number of hours he (as the theory was formulated) wants to work by making trade-offs between hours of labor and leisure. Labor is assumed to yield income but no direct utility (satisfaction), whereas leisure yields utility but no income. The individual chooses what sort of occupation to enter based on his preferences, abilities, and the amount of investment in human capital (education and training) that an occupation requires. The wage received while working is assumed to be determined by market conditions of supply and demand and to reflect the amount that his last increment of work contributes to the value of production (the marginal product of labor).

Some of the earliest work on sex and gender in economics took this model and extended or modified it to encompass what were perceived as uniquely women's issues. In 1962 the economist Jacob Mincer proposed that married women face three, rather than two, options for the use of their time: labor, leisure, and work in the home. A substantial and highly statistically sophisticated literature subsequently developed on the topic of women's labor force participation. Mincer and Solomon Polachek in 1974 proposed that women tended to be employed in different occupations than men because of choices made concerning investment in human capital. Assuming women would be out of the labor force for some periods because of child rearing, it made sense, they argued, that women would choose occupations that had lower education and training requirements. Men, meanwhile, would choose to make deeper investments in order to gain the benefits over a more protracted span of years.

By the early 1970s a number of studies of the gap between average male and average female wages had been accomplished. At that time, female, year-round, full-time workers in the United States earned approximately 60 percent of men's wages, on average, leaving a raw wage gap of approximately 40 percentage points or 40 cents on the dollar. Using survey data on large numbers of male and female workers, empirical studies sought to explain the source of wage gaps in the United States and other countries by breaking them down into components. Using statistical methods, portions of the gap were explained by differences in choice of occupation, and additional portions were attributed to differences in average levels of education, experience, unionization, or other observable worker characteristics that might lead to differences in productivity and earnings. Generally, about half of the gender wage gap remained unexplained by variations in these observable characteristics.

A number of the economists conjectured that this unexplained gap could be attributed to characteristics that affect productivity but are not observable in survey data. Women might have preferences, they suggested, that lead to lower levels of ambition, energy, or dedication to their jobs. The idea that there could be a significant problem of sex discrimination was generally dismissed because it goes against core assumptions of neoclassical theory, which posits that wages are based on marginal productivity, not on social factors such as gender. In addition, it was argued that in a competitive market economy, discriminators would not be able to stay in business. That is, a firm that failed to make its hiring decisions based on productivity factors alone would make lower-than-normal profits, and lose out to its competitors. This argument was, in turn, based on a theory of discrimination advanced by the economist Gary S. Becker during the 1960s that portrayed discrimination as simply an individual preference (a taste for discrimination).

In the 1970s and 1980s the feminist economists Barbara R. Bergmann, Marianne A. Ferber, Francine D. Blau, Heidi Hartmann, and others challenged the notions of sex and gender implicit in many mainstream economists' studies. While the economics literature assumed that women "naturally" preferred to stay at home or be maids, teachers, or nurses, social change was quickly calling this assumption into question. With the advent of the women's movement and antidiscrimination laws in a number of countries, many women were by that time "voting with their feet" and moving into the paid labor force in unprecedented numbers, as well as breaking into formerly male-dominated professions such as business and law. Feminist scholars challenged the orthodox view that labor market outcomes were a matter of biologically given sex differences in preferences and abilities. The term occupational segregation was introduced to refer to the socially constructed division between "men's jobs" and "women's jobs," and wage studies were reexamined.

Using corroborating evidence of discrimination from ethnographies, court cases, and studies of individual occupations or employers, feminist scholars argued that the unexplained gap largely reflected discrimination. The persistence of beliefs such as that "men need higher wages because they have families to support," or that women are less able, or should not be in positions to direct men, came through strongly in such alternative forms of data (Bergmann 1989). In addition, feminist scholars called into question the idea that women freely choose their occupations, educational levels and tracks, seniority, and union status in a world in which sex stereotyping and male-dominated power structures are endemic. Occupational segregation and discrimination by educational institutions, employers, and unions could cause women's observable characteristics to differ from men's, these scholars argued, even when women's innate abilities were the same. They thus called into question the view that discrimination is an individual preference, pointing instead to its existence as a deep and widespread social and institutional phenomenon. These scholars also initiated new studies, such as those by the economist Andrea H. Beller and the sociologist Paula England, both published in 1982, that showed that Mincer and Polachek's human capital theory could not explain women's distribution across occupations.

Economic research into gendered labor market outcomes continues, both along traditional and more feminist lines. Some economists have sought to assess the effectiveness of anti-discrimination law (particularly, in the United States, Title VII of the Civil Rights Act of 1964), affirmative action policies (put into law for U.S. federal contractors by Executive Order 11246 of 1965), and comparable worth policies (also called pay equity, mandating "equal pay for work of equal value," and enacted by some localities). Studies over time tend to show a narrowing of the wage gap in the United States from about 40 cents on the dollar in 1970 to about 28 cents by 1990, and about 25 cents in the early 2000s (Blau, Ferber, and Winkler 2006). International studies of wage gaps show the importance of a nation's overall wage structure in influencing the gender gap, with countries with centralized wage bargaining and relatively low overall inequality generally having smaller gender wage gaps (Blau and Kahn 2003).

Many studies have looked at how marital status and the presence of children affect earnings, often finding that being married and having children increases, on average, the wages of men, holding factors such as education and experience on constant, while decreasing the earnings of women. Interpretations continue to vary as to how much such effects can be attributed to choice (i.e., to women having a biologically based preference for focusing on children at the expense of their paid work); how much is due to employer prejudices regarding the abilities, interests, and responsibilities of mothers versus fathers; and how much reflects a lack of attention by men and support from society at large for the work of child care (i.e., to power-based gender roles assigning the responsibility to individual women, regardless of their talents and interests).

The issue of gender within the labor market for economists has also been the subject of study. The Committee on the Status of Women in the Economics Profession (CSWEP), formed within the American Economic Association in 1971, is charged with monitoring the advancement of women within the profession and acting to increase that advancement. CSWEP annual reports indicate that women comprised less than 5 percent of economics faculty in the United States in 1972, but by 2004 comprised 27 percent of assistant professors and 21 percent of associate professors. Less than 9 percent of full professors, however, were female in 2004. A 2004 study by the economists Donna K. Ginther and Shulamit Kahn found that women's lack of representation in the higher echelons of academic economics cannot be explained by pipeline issues (that is, by a lack of women in lower ranks ready to move up into higher ranks), and is more marked in economics than in a number of related disciplines. The progress of women economists has been studied in other countries as well (Jacobsen 2006).

ECONOMICS OF HOUSEHOLDS

In core neoclassical economic theory, households are treated as though they are individuals, who supply labor and buy products according to a unitary set of preferences. It was not until the 1970s that mainstream economists started to treat the internal workings of households as something of potential interest. The so-called new home economics pioneered by the economists Becker, Mincer, and Theodore W. Schultz brought standard theories of individual utility-maximization to bear on issues of marriage, divorce, and fertility. In Becker's theory of (heterosexual) marriage, for example, traditional gender roles are explained as the outcome of mutually beneficial comparative advantage. Women, being relatively more efficient in home production, rationally specialize in nonmarket work, while men, according to this theory, rationally specialize in market work. The relative efficiencies were explained as being either due to biological sex differences or women having lower market earnings. Becker also advanced the theory that a household's unitary set of preferences could be taken to be that of the household altruist, the one individual in the household who cares about everyone's welfare (and—it was assumed but not made clear—also had control over the household income).

Critical economists, including Ferber, Jane Humphries, Alice H. Amsden, and others, soon raised objections to these theories that, by the nature of their assumptions, served to justify the status quo. They pointed out the circular reasoning in the argument that women specialize in home production because they make less on the market, and make less on the market because they specialize in home production. They noted that unitary and altruist models of households glossed over issues of divergent interests and power differentials within families, which could in turn be influenced by factors outside families such as cultural norms and public policy.

"Bargaining" models of household behavior, advanced by the economists Marilyn E. Manser, Murray Brown, and Marjorie McElroy in the early 1980s, improved on unitary models by positing households consisting of two people, each with their own preferences, who must divide the benefit from a marriage. Should they divorce, each of their utilities would be reduced to threat point levels. These models mathematically formalized the idea that the spouse with better opportunities outside of marriage (because of, for example, higher earnings or favorable divorce policies) may wield more power over intrahousehold decision-making. Some feminist economists, while accepting the value of looking at marriages as situations of cooperative conflict (as described by the economist Amartya Sen), found formal modeling to be too restrictive and urged a broader examination of the determinants of power and decision-making within families (Agarwal 1997). Bargaining models, for example, are limited to consideration of two parties, meaning that full consideration of the interests and influence of non-spousal parties (such as children or other household members) is precluded.

Empirical work on household spending behavior has overwhelmingly tended to disprove the unitary model. In the unitary model, it should make no difference who in the family has wealth or brings in income, because spending is always carried out according to "household" preferences. A now extensive literature on intrahousehold allocation in several countries has shown that, in general, spending varies depending on the share of income or wealth contributed by the mother in a family with children, as compared to the father. A number of studies have found that expenditures on children's items, such as children's food and clothing, are higher when the mother controls a larger share of household spending.

Another debate in economics concerns whether housekeeping and child-care work in the home, traditionally done by women, is productive and a crucial part of the economy. Traditionally, the value of this work has been omitted in calculations of gross domestic product (GDP). In 1988 the economist Marilyn Waring pointed out how the omission of women's traditional work from the United Nations "system of national accounts" can bias policymaking. While still not officially part of accounts, beginning in the 1990s some countries started to develop satellite accounts that seek to measure the value of such work, based in part on data from national surveys of how people use their time. Other economists have looked at how measures of economic growth might be biased by the omission of household production, or how the treatment of unpaid labor as unproductive has affected tax policy.

A substantial literature on the economics of fertility has also developed. Some of this literature emphasizes that increasing women's education, earnings, and power within the household in poor countries has been found to bring down birthrates. The effects of coercive population policies on women's human rights may also be discussed. In other economics discussions of population issues, however, the fact that women are involved may be hardly mentioned.

FEMINIST CRITIQUES OF THE DISCIPLINE

In the early 1990s feminist economists began publishing more thoroughgoing critiques of the mainstream discipline, pointing out that the failures in labor market and household theories were not just isolated instances but rather signs of deep-seated masculinist bias in the discipline. Formal choice-theoretic modeling; a central image of rational, autonomous, and self-interested economic man; and a narrow focus on mathematical and econometric methods were (and still are) hallmarks of mainstream economics. Feminists argued that these are a Procrustean bed when it comes to analyzing phenomena fraught with issues of tradition, connection to others, and relations of power and domination. Feminists began to raise questions about the mainstream definition of economics, its central models, and the high regard given to a particular set of methodological tools.

Essays on this theme were brought together in a 1993 volume, Beyond Economic Man: Feminist Theory and Economics, edited by Ferber and Julie A. Nelson. In this volume it was suggested that economics be defined by a concern with the provisioning of life in all spheres in which this occurs, rather than only in markets. Investigations were made into how a particular set of professional values, emphasizing culturally masculine-associated factors such as autonomy, separation, and abstraction, had come to take precedence over culturally feminine-associated factors such as interdependence, connection, and concreteness. The contributors argued that rather than taking the former as a sign of "rigor" in the discipline, the truncation of methods created by masculinist bias has weakened the discipline's ability to explain real-world phenomena. Questions were raised about mainstream economics not because it is too objective, but because it is not objective enough.

While many feminist economists continue to make use of traditional mainstream tools, on the whole the field of feminist economics has come to be characterized by inclusion of a broader range of concepts and methods. These encompass theories of human behavior that include a balance between individuality and relationship, autonomy and dependence, and reason and emotion, and the use of additional methods including historical studies, case studies, interviews, and other qualitative data. Feminist economists tend to find that such serious efforts to create and promote more adequate forms of economic practice lead to new insights across the board, whether or not the topic being studied is explicitly gender-related.

With the publication of a number of books and articles, and gatherings at early conferences, feminist economics coalesced into an organized field in the early 1990s. The International Association for Feminist Economics was formed in 1992, and its journal, Feminist Economics, commenced publication a few years later. An encyclopedia of feminist economics, edited by Janice Peterson and Margaret Lewis, was published in 1999, and a review of developments during the first ten years of feminist economics was published in 2003 and edited by Ferber and Nelson.

ADDITIONAL AREAS OF RESEARCH

In addition to work on labor markets, households, and the philosophy and methodology of economics, economists have addressed issues of sex and gender in a number of other areas, from both traditional and feminist perspectives.

Work on public policy issues affecting women's economic status has been extensive, not only on matters of labor market discrimination but also on issues such as access to credit or pensions, welfare and poverty, childcare availability, family leaves, health care, and taxation. Beginning in the 1990s, a number of countries developed "gender budgets" that analyze government budgets for their gender impacts.

Scholars of the history of economic thought have researched the lives and writings of early women economists and examined how male economists treated issues of sex and gender in historical texts. In the process, they have brought renewed appreciation (at least among feminists) to the economic writings of Charlotte Perkins Gilman (1860–1935), Margaret G. Reid (1896–1991), and others. The historical writings of male economists on questions regarding women show, with only a few notable exceptions, a pronounced tendency to substitute cultural biases for analysis (Pujol 1992). Gendered analysis has been applied not only to the history of neoclassical economics but also to the history of Marxist, institutionalist, and other schools of economics.

While the economic history of various countries and regions traditionally focused on men's activities, feminist scholars have investigated the roles played by women. Women's historical roles as household workers, as agricultural or industrial workers, as colonists or subjects of colonization, and as activists in combating discrimination or changing public policies have been investigated.

The economic status of girls and women in the global South has increasingly become a topic of economic study. The economist (and Nobel laureate) Amartya Sen played a crucial role in increasing attention paid to this area with his 1990 report on the missing women of China, India, and other countries. In these parts of the world, the number of adult women is substantially below the number that would be expected from a normal ratio of births. Inferior access to food and health care (and, increasingly, the use of sex-selective abortion) has caused millions of women to go "missing." Feminist scholars such as Diane Elson (1995) and Lourdes Benería (2003) have also investigated the gender impact of international policies related to trade, investment, and credit, carried out by individual nations and multilateral organizations such as the International Monetary Fund and World Bank. Shifts in the trading patterns for goods produced by women versus by men, for example, or macroeconomic policies that lead to cuts in support to health, education, or child care, can differentially affect men and women.

In many fields in which empirical data can be disaggregated by sex, literatures have grown up examining sex differences in male and female economic behavior. These include studies, for example, of whether women or men are more cooperative in experimental game situations (laboratory studies in which economists study choice behavior), or whether sex makes a difference in the willingness to take risks in investment decisions. In some of these studies, attempts are made to adequately explain and explore any differences found, whereas in others the analysis remains at a superficial level.

The intersections of sex and gender with issues of race, class, caste, sexual preference and gender identity have also been researched. The economist M. V. Lee Badgett (2001) and others, for example, have studied labor market discrimination and household structures among gays and lesbians. The economist Deirdre McCloskey (1999) has written about her transsexual transition.

Sexuality has also entered economics discussions under the topics of commercial sex, rape, and sexual harassment. A few labor market studies have focused on the working conditions and pay of sex workers. Some economists, and many in the area of law and economics, have studied the use of rape and sexual harassment to intimidate women in the workforce. In 1992 Richard A. Posner, a neoclassical economist, libertarian, and leading figure in the law and economics movement, published a controversial book titled Sex and Reason, in which he addressed topics including prostitution, abortion, and rape. Critics claim that his arguments (such as his characterization of female infanticide as simply a rational method of family planning) tend to epitomize a blindly economistic view of the world.

Beginning in the 1990s, feminist economists including Nancy Folbre (1994) and Susan Himmelweit (1999) initiated research on the topic of caring labor. Work such as nursing or child care, which is done for pay, but also often out of a sense of concern for or emotional closeness with the person receiving the service, transgresses the usual boundaries between concepts of love and work. Empirical studies about the conditions of such work, as well as studies of the sorts of belief systems that often make such work ill-paid or disrespected, have taken place within economics as well as in related fields such as sociology and political theory. Communication among scholars on this issue often breaks down around the question of whether economies are inherently cold and impersonal, or whether this belief is itself a social construction (Nelson 2006).

THE STATE OF THE FIELD

Among economists who associate themselves most closely with the mainstream, sex and gender research remains mostly a matter of applying conventional, individualistic, and highly formalized forms of theoretical analysis to this subject matter, or simply disaggregating empirical research by sex categories. Whether such research sheds useful light on sex and gender issues in economic life, or instead says more about the biases of its creators, may be debated. Meanwhile, economists and other scholars who are less loyal to the methodological strictures of mainstream economics have sought to investigate more deeply how sex and gender shape, and are shaped by, the economic activities that provide for the sustaining and flourishing of life.

BIBLIOGRAPHY

Agarwal, Bina. 1997. "'Bargaining' and Gender Relations: Within and Beyond the Household." Feminist Economics 3(1): 1-51.

Badgett, M. V. Lee. 2001. Money, Myths, and Change: The Economic Lives of Lesbians and Gay Men. Chicago: University of Chicago Press.

Beller, Andrea H. 1982. "Occupational Segregation by Sex: Determinants and Changes." Journal of Human Resources 17(3): 371-392.

Benería, Lourdes. 2003. Gender, Development, and Globalization: Economics as if All People Mattered. New York: Routledge.

Bergmann, Barbara R. 1989. "Does the Market for Women's Labor Need Fixing?" Journal of Economic Perspectives 3(1): 43-60.

Blau, Francine D., and Lawrence M. Kahn. 2003. "Understanding International Differences in the Gender Pay Gap." Journal of Labor Economics 21(1): 106-144.

Blau, Francine D.; Marianne A. Ferber; and Anne E. Winkler. 2006. The Economics of Women, Men, and Work. 5th edition. Upper Saddle River, NJ: Pearson/Prentice Hall.

Elson, Diane, ed. 1995. Male Bias in the Development Process. 2nd edition. Manchester, UK: Manchester University Press.

England, Paula. 1982. "The Failure of Human Capital Theory to Explain Occupational Sex Segregation." Journal of Human Resources 17(3): 358-370.

Ferber, Marianne A., and Julie A. Nelson, eds. 1993. Beyond Economic Man: Feminist Theory and Economics. Chicago: University of Chicago Press.

Ferber, Marianne A., and Julie A. Nelson, eds. 2003. Feminist Economics Today: Beyond Economic Man. Chicago: University of Chicago Press.

Folbre, Nancy. 1994. Who Pays for the Kids? Gender and the Structures of Constraint. London: Routledge.

Ginther, Donna K., and Shulamit Kahn. 2004. "Women in Economics: Moving Up or Falling Off the Academic Career Ladder?" Journal of Economic Perspectives 18(3): 193-214.

Himmelweit, Susan. 1999. "Caring Labor." Annals of the American Academy of Political and Social Science 561: 27-38.

Jacobsen, Joyce, ed. 2006. "Explorations: The Status of Women in Economics." Feminist Economics 12(3): 427-474.

McCloskey, Deirdre. 1999. Crossing: A Memoir. Chicago: University of Chicago Press.

Nelson, Julie A. 2006. "Can We Talk? Feminist Economists in Dialogue with Social Theorists." Signs: Journal of Women in Culture and Society 31(4): 1052-1074.

Peterson, Janice, and Margaret Lewis, eds. 1999. The Elgar Companion to Feminist Economics. Cheltenham, UK: Edward Elgar.

Posner, Richard A. 1992. Sex and Reason. Cambridge, MA: Harvard University Press.

Pujol, Michèle A. 1992. Feminism and Anti-feminism in Early Economic Thought. Aldershot, UK: Edward Elgar.

Sen, Amartya. 1990. "More than 100 Million Women Are Missing." New York Review of Books 37(20): 61-66.

Waring, Marilyn. 1988. If Women Counted: A New Feminist Economics. San Francisco: Harper and Row.

                                          Julie A. Nelson