Economic Illiteracy and Rational Voters

By John Stossel
When I speak on college campuses, students often ask what can be done about the "problem" of young people who don't care enough to vote. I always say that I don't see it as much of problem "because most of you don't know anything yet. I'm OK with you not voting!" The students laugh, but I'm not joking.
It wasn't until I was about 40 that I started to believe I had acquired a good sense of what domestic policies might serve people well. (I still have no clue about international affairs.) I only started to think I knew what ought to be done after years of reporting and reading voraciously to absorb arguments from left and right. The idea that most voters vote without having done much of that work is, frankly, scary.

I'm not alone in this concern. An economist at George Mason University, Bryan Caplan, says few people think about their vote or even see any benefit in doing so. His new book, "The Myth of the Rational Voter: Why Democracies Choose Bad Policies" , argues that most voters cast their ballot on the basis of irrational biases about economic matters. That's why so many candidates hostile to free markets, profits, free world trade and immigration get elected. People tend to acquire their wrong opinions about economic policy packaged in worldviews they inherited while growing up. They never test their views against the evidence because that would be unsettling. No one likes having his worldview challenged. So people vote for candidates who make them feel good. They vote irrationally.
Caplan stresses that most voters see no reason to do otherwise because they don't bear the consequences of their choices. This irrationality does not carry over into their personal lives because there they bear the brunt of their own decisions. But when irrationality is free, notes Caplan, people will indulge their biases.
Caplan divides them into three categories: antimarket bias, antiforeign bias, make-work bias and pessimistic bias. Antimarket bias describes people feeling that trade and profit are zero-sum games, that one person's gain is another person's loss. They haven't learned that free exchange is win-win and that in a free market, profit comes from cost-cutting innovation. Antiforeign bias, perhaps a vestige of primitive man, consists of distrusting "them" even though our prosperity increases according to how global the division of labor is. Foreigners don't want to invade us; they want to sell us useful things. Make-work bias is the belief that what makes us rich is jobs, rather than goods, and so anything that eliminates jobs is bad. If that were really true, we could prosper by outlawing all inventions created after 1920. Think of all the jobs that would create! Finally, pessimistic bias is the view that any economic problem is proof of general decline. Lots of people actually think we're poorer than our grandparents were!
As a result of these biases, people often support price controls, foreign-trade barriers and laws against job "outsourcing," and oppose immigration. Most economists are eager to demonstrate that these policies are bad for society, but most people aren't interested in evidence. They're interested in what confirms their worldview and makes them feel good. So they often vote for protectionists, anti-immigration advocates and other opponents of the free market.
Caplan's book isn't calculated to cheer up those of us who favor more market and less democracy. He offers some solutions that aren't likely to be adopted any time soon, such as permitting only the economically literate to vote, or giving them more votes, or eliminating get-out-the-vote campaigns (which serve only to get out the uneducated vote).
More practically, he thinks that "Everyone who knows some economics" should grab every opportunity to teach it. That's what I try to do with my "20/20" segments, television specials and the Stossel in the Classroom program, which brings economic ideas to high-school and college classrooms.
I hope we will create some rational voters in the process.
Copyright 2007 Creators Syndicate Inc.

Credit cards before 2007?

Source :www.economylab.org

i heard on the radio that if you took out a credit card before 2007 everything you own on the card will be wiped clean?
i didn't hear the full story, but for them that know..
does that count for every credit card?
if not, which ones? and why?
does anyone have any links for this thing? i've tryed looking arond but can't find anything…
can anyone tell me more on how this works and how to do it
thanks
Answer
I think what have heard about is the changes that were made to the Consumer Credit Act (1974) in 2006. Under the terms of this act, credit cards and other types of credit agreement have to be drawn up in a particular way, include specific details, be accompanied by certain bits of information. What happens if some of these things are missing? Well, it used to be that if an agreement wasn't drawn up correctly the debt could not be pursued through the courts. It would not be wiped clean as such, but the creditor would not be able to enforce it in court. The government decided this was a bad thing and changed the law to give the court the right to decide, in each case where the original agreement was not drawn up correctly, whether it should be possible to take action to recover the debt. This change took effect in 2007 - on 1 April, I think.
So, you weren't dreaming. Some people who took out credit in 2007 or earlier will have agreements they can't be taken to court for. It isn't all that common though, particularly with credit cards, since credit card companies generally know what they need to do to stay on the right side of the law. None of this is relevant if your agreement was drawn up correctly, which will have been the case in the majority of cases.

Obesity: Economic Dimensions of a “Super Size” Problem

by Maria L. Loureiro
Changes in lifestyles, as well as higher consumption rates of foods rich in fat and carbohydrates, are contributing considerably to a more overweight population around the world. This article considers socioeconomic causes and consequences of obesity. Obesity is an international problem, and as such is compared on an international basis where data are available.
OverviewObesity is a growing health concern for both developed and developing countries. World Health Organization (WHO) figures indicate that obesity is a "global epidemic." Obesity is a severe condition of overweight. There are more than one billion overweight adults, and at least 300 million of them are clinically obese. Overweight affects more people than malnutrition and hunger (WHO, 2004). However, economists still know very little about its causes, consequences, and potential remedies. In particular, economists wonder why obesity is more prevalent in Western industrialized countries, many developing countries, and new transitional economies.
Unfortunately, obesity is not a well-documented problem; thus, statistical data are hard to obtain. Figure 1 shows percentages of overweight and obese individuals for Organisation for Economic Co-operation and Development (OECD) countries (OECD, 2004). The United States has the highest percentage of obese and overweight population (64.5%); Mexico (62.3%), the United Kingdom (61%), and Australia (58.4%) follow close behind. The lowest percentages are recorded in Japan (25.8%) and Korea (30.6%).
Globally, the incidence of weight-related problems is the highest ever reported (Figure 2). As in the United States, overweight rates remained more-or-less stable in OECD countries during the 1980s and grew enormously in the 1990s. Many speculate that this trend may go up, particularly when we consider the incidence of obesity among children and adolescents. According to the American Obesity Association (2004), the percentage of obese children grew from 7% in 1976-1980 to 15.3% in 1999-2000. A similar trend occurred among adolescents, rising from 5% in 1976-1980 to 15.5% in 1999-2000. Multiple studies have shown that obese children are likely to become obese adults.
Consequences of Weight-Related ProblemsObesity and overweight problems have serious social and economic consequences. Multiple studies have shown that obesity negatively affects earnings and wages, particularly for females (Cawley, 2004). In the OECD, obesity-related medical costs are rising, although the contribution of obesity to the total health bill is not easy to determine. Obesity carries both direct and indirect costs. Direct costs include those for preventive, diagnostic, and treatment services. Indirect costs occur through losses in labor-force participation due to increases in health-related problems, including type 2 diabetes, heart disease, certain cancers, stroke, and depression. Table 1 shows statistical correlation rates between the percentage of obese and overweight individuals and data on health costs and other socio-demographic variables in OECD countries. The data show that increased incidence of obesity is associated with increased observed health expenditures and decreased life expectancy.
Studies based in the United States reveal that health-care costs for overweight and obese individuals averages 37% more than for people of normal weight, adding an average of $732 to the annual medical bills of each American. Estimated medical costs connected to obesity and smoking each account for about 9.1% of all health expenditures in the United States (Finkelstein, Fiebelkorn, & Wang, 2003).
Exploring the Roots of the ProblemLeaving genetics aside, weight-related problems are caused by the difference between calories consumed and calories used. Cultural and sociodemographic factors contribute to this calorie imbalance. Some argue that obesity growth is mainly due to a higher intake of calories, but others state that it is mainly caused by a lower expenditure of calories in daily activities.
In connection with the higher-calorie-intake argument, a popular justification is the growth of fast-food and soft-drink consumption, associated with increases in dietary intake of saturated fats, sugars, and calories. In addition, increases in serving portions are also considered quite important. Other researchers argue that female labor participation is a contributing factor: Presumably, healthier home-cooked dinners have been widely replaced by TV dinners or restaurant dinners—which frequently take place in fast-food restaurants. Cutler, Glaeser, and Shapiro (2003) analyze changes in food consumption between the mid-1970s and mid-1990s and observe that the growth in calories is enough to explain the increase in weight. In the process, they partially invalidate the fast-food argument, pointing out that the main reason for increased dietary caloric intake was calories consumed outside the main meals (i.e., snacks). They also failed to find a strong interrelationship between obesity and the number of women working.
In terms of calories expended, other researchers emphasize the role of reduced physical activity and technological change—products of the transition from rural to urban societies—as well as a higher rate of passive entertainment. Lakdawalla and Philipson (2002) concluded that a worker who spends his/her career in a sedentary job will be heavier than someone in a highly active job. Further, they estimated that about 40% of the total growth in weight in the United States may be due to expansion in calories, potentially through increased food abundance (agricultural innovation), and about 60% due to demand factors, such as a decrease in physical activity.
Other potential economic explanations which justify the imbalance of calories refer to the consequences of becoming a more industrialized society in which the value of time increases. As Chou, Grossman, and Saffer (2004) point out, in industrialized societies, workers sell more of their time to the labor market and have less disposable time for entertainment and other household activities (including food preparation). This lack of time is what may explain the growth of fast-food restaurants in the United States. Their results indicate that not only restaurant availability and restaurant food prices matter when explaining weight gain, but also a set of sociodemographic characteristics of the individuals. In particular, they conclude that wealthier and more educated individuals are less likely to have obesity problems, whereas black and Hispanic are more likely to suffer from obesity or have higher weights. Thus, all evidence shows that obesity is a complex phenomenon, linked not only to the demand and supply conditions of food products, but also to economic transitions and cultural change of societies. This makes it harder to disentangle.
What Do the Data Tell Us?It is difficult to develop a globally applicable explanation of weight-related problems, because different socioeconomic and cultural factors are at work (Loureiro & Nayga, 2004). The proliferation and impact of weight-related problems vary largely between most European countries, North America, and the Asian countries. One of the main reasons is higher calorie intake, which may contribute to calorie imbalance (Table 2). According to the OECD, US daily calorie intake grew by 716 calories (almost 25%) between 1973 and 1999. Significant calorie growth was observed elsewhere in the Netherlands, New Zealand, and Spain. On the contrary, in Japan, for example, there is a clear control of calorie intake, and calorie growth during the last 20 years has been the lowest in the entire OECD. This corresponds with one of the lowest rates of weight problems in the OECD. However, in countries such as Australia, the daily calorie intake during the same period has grown also moderately (87 calories), while the percentage of obese individuals increased by 23.4%. Thus, it seems that the spread of obesity has not been caused everywhere by higher calorie intake, although calorie intake has gone up in all OECD countries over the past decade. In the context of the OECD, female labor participation may have contributed to unhealthy food habits. Table 1 shows that countries with more females working outside the house are more likely to suffer weight-related problems. Other factors, such as the transition from rural to urban societies, changes in food habits, and the reduction of strenuousness of work, also contribute.
An interesting finding is that countries with a higher percentage of urban population are more likely to suffer weight-related problems (Table 1). As shown in Table 2, Australia, Netherlands, and the U.K, all with almost 90% of the total population living in urban areas, have large percentages of overweight population. By contrast, in countries where the percentage of individuals living in urban areas is smaller, weight-related problems are also present and serious, as in the United States. This may be due to the mechanization and technical progress of agriculture, which could be reducing significantly the daily use of calories in rural areas while increasing the calorie supply. In general, a preliminary data analysis confirms that in OECD countries, obesity is linked to many of the same factors as in the United States, related to the industrialization and westernization of societies around the world.
There are, however, some cultural differences that should be taken into consideration in order to understand the spread of obesity and weight-related problems around the world. For instance, the spirit of massive consumption and the idea of "getting a good value for your money" are more linked to some countries than others. In addition, the effects related to the imitation of western lifestyles are also different, depending on the degree of reception and adoption of these new cultural habits, which include the consumption of fast food, sodas, and snacks.
ConclusionsPopulation and consumption data reveal that socioeconomic and cultural factors are affecting the spread of obesity around the world. Although economists have recently started exploring the economic causes and consequences of obesity, providing a solution to this problem may require a complex vision that incorporates more than economic incentives to help consumers eat healthier foods (such as providing mandatory nutritional food information, taxing food products with high levels of sugars, carbohydrates, and fats, or subsidizing certain fruits and vegetables for lower-income groups). Given that both consumption and expenditure of calories matter, new health policies promoting more active lifestyles should be put forward by countries affected by the obesity epidemic. This would alleviate the symptoms of new sedentary lifestyles common to all industrialized countries. The fight against weight problems may also require having an understanding of the sociological perspectives of cultural change and economic growth, reminding individuals that "they are what they eat."

Criticisms of economics

The dismal science is a derogatory alternative name for economics devised by the Victorian historian Thomas Carlyle in the 19th century. It is often stated that Carlyle gave economics the nickname "dismal science" as a response to the late 18th century writings of The Reverend Thomas Robert Malthus, who grimly predicted that starvation would result, as projected population growth exceeded the rate of increase in the food supply. The teachings of Malthus eventually became known under the umbrella phrase "Malthus' Dismal Theorem". His predictions were forestalled by unanticipated dramatic improvements in the efficiency of food production in the 20th century; yet the bleak end he proposed remains as a disputed future possibility, assuming human innovation fails to keep up with population growth.[124]
Some economists, like John Stuart Mill or Leon Walras, have maintained that the production of wealth should not be tied to its distribution. The former is in the field of "applied economics" while the latter belongs to "social economics" and is largely a matter of power and politics.[125]
In The Wealth of Nations, Adam Smith addressed many issues that are currently also the subject of debate and dispute. Smith repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate a government into doing their bidding. In Smiths day, these were referred to as factions, but are now more commonly called special interests, a term which can comprise international bankers, corporate conglomerations, outright oligopolies, monopolies, trade unions and other groups.[126]
Economics per se, as a social science, does not stand on the political acts of any government or other decision-making organization, however, many policymakers or individuals holding highly ranked positions that can influence other people's lives are known for arbitrarily use a plethora of economic theory concepts and rhetoric as vehicles to legitimize agendas and value systems, and do not limit their remarks to matters relevant to their responsibilities.[127] The close relation of economic theory and practice with politics[128] is a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with specific social agendas and value systems.[129]
In Steady State Economics 1977, Herman Daly points out the logical inconsistencies between the emphasis placed on economic growth and the energy and environmental realities confronting us.[130] Like Frederick Soddy, Daly argued that our preoccupation with monetary flows at the expense of thermodynamics principles misleads us into believing that technological advance is limitless, and that perpetual economic growth is not only physically possible, but morally and ethically desirable as well. In Wealth, Virtual Wealth and Debt, (George Allen & Unwin 1926), Frederick Soddy turned his attention to the role of energy in economic systems. He criticized the focus on monetary flows in economics, arguing that "real" wealth was derived from the use of energy to transform materials into physical goods and services. Soddy's economic writings were largely ignored in his time, but would later be applied to the development of biophysical economics and ecological economics and also bioeconomics in the late 20th century.[131]
Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of macroeconomic policies[132] (monetary and fiscal policy) of the States, are focus of contention and criticism.[133][134][135][136] Deirdre McCloskey, a longstanding critic of economics, claims that her criticisms have gone largely unheard over the years,[137] although her contention is controversial.[138]

Criticism of assumptions
Economics has been subject to criticism that it relies on unrealistic, unverifiable, or highly simplified assumptions. Regardless of whether they are mathematical assumptions, examples include the assumption of perfect information, with its corollaries of profit maximization and rational choices.[139] [140][141]
Mainstream economics is often criticized by heterodox economics, as well as some within the mainstream community, for its focus on formalized mathematical theorems and technique over content, and its relative lack of attention to institutions, uncertainty, and real world problems.[142][143] Heterodox schools have emphasized unquantifiable Knightian uncertainty, imperfect information, social institutions, and the enormous complexity of economic systems and agents. Although much of the most groundbreaking economic research in history involved concepts rather than math, today it is nearly impossible to publish a non-mathematical paper in top economic journals.[144] Disillusionment on the part of some students with neoclassical economics led to the post-autistic economics movement, which began in France in 2000.
David Colander, an advocate of complexity economics, has also commented critically on the mathematical methods of economics, which he associates with the MIT approach to economics, as opposed to the Chicago approach (although he also states that the Chicago school can no longer be called intuitive). He believes that the policy recommendations following from Chicago's intuitive approach had something to do with the decline of intuitive economics. He notes that he has encountered colleagues who have outright refused to discuss interesting economics without a formal model, and he believes that the models can sometimes restrict intuition.[145] More recently, however, he has written that heterodox economics, which generally takes a more intuitive approach, needs to ally with mathematicians and become more mathematical.[91] "Mainstream economics is a formal modeling field", he writes, and what is needed is not less math but higher levels of math. He notes that some of the topics highlighted by heterodox economists, such as the importance of institutions or uncertainty, are now being studied in the mainstream through mathematical models without mention of the work done by the heterodox economists. New institutional economics, for example, examines institutions mathematically without much relation to the largely heterodox field of institutional economics.
In his 1974 Nobel Prize lecture, Friedrich Hayek, known for his close association to the heterodox school of Austrian economics, attributed policy failures in economic advising to an uncritical and unscientific propensity to imitate mathematical procedures used in the physical sciences. He argued that even much-studied economic phenomena, such as labor-market unemployment, are inherently more complex than their counterparts in the physical sciences where such methods were earlier formed. Similarly, theory and data are often very imprecise and lend themselves only to the direction of a change needed, not its size.[146] In part because of criticism, economics has undergone a thorough cumulative formalization and elaboration of concepts and methods since the 1940s, some of which have been toward application of the hypothetico-deductive method to explain real-world phenomena.[147]
Source : Wikipedia.org

Economics and other subjects

Main articles: Law and Economics, Philosophy of economics, Natural resource economics, and Thermoeconomics
Economics is one social science among several and has fields bordering on other areas, including economic geography, economic history, public choice, energy economics, cultural economics, and institutional economics.
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of legal rules, to assess which legal rules are economically efficient, and to predict what the legal rules will be.[111][112] A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities.[113]
The relationship between economics and ethics is complex. Many economists consider normative choices and value judgments, like what needs or wants, or what is good for society, to be political or personal questions outside the scope of economics. Once a person or government has established a set of goals, however, economics can provide insight as to how they might best be achieved.
Others see the influence of economic ideas, such as those underlying modern capitalism, to promote a certain system of values with which they may or may not agree. (See, for example, consumerism and Buy Nothing Day.) According to some thinkers, a theory of economics is also, or implies also, a theory of moral reasoning.[114]
The premise of ethical consumerism is that one should take into account ethical and environmental concerns, in addition to financial and traditional economic considerations, when making buying decisions.
On the other hand, the rational allocation of limited resources toward public welfare and safety is also an area of economics. Some have pointed out that not studying the best ways to allocate resources toward goals like health and safety, the environment, justice, or disaster assistance is a sort of willful ignorance that results in less public welfare or even increased suffering.[115] In this sense, it would be unethical not to assess the economics of such issues. In fact, state agencies all over the world, including the federal agencies in the United States, routinely conduct economic analysis studies toward that end.
Energy economics relating to thermoeconomics, is a broad scientific subject area which includes topics related to supply and use of energy in societies. Thermoeconomists argue that economic systems always involve matter, energy, entropy, and information.[116]Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics but in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits of the various mechanisms for capturing and utilizing available energy to build biomass and do work.[117][118] As a result, thermoeconomics are often discussed in the field of ecological economics, which itself is related to the fields of sustainability and sustainable development.
Georgescu-Roegen introduced into economics, the concept of entropy from thermodynamics (as distinguished from the mechanistic foundation of neoclassical economics drawn from Newtonian physics) and did foundational work which later developed into evolutionary economics. His work contributed significantly to bioeconomics and to ecological economics.[119][120][121][122][123]
Source : Wikipedia.org

Economics in practice

Being an economist
Main article: Economist
The professionalization of economics, reflected in the growth of graduate programs on the subject, has been described as "the main change in economics since around 1900".[90] Most major universities and many colleges have a major, school, or department in which academic degrees are awarded in the subject, whether in the liberal arts, business, or for professional study. The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (colloquially, the Nobel Prize in Economics) is a prize awarded to economists each year for outstanding intellectual contributions in the field. In the private sector, professional economists are employed as consultants and in industry, including banking and finance. Economists also work for various government departments and agencies, for example, the national Treasury, Central Bank or Bureau of Statistics.

Economists' tools
Main articles: Mathematical economics, Economic methodology, and Schools of economics
Contemporary mainstream economics, as a formal mathematical modeling field, could also be called mathematical economics.[91] It draws on the tools of calculus, linear algebra, statistics, game theory, and computer science.[92] Professional economists are expected to be familiar with these tools, although all economists specialize, and some specialize in econometrics and mathematical methods while others specialize in less quantitative areas. Heterodox economists place less emphasis upon mathematics, and several important historical economists, including Adam Smith and Joseph Schumpeter, have not been mathematicians. Economic reasoning involves intuition regarding economic concepts, and economists attempt to analyze to the point of discovering unintended consequences.

Theory
Mainstream economic theory relies upon a priori quantitative economic models, which employ a variety of concepts. Theory typically proceeds with an assumption of ceteris paribus, which means holding constant explanatory variables other than the one under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research than prior theories.[93]
In microeconomics, principal concepts include supply and demand, marginalism, rational choice theory, opportunity cost, budget constraints, utility, and the theory of the firm.[94][95] Early macroeconomic models focused on modeling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists were pressured to base their models in microfoundations. The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory, the quantity theory of money predicts that increases in the money supply increase inflation, and inflation is assumed to be influenced by rational expectations. In development economics, slower growth in developed nations has been sometimes predicted because of the declining marginal returns of investment and capital, and this has been observed in the Four Asian Tigers. Sometimes an economic hypothesis is only qualitative, not quantitative.[96]
Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) used mathematical methods to represent the theory, particularly as to maximizing behavioral relations of agents reaching equilibrium. The book focused on examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data.[97]

Empirical investigation
Main article: Econometrics
Economic theories are sometimes tested empirically, largely through the use of econometrics using economic data.[98] The controlled experiments common to the physical sciences are difficult and uncommon in economics, and instead broad data is observationally studied; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more tentative. Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size, economic significance, and statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is dependent upon the falsifiable hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data sets, and prior beliefs.
Criticism based on professional standards and non-replicability of results serve as further checks against bias, errors, and over-generalization,[99][95] although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data.[100] Like theories, uses of test statistics are themselves open to critical analysis,[101][102][103] although critical commentary on papers in economics in prestigious journals such as the American Economic Review has declined precipitously in the past 40 years.[104] This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).[105]
In applied economics, input-output models employing linear programming methods are quite common. Large amounts of data are run through computer programs to analyze the impact of certain policies; IMPLAN is one well-known example.
Experimental economics has promoted the use of scientifically controlled experiments. This has reduced long-noted distinction of economics from natural sciences allowed direct tests of what were previously taken as axioms.[106][107] In some cases these have found that the axioms are not entirely correct; for example, the ultimatum game has revealed that people reject unequal offers. In behavioral economics, psychologists Daniel Kahneman and Amos Tversky have won Nobel Prizes in economics for their empirical discovery of several cognitive biases and heuristics. Similar empirical testing occurs in neuroeconomics. Another example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences.[108][109] These techniques have led some to argue that economics is a "genuine science.".[8]

Game theory
Main article: Game theory
Game theory is a branch of applied mathematics that studies strategic interactions between agents. In strategic games, agents choose strategies that will maximize their payoff, given the strategies the other agents choose. It provides a formal modeling approach to social situations in which decision makers interact with other agents. Game theory generalizes maximization approaches developed to analyze markets such as the supply and demand model. The field dates from the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. It has found significant applications in many areas outside economics as usually construed, including formulation of nuclear strategies, ethics, political science, and evolutionary theory.[110]
Source : Wikipedia.org

History of economic thought

The upper part of the stele of Hammurabi's code of laws
Main articles: History of economic thought and Schools of economics
The city states of Sumer developed a trade and market economy based originally on the commodity money of the Shekel which was a certain weight measure of barley, while the Babylonians and their city state neighbors later developed the earliest system of economics using a metric of various commodities, that was fixed in a legal code.[65] The early law codes from Sumer could be considered the first (written) economic formula, and had many attributes still in use in the current price system today... such as codified amounts of money for business deals (interest rates), fines in money for 'wrong doing', inheritance rules, laws concerning how private property is to be taxed or divided, etc.[66] For a summary of the laws, see Babylonian law and Ancient economic thought.
Economic thought dates from earlier Mesopotamian, Greek, Roman, Indian, Chinese, Persian and Arab civilizations. Notable writers include Aristotle, Chanakya, Qin Shi Huang, Thomas Aquinas and Ibn Khaldun through to the 14th century. Joseph Schumpeter initially considered the late scholastics of the 14th to 17th centuries as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary, interest, and value theory within a natural-law perspective.[67] After discovering Ibn Khaldun's Muqaddimah, however, Schumpeter later viewed Ibn Khaldun as being the closest forerunner of modern economics,[68] as many of his economic theories were not known in Europe until relatively modern times.[69]

1638 painting of a French seaport during the heyday of mercantilism.
Two other groups, later called 'mercantilists' and 'physiocrats', more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.[70][71]
Physiocrats, a group of 18th century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. Adam Smith described their system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. Variations on such a land tax were taken up by subsequent economists (including Henry George a century later) as a relatively non-distortionary source of tax revenue. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire, which called for minimal government intervention in the economy.[72][73]

Classical political economy
Main article: Classical economics

Adam Smith wrote The Wealth of Nations.
Publication of Adam Smith's The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline."[74] The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.
In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace. He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.
In his famous invisible-hand analogy, Smith argued for the seemingly paradoxical notion that competitive markets tended to advance broader social interests, although driven by narrower self-interest. The general approach that Smith helped initiate was called political economy and later classical economics. It included such notables as Thomas Malthus, David Ricardo, and John Stuart Mill writing from about 1770 to 1870.[75]
While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labor and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.

Malthus cautioned law makers on the effects of poverty reduction policies.
Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s.
Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[76] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium.

Marxism and neo-classicism
Main articles: Marxian economics and Neoclassical economics

The Marxist school of economic thought comes from the work of German economist Karl Marx.
Marxist (later, Marxian) economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx's major work, Capital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital.[77][78] The labour theory of value held that the value of a thing was determined by the labor that went into its production. This contrasts with the modern understanding that the value of a thing is determined by what one is willing to give up to obtain the thing.
A body of theory later termed 'neoclassical economics' or 'marginalism' formed from about 1870 to 1910. The term 'economics' was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for 'econonic science' and a substitute for the earlier, broader term 'political economy'.[79][80] This correspnded to the influence on the subject of mathematical methods used in the natural sciences.[2] Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value inherited from classical economics in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.[81]
In microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics.[82][83]
Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for analyzing long-run variables affecting national income.

Keynesian economics
Main articles: Keynesian economics and Post-Keynesian economics

John Maynard Keynes (above, right), widely considered a towering figure in economics.
Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field.[84][85] The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "effective demand" and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis.[86][87][88]
Keynesian economics has two successors. Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge and the work of Joan Robinson.[89] New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behavior but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.

Other schools and approaches
Main article: Schools of economics
Other well-known schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, include the Austrian School, Chicago School, the Freiburg School, the School of Lausanne and the Stockholm school. Contemporary mainstream economics is sometimes separated into the MIT, or Saltwater, approach, and the Chicago, or Freshwater, approach.
Within macroeconomics there is, in general order of their appearance in the literature; classical economics, Keynesian economics, the neoclassical synthesis, post-Keynesian economics, monetarism, new classical economics, and supply-side economics. Alternative developments include ecological economics, institutional economics, evolutionary economics, dependency theory, structuralist economics, world systems theory, thermoeconomics, econophysics and technocracy.
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International economics

Main articles: International economics and Economic system
International trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of gains from trade. Policy applications include estimating the effects of changing tariff rates and trade quotas. International finance is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary globalization.[58][59][60]

Comparative advantage
Main articles: Comparative advantage, Gains from trade, Free trade, and Fair trade
David Ricardo, Principles of Political Economy and Taxation

International trade
Main articles: International trade and Free trade
See also: European Union, World Trade Organization, North American Free Trade Agreement, and ASEAN

Poverty and development
Main article: Development economics

World map showing GDP (PPP) per capita.
The distinct field of development economics examines economic aspects of the development process in relatively low-income countries focussing on structural change, poverty, and economic growth. Approaches in development economics frequently incorporate social and political factors.[61][62]
Economic systems is the branch of economics that studies the methods and institutions by which societies determine the ownership, direction, and allocaton of economic resources. An economic system of a society is the unit of analysis. Among contemporary systems at different ends of the organizational spectrum are socialist systems and capitalist systems, in which most production occurs in respectively state-run and private enterprises. In between are mixed economies. A common element is the interaction of economic and political influences, broadly described as political economy. Comparative economic systems studies the relative performance and behavior of different economies or systems.[63][64]

International finance
Main articles: International finance, International Monetary Fund, and World Bank
See also: Sovereign wealth fund
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Macroeconomics

Main article: Macroeconomics

Circulation in macroeconomics
Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down," that is, using a simplified form of general-equilibrium theory.[45] Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.[46] This has addressed a long-standing concern about inconsistent developments of the same subject.[47] Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labor force growth. [48][49]

Growth

World map showing GDP real growth rates for 2007.
Main articles: Economic growth and General equilibrium
Growth economics studies factors that explain economic growth – the increase in output per capita of a country over a long period of time. The same factors are used to explain differences in the level of output per capita between countries. Much-studied factors include the rate of investment, population growth, and technological change. These are represented in theoretical and empirical forms (as in the neoclassical growth model) and in growth accounting.[50][51]

Depression and unemployment
See also: Circular flow of income, Aggregate supply, Aggregate demand, Great Depression, and Unemployment

Inflation and monetary policy
Main articles: Inflation and Monetary policy
See also: Money, Quantity theory of money, Monetary policy, History of money, and Milton Friedman

A 640 BC one-third stater coin from Lydia, shown larger. One of the first standardized coins.

Some different currencies. Exchange rates are determined in currency markets used in international trade.
Money is a means of final payment for goods in most price system economies and the unit of account in which prices are typically stated. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention, like language, useful to one largely because it is useful to others. As a medium of exchange, money facilitates trade. Its economic function can be contrasted with barter (non-monetary exchange). Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate double coincidence of wants as to what is exchanged, say apples and a book. Money can reduce the transaction cost of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces.[52]
At the level of an economy, theory and evidence are consistent with a positive relationship running from the total money supply to the nominal value of total output and to the general price level. For this reason, management of the money supply is a key aspect of monetary policy.[53][54]

Fiscal policy and regulation
Main articles: Fiscal policy, Government spending, Regulation, and National accounts
National accounting is a method for summarizing aggregate economic activity of a nation. The national accounts are double-entry accounting systems that provide detailed underlying measures of such information. These include the national income and product accounts (NIPA), which provide estimates for the money value of output and income per year or quarter. NIPA allows for tracking the performance of an economy and its components through business cycles or over longer periods. Price data may permit distinguishing nominal from real amounts, that is, correcting money totals for price changes over time.[55][56] The national accounts also include measurement of the capital stock, wealth of a nation, and international capital flows.[57]

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