The Philosophy of Economics: Why do we study Economics?
~ Louis Pasteur in His Laboratory by Albert Edelfelt
“What we do need – is the ability to understand the various knowledge’s. What is each one about? What is it trying to do? What are its central concerns and theories? What major new insights has it produced? What are its important areas of ignorance, its problems, its challenges?…Without such understanding, the knowledge’s themselves will become sterile, will indeed cease to be “knowledges (Drucker, 2005).”
~ Peter Drucker
Knowing what economics is isn’t enough. For every why there is a wherefore. So why do we study economics? To ask this question is to go one level deeper than merely determining the scope of economics. Under a microscopic lens, the answer to the question above lies in the philosophy behind economics. As with every other subject or discipline, it is important that we discover why we are studying it in the first place, or simply put, why is it important?
The philosophy of economics is the philosophy of social science with economic examples (Honderich, 2005). The difference between economics and other social sciences like psychology and sociology is its distinctive approach to the problems and patterns of societies. Economics is more about the individual making informed economic-related decision based on scarcity of resources. This focus on scarcity and self-interest makes economics a distinctive subset of sociology.
As a discipline (normative economics), economics aims to discover answers to these three questions:
- What goods are being produced and in what quantities?
- How are goods being produced?
- For whom are goods being produced?
In practical application (positive economics), economics aims to answer the following:
- Are we producing the right goods and services at the right quantities?
- Are we efficient in producing goods and services based on scarce resources?
- Are we producing the goods and services for the right individuals in society?
Note: Normative economics aims at answering what is. Positive economics aims at answering what should be.
From the results of answering the questions above, an economist aims to make effective use of a society’s resources to satisfy the wants and needs of the people. The heart of economics is the maximization of expected utility based on the society’s limited resources at a particular point in time. The more efficient the use of resources to satisfy needs and wants, the more successful the economist is perceived to be.
In short, the goal of economics is to achieve economic efficiency defined by Paul Samuelson as the following:
Economic efficiency requires that an economy produce the highest combination of quantity and quality of goods and services given its technology and scarce resources (Samuelson & Nordhaus, 2010). An economy is producing efficiently when no individual’s economic welfare can be improved unless someone else is made worse off (similar to achieving Pareto efficiency).
Looking holistically at economics, one must go beyond the simple relationship of satisfying the needs and wants of individuals with goods and services. The true aim of economics goes beyond that. By virtue of being a social science, the end result of economics must result in an increase in the wellbeing of individuals and, therefore, an increase in the material standard of living of a society. We should not confine the scope of economics merely to goods and services. People do, in real life, tend to make very ‘economic’ decisions in every other aspect of their lives (for example, should I read a book or play a computer game?).
At a micro level, economics examine the decisions made by individuals and their impact on both themselves and the society they reside in. To take an economic approach to making decisions involves acknowledging that our actions affect others. Everything and everyone is interrelated and interconnected in a giant web of activity in any society anywhere in the world. When we decide to do something, we must also consider the unintended consequences that our actions have on others. Economics help us to see the bigger picture of things; it helps us to view our actions and interactions as part of a giant system with many causes and effects.
At a macro level, economics help us to make informed decisions. The study of economics teaches us the basic economic principles that allow us to understand the economic issues that are discussed everyday in the media and in politics. This is turn will help us in deciding whether to support or oppose the economic policies implemented by our governments (especially in democratic countries where we are allowed to vote for our future leaders).
Economics looks not only at the means but also at the ends. In economics, the consequences matter more than the goals (Sowell, 2011). Economics forces us to look at economic policies and systems through the incentives they create rather than the noble goals that they seek to pursue. Time and time again, history has proved that in the long run, human beings react to economic incentives more than other forms of motivation.
As an endnote, I will like to stress on the importance of looking at reality as a whole rather than as separate distinct individual parts. When you discover how everyone and everything is connected, your conduct will change for the better and you will feel the weight of your every action. No longer will you aim to do what you can, but rather, you will aim to do what you should. Obligations will supersede individual freedom. Alfred Marshall famously defined economics as, ‘A study of mankind in the ordinary business of life.’ We should never limit the boundaries of our knowledge to the discipline we are studying. Do not be too quick label something ‘out of scope’ of the study of economics.