What is Economics?
This is a surprisingly difficult question to answer. So difficult that Roger Backhouse and Steven Medema needed to provide a full, article length survey of its answers. It’s a surprisingly practical question to ask as well, because we turn to economists for solutions to a number of the world’s problems, and if we don’t really know what they do, we might find they don’t actually solve the problems we want them to.
Economics might be unique among the sciences (in the old sense of the word qua body of knowledge) that if we ask what “it” is we aren’t especially likely to get a straightforward answer. So involved is its answering that Roger Backhouse and Steven Medema had to write an (excellent) paper on the subject. They reached a deeply unsatisfactory answer, a meaningless tautology really which could mean anything: economics is what economists do.
In theory, if all economists suddenly decided to take up astrology (some unkindly would say to the advantage of our predictive power) economics would become the study of star signs.
Let’s here try a different angle and ask what economics is from a practical angle. We quickly find an answer (economics is the study of the economy) which raises new questions to be sure, but profitable ones. First, let’s take a look at the history of answers to the question of what economics is using Backhouse and Medema’s paper, before formulating our own answer and considering how it is of surprising practical importance.
Historical definitions of economics
At the dawn of the science of economics as a discipline in its own right there was Adam Smith. And in the beginning he wrote a book and the book was good. The title gave us one of the first definitions of economics: An Inquiry into the Nature and Causes of the Wealth of Nations.
In the beginning, the question which economics (then a branch of moral philosophy) sought to answer was: what determines the wealth of a nation? In modern parlance we would rephrase this as the question of what drives economic growth — that which adds to the national wealth.
David Ricardo kept this focus but amended it slightly to draw attention to a particular subtlety therein. National wealth is held by no one in particular, it is distributed among the various people of a nation. So Ricardo added to the study of the nature and causes of the wealth of nations an interest also in the distribution of the wealth of nations and the causes thereof.
John Stuart Mill expanded a little further on this interest in the nature and causes of the wealth of nations again by adding a focus on the manner in which individual motivations led to individual actions which led, in combination, to the increase and distribution of the national wealth. John Stuart Mill therefore linked the study of the nature and cases of the wealth of nations with the drivers of human behaviour — with what would become psychology.
The study of the determination and distribution of wealth defined economics in its earliest form as a science in its own right. This is known as the “classical” period in the history of economic thought.
Sylvia Nasar has documented how this obsessed the early “classical” economists. Joan Robinson argued that this obsession stemmed from their need to justify economic growth to a religious society wary (at least on the surface) of the sin of greed. Whatever it was that motivated them, they were very much concerned with the system whereby material wealth was generated.
A fairly major change in the definition of economics was bridged by one of the greatest economists of all history: Alfred Marshall. This is the very beginning of my copy of his legendary Principles of Economics:
Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.
Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.
It’s a beautifully picturesque, almost Hesiodic definition: “a study of mankind in the ordinary business of life”. That aside, Marshall raised the status of Mill’s link of the study of the nature and causes of the wealth of nations with that of human motivation and action. He defined the study of human motivation and action as one whole side of economics, the more important side in fact.
Marshall was effectively saying that economics was on the one side the study of the nature and causes of the wealth of nations, but on the other, more important side, psychology. This is readily understood by his personal intellectual history. Sylvia Nasar has pointed out that Marshall was in fact interested in Gestalt psychology, and even considered pursuing it as a career.
It was Marshall’s elevation of psychology (or at least what became known as psychology) as the more important part of economics which would give rise to what has become the most enduring and potent definition of economics, that given it by Lionel Robbins.
The dominant model of psychology in economics at that time was what would later become known as “rational choice theory”. Individual behaviour was thought to consist of choosing out of a constrained set of alternative courses of action the one associated with the highest “utility”, a concept introduced by Jeremy Bentham to represent something between “use-value”, “pleasure” and “happiness”.
This became the basis for the definition of economics offered by Lionel Robbins in his famous Essay on the Nature and Significance Economic Science:
…the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
The ends spoken of here are captured by “utility” and the scarce means various “commodities” (goods and services) which might serve any number of uses.
Luigino Bruni and Robert Sugden have documented how, over time Paul Samuelson’s behaviourist interpretation of utility as “preferences” impossible of any further explanation came to dominate and push psychology as a discipline out of economics. Economics then became the study of individuals making “rational choices”: maximising utility/preferences under constraints. We say “rational choices”, because a lot of philosophers would disagree with this conception of rationality.
The basic, least controversial definition of economics has really remained thus ever since. The study of “rational choices” is at the foundation of equilibrium theory (the workhorse models of the discipline of economics), game theory (the study of strategic interaction in all settings), and increasingly the study of public choice (how political decisions are actually made). It is also, really, at the foundation of behavioral economics (which is different to behavioural economics), which Matthew Rabin characterised as composed mostly of “portable extensions of existing models”, existing models being based on rational choice theory.
Backhouse and Medema remind us in the latter part of their history however that this is merely the least controversial definition of economics. A number of economists especially in the less theoretical arenas of the discipline, the areas more concerned with the analysis of datasets, would dispute this definition. “Economists” study areas diverse as education, crime, sport, religion, the family and yes, even sex. Go figure. Steven Levitt of “Freakonomics” fame is the epitome of this catholicity (the unkind would say “schizophrenia”) of economics.
Backhouse and Medema’s purpose was not to state their claim, but to identify the definition given by the discipline to itself. They were forced to retreat to a deeply unsatisfactory definition of economics: economics is what economists do.
This is unsatisfactory because it is an empty tautology. Usually the definition of a discipline will inform us of what the practitioners of that discipline do (physicists study physical systems, biologists study biological systems, psychologists study human psychology), but here the discipline is defined by what its practitioners do.
But what do the practitioners do if the discipline they practice is defined by what they do? We have to ask them, a lot of them, which isn’t particularly practical.
Robert Solow once joked that while everything reminded Milton Friedman of the money supply, everything reminded him of sex but that he kept it out of the journals. But if Robert Solow hadn’t been able to help himself, economics would become, amongst unrestricted other things, the study of sexual behaviour. This is no frivolous example; I recall a “job market paper” offered to the University of Queensland which applied rational choice theory to the choice between the withdrawal method and abstinence.
So what is economics really if its professed practitioners study such diffuse topics we can’t define it? It could be anything. But this is not useful, and why we need a definition of economics. A definition should restrict the range of things to which a word applies, for that is the purpose of a word — to describe some thing, not everything.
A practically useful definition
Practicality is the conscience of science. Ultimately we desire science which is useful; knowledge which allows us to do things we couldn’t do without having it.
The answer to the question “what is economics” might seem to be the subject of a stately philosophical debate. It is, but it is also practical. We demand answers from any science such as economics for various questions to be posed to it. We need to know what economics is so that we can use it to answer questions we have about our world.
We can draw a lesson here from the practical sciences. Physics is the study of physical systems, chemistry the study of chemical systems, biology the study of biological systems, computer science the study of computing systems, psychology the study of psychological systems, sociology the study of social systems. Even theological science (yes, there is such a thing, and Cardinal Newman demonstrated the practicality of its knowledge) is the study of the system of God. Each practical science is a subject develops knowledge of the system which it studies.
From a practical perspective, we ought to really define economics as the study of the economy. If economists study the economy, create knowledge about it, we can have them answer questions about the economy. We can do things in the economy which we couldn’t do before without having the knowledge of economics.
If economics is not the study of the economy, but simply what economists do, then how can we know what questions we can ask an economist? If I ask an economist a question about some economic phenomenon, for instance “why did the Global Financial Crisis of 2007–2008 happen?” I will often get the answer “I don’t know, I study education/crime/sport/religion/family/sex”.
It is not practical to define economics as simply “what economists do” and leave it at that, we have no knowledge of what the science of economics may be used for.
Economics is a practical subject, a useful subject, when it gives us a science of the economy.
What next?
Economics is the study of the economy, good, now on to the next thing. While that definition is a tautology, it’s a useful one because it isn’t empty. It points us to the beginning of a fruitful line of questioning the answering of which progressively unveils an economic science.
Our first question in this series is: if economics is the study of the economy, then what is the economy?
As a matter of definition, an economic system is a system in which goods and services, the material requisites for life and its enjoyment are produced and exchanged. But there is a deeper and still more interesting aspect to that question: what is the nature of the system in which goods and services are produced and exchanged?
That is the original question of economics. What is the economy? I have begun an attempt to answer it here, and we readily see upon the answering of this question a whole range of new questions emerge in sequence, which answered unveil an economic science.
