Economy is a social science concerned with the production, distribution, exchange, and consumption of goods and services.  Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently and economic objective they select.

Standard economics can be divided into two major fields:

The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible.  As economists say, they maximize utility. For their part, entrepreneurs seek as much profit as they can extract from their operations.

Macroeconomics focuses on the performance, structure, behavious and decision making of the economy as a whole. It focuses factors like national income and employment etc. The aim of macroeconomics is to understand the interrelationship between these factors and between various sectors of economy. Macroeconomics dates from the book, “The General Theory of Employment, Interest, and Money” (1935), by the British economist John Maynard Keynes.  His explanation of prosperity and depression centres on the total or aggregate demand for goods and services by consumers, business investors, and governments.  According to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending and consequently larger budget deficits by government.

History of Economic Thought

Economic issues have occupied people’s minds throughout the ages. Aristotle and Plato in ancient Greece wrote problems of wealth, property, and trade.  Both were prejudiced against commerce, feeling that to live by trade was undesirable. The Romans borrowed their economic ideas from the Greeks and showed the same contempt for trade.

During the middle Ages the economic ideas of the Roman Catholic Church were expressed in the canon law, which condemned usury (the taking of interest for money loaned) and regarded commerce as inferior to agriculture. 

Economics as a subject of modern study dates from the work, “Inquiry into the Nature and Causes of the Wealth of Nations” (1776), by the Scottish philosopher and economist Adam Smith.

Classical Economics

Classical economics starts with Smith, continues with the British economists Thomas Robert Malthus and David Ricardo, and culminates with John Stuart Mill. From Ricardo, classicists derived the notion of diminishing returns[1], which held that as more labor and capital were applied to land, yields after “a certain and not very advanced stage in the progress of agriculture steadily diminished.”

Through AdamSmith’s emphasis on consumption, rather than production, the scope of economics was considerably broadened. Smith was optimistic about the chances of improving general standards of life.  He called attention to the importance of permitting individuals to follow their self-interest as a means of promoting national prosperity.

Malthus, on the other hand, in his enormously influential book “An Essay on the Principle of Population” (1798), imparted a tone of gloom to classical economics, arguing that hopes for prosperity were fated to founder on the rock of excessive population growth. 

Mill’s Principles of political Economy was the leading text on the subject until the end of the 19th century.  Although Mill accepted the major theories of his classical predecessor, he held out more hope than did Ricardo and Malthus that the working class could be educated into rational limitation of their own numbers.  Mill was also a reformer who was quite willing to tax inheritances heavily and even to allow government a larger role in protecting children and workers. He was far more critical than other classical economists of business behaviour and favoured worker ownership of factories. Mill thus represents a bridge between classical laissez-faire economics and an emerging welfare state.

The classical economists also accepted Say’s Law of Markets, the doctrine of the French economist Jean Baptiste Say. Say’s law holds that the danger of general unemployment of “glut” in a competitive economy is negligible because production tends to create its own matching demand up to the limit of human labour and the natural resources available for production.  Each enlargement of output adds to the wages and other incomes that constitute the funds needed to purchase added output.

The Neoclassicists

Classical economists proceeded from the assumption of scarcity, such as the law of diminishing returns and Malthusian population doctrine. Dating from the 1870s, neoclassicist economists such as William Stanley Jevons in Great Britain, Leon Walras in France, and Karl Menger in Austria shifted emphasis from limitations on supply in interpretations of consumer choice in psychological terms.

British economist Alfred Marshall, particularly in his masterly neoclassicist work “Principles of Economic” (1890), explained demand by the principle of marginal utility, and supply by the rule of marginal productivity (the cost of producing the last item of a given quantity).

By implication, if not direct statement, the tendency of neoclassical doctrine has been politically conservative.  Its advocates distinctly prefer competitive markets to government intervention and, at least until the Great Depression of the 1930s, insisted that the best public policies were echoes of Adam Smith: low taxes, thrift in public spending, and annually balanced budgets.  Neoclassicists do not inquire into the origins of wealth.  They explain disparities in income as well as wealth for the most part by parallel differences among human beings in talent, intelligence, energy, and ambition. Hence, men and women succeed or failed because of their individual attributes.

Keynesian Economics

John Maynard Keynes was a student of Alfred Marshall and an exponent of neoclassical economics until the 1930s. The Great Depression bewildered economists and politicians alike.

New explanations and fresh policies were urgently required; this was precisely what Keynes supplied. In his enduring work “The General Theory of Employment, Interest, and Money”, Existing explanations of unemployment he rejected: Neither high price nor high wages could explain persistent depression and mass unemployment. Instead, he proposed an alternative explanation of these phenomena focused on what he termed aggregate demand – that is, the total spending of consumers, business investors, and governmental bodies.  When aggregate demand is low, he theorized, sales and jobs suffer; when it is high, all is well and prosperous.