Economics: Overview

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ECONOMICS: OVERVIEW

In economics, issues of science, technology, and ethics are more diverse than in any other scientific or technological discipline. In the first instance, like all the sciences, economics is both dependent on and independent of ethics. Its methods involve internal commitments of an ethical character (e.g., truth telling) but are subject to external ethical oversight (e.g., with regard to the proper treatment of human participants in empirical research). At the same time, as the entry on "Economics and Ethics" points out, the content of the science may have ethical implications in ways that physics, for instance, does not.

In the second instance, insofar as economics constitutes a technique or technology, it may provide guidance for how to achieve externally determined ends. As such it exhibits multiple interactions with various ethical, legal, and policy perspectives. Such interactions are referenced in entries such as those on "Capitalism," "Market Theory," "Political Economy," and "Science Policy."

Modern Economics

Economics in the modern sense (also called "neoclassical economics") is the science of the allocation and utilization of resources under conditions of scarcity, that is, when there are not enough resources or goods to satisfy all human needs or wants. In a widely adopted definition, for example, the British economist Lionel Robbins (1932) describes economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternatives uses" (p. 16). Insofar as economics assumes that most goods and services are scarce or insufficient to satisfy human wants, and that by and large all human wants are legitimate, economics places the free satisfaction of individual human desires at the top of its own internal moral hierarchy. This may be described as the ethics of economics, one that further provides a basic justification for modern technology as a means to increase efficiency in exploitation, production, and distribution, and has been subject to extended historicophilosophical assessment and some criticism (see, e.g., Polanyi 1944, Dumont 1977, Rhoads 1985, Achterhuis 1988, Nelson 2001).

The science of economics is divided into two main overlapping branches dealing with smaller scale and larger scale economic phenomena. The economic analysis of scarcity and the pursuit of productive efficiency in the sense of maximizing satisfaction (or utilities) among individuals at the level of consumers, firms, and markets is called microeconomics. The economic analysis of scarcity at the national level, usually in terms of policies that promote or hinder gross economic productivity, employment, investment, or inflation, is called macroeconomics. There is a greater consensus about the principles operative in and recommendations for behaviors in microeconomics than in macroeconomics.

A strong consensus at the level of microeconomics is exhibited around what are known as the first and second theorems of welfare economics. It is universally agreed that both theorems follow logically from the general equilibrium model—even while there are disagreements about the plausibility of the assumptions necessary for the theory to hold that make problematic any policy recommendations based on it. Again, see "Economics and Ethics."

The first theorem states that the general equilibrium in a competitive economy is Pareto efficient. A special kind of efficiency, Pareto efficiency (as formulated by the Italian engineer economist Vilfredo Pareto) is that situation in which it is not possible to make anyone better off without making someone else worse off. A competitive general equilibrium refers to the outcome in an ideal setting in which consumers are able, in a free and well-informed manner, to exchange goods and services in an open market with multiple independent producers. Of course, this ideal is not always the reality.

The second theorem states that any feasible allocation of welfare to economic actors can be achieved by the appropriate assignment of property rights to agents, followed by competitive production and exchange. What this means is that any desired Pareto-efficient outcome can be achieved simply by an appropriate initial distribution of property rights followed by free-market activity.

It is important to note that because of debates about the assumptions behind the model on which these theorems rely, they do not in themselves fully justify the market economy. The market economy based on private property upheld by the state simply seems to work better in achieving popularly approved welfare goals than alternative systems.

Insofar as economics involves both scientific theory about decision-making and techniques (or technologies) for decision-making, it has further implications for ethics. Indeed, those special economic analyses found in "Game Theory" and its generalization known as "Rational Choice Theory" have on occasion been presented as scientific assessments of some aspects of human behavior that also have normative force.

The less than strong consensus at the level of macroeconomics is reflected in extended debates about how science and technology contribute to national economic productivity, employment, investment, or inflation. These debates are reviewed in the entries on "Innovation," "Invention," "Political Economy," and "Science Policy." They are also related to a host of studies in the history and sociology of science, technology, and economic change that are relevant but not considered at length (see, e.g., Rosenberg 1976, 1982, 1994; Mokyr 1990, 2002; Rosenberg, Landau, and Mowery 1992; Mirowski and Sent 2002).

Still a third main branch of economic analysis concerns development. This field of economics and its special relations to science, technology, and ethics is considered in the entry on "Development Ethics."

Postmodern Economic Issues

Along with these three main branches of economics, there are a number of closely related specialized forms that qualify or extend the modern economic framework. Two of these have been given special entries: "Ecological Economics" and "Environmental Economics."

Environmental economics, which began to be recognized as a special field in the 1970s, seeks to adapt the principles of micro- or welfare economics to satisfying individual environmental desires for clean water and clean air by seeking to identify the best market mechanisms to promote pollution or emission reductions and waste management. To some extent it is often argued that this requires the social scientific management of markets.

Ecological economics, which emerged in the 1980s, especially contends that market mechanisms are insufficient to evaluate ecological phenomena. As a result, it seeks new ways to conceptualize, for instance, the carrying capacity of the environment and the economic value of natural goods and services.

Both environmental and ecological economics, because they require experts to adjust or correct markets to make them reflect social values, must deal with the problem formulated by social choice theory. Social choice theory concerns the question of whether societies—rather than individuals—can be said to have preferences, and if so, how these preferences relate to the preferences of the individual members of a society. The core result of social choice theory is an impossibility theorem, formulated by the economist Kenneth J. Arrow (1970), that challenges the notion that a society can rank its options in a coherent way. Arrow's theorem states that if everyone in a society has individual preferences that satisfy some basic principles of consistency, and applies these preferences to rank-order a set of options, unless everyone has the same preferences (or agrees to appoint a dictator) there will be no way to add up the individual preferences to achieve a social preference ranking that retains the consistency observed in individual preferences.

CARL MITCHAM
ROSS MCKITRICK

BIBLIOGRAPHY

Achterhuis, Hans. (1988). Het rijk van de schaarste: Van Thomas Hobbes tot Michel Foucault [The reign of scarcity: From Thomas Hobbes to Michel Foucault]. Baarn, Netherlands: Ambo.

Arrow, Kenneth J. (1970). Social Choice and Individual Values, 2nd edition. New Haven, CT: Yale University Press.

Dumont, Louis. (1977). From Mandeville to Marx: The Genesis and Triumph of Economic Ideology. Chicago: University of Chicago Press.

Mirowski, Philip, and Esther-Mirjam Sent, eds. (2002). Science Bought and Sold: Essays in the Economics of Science. Chicago: University of Chicago Press. A collection of nineteen texts: one (by Charles Sanders Peirce) from the 1800s, three from the 1950s and 1960s, ten from the 1990s and 2000s, with five previously unpublished. Good introduction.

Mokyr, Joel. (1990). The Lever of Riches: Technological Creativity and Economic Progress. New York: Oxford University Press.

Mokyr, Joel. (2002). The Gifts of Athena: Historical Origins of the Knowledge Economy. Princeton, NJ: Princeton University Press.

Nelson, Robert H. (2001). Economics as Religion: From Samuelson to Chicago and Beyond. University Park: Pennsylvania State University Press.

Polanyi, Karl. (1944). The Great Transformation. New York: Rinehart.

Rhoads, Steven E. (1985). The Economist's View of the World: Government, Markets, and Public Policy. Cambridge, UK: Cambridge University Press. A widely regarded and often reprinted introduction by a political scientist.

Robbins, Lionel. (1932). An Essay on the Nature and Significance of Economic Science. London: Macmillan.

Rosenberg, Nathan. (1976). Perspectives on Technology. Cambridge, UK: Cambridge University Press.

Rosenberg, Nathan. (1982). Inside the Black Box: Technology and Economics. Cambridge, UK: Cambridge University Press.

Rosenberg, Nathan. (1994). Exploring the Black Box: Technology, Economics, and History. Cambridge, UK: Cambridge University Press.

Rosenberg, Nathan; Ralph Landau; and David C. Mowery, eds. (1992). Technology and the Wealth of Nations. Stanford, CA: Stanford University Press.

Encyclopedia of Science, Technology, and Ethics