What is Economics?

One of the questions I like to ask my student during the first week of class every year is “What is Economics?” The answers are always interesting to read, because unlike many other high school classes, Econ is one of those subjects students sometimes have no idea what it’s all about when they sign up for the class. Below are some of the definitions of “Economics” students shared in their first day survey this week:

“Economics is the study of money flow between either countries or individual companies.”


“My definition of Economics is the control of money by a person, organization or nation.”



“Economics is a complex system that determines and justifies global prices, currency values, and ultimately the success of a nation.”



“I’d say Economics is the study of how humans use resources including income, investments, taxes and the economy.”



“I think economics is the study of investments and money. Especially income and outcome, and taxes in the government.”



“The study of the distribution of wealth and how humanbeings tend to handle wealth.”



“A bunch of old men moaning about all of the potentially free lunch oppurtunities they had missed in their youth, passed off as the behaviour of markets.”



As you can see, most students do not yet have a clear definition of the subject in their heads when they start the course, which is perfectly understandable! So I thought I’d start the year off by sharing my definition of economics.





Please read the following introduction to Economics then answer the discussion question that follows.

So what IS Economics, anyway? Well, look around you. What do you see? From here in my house in Surrey, I see a new housing block being built. I can count three yellow cranes swinging their arms hauling construction materials around their respective sites. Beyond the cranes I see beautiful woodland stretching up a hillside with green sheep pastures and quaint farm houses scattered here and there. I see a church steeple and the rooftops of the businesses down in the village below. I can just see the tops of cars racing along the M25.



Now ask yourself, how did things get to be this way?





Why are new buildings going up in the midst of Europe’s deepest recession in decades?





Why are farmers still able to graze sheep on hillsides when 100 square meter condos are selling for a million francs just below their fields?





Why are the ancient woodlands of the North Downs still standing even as development has encroached into most of the region’s forests and natural ecosystems?





How do normal people make enough money to live comfortably in this expensive part of the UK?





Where do the things we buy come from?





Who built this computer I’m typing on and what will I be doing for a living in twenty years?

One of my favorite quotes that to me sums up what economics is all about comes not from an economist, but from the civil rights leader Martin Luther King. In 1967 King wrote:

Did you ever stop to think that you can’t leave for your job in the morning without being dependent on most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that’s handed to you by a Pacific islander. You reach for a bar of soap, and that’s given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning, and that’s poured into your cup by a South American. And maybe you want tea: that’s poured into your cup by a Chinese. Or maybe you’re desirous of having cocoa for breakfast, and that’s poured into your cup by a West African. And then you reach over for your toast, and that’s given to you at the hands of an English-speaking farmer, not to mention the baker. And before you finish eating breakfast in the morning, you’ve depended on more than half the world. This is the way our universe is structured, this is its interrelated quality.

Economics is about all the questions I posed above and it’s about all the interactions King describes. Economics is about solving one major problem faced by all human societies going back thousands of years. Economics is about the problem of scarcity.





Scarcity is the natural phenomenon arising from the fact that all the world’s resources are physically limited in quantity.

Limited resources alone would not pose a problem if it were not for one characteristics of human beings that makes us truly unique in the animal kingdom. The fact that we have desires and wants beyond our basic physical needs. In the face of humans’ practically unlimited desires and wants, the limited nature of the earth’s limited natural resources gives rise to conflicts regarding the allocation of those resources. Economics is the social science that deals with the allocation of earth’s scarce resources among the competing wants and needs of society. Economists provides society with various tools and techniques for efficiently allocating our scarce resources.

Discussion question:

Scarcity of resources has given rise to countless conflicts among and between societies throughout history. Identify one conflict from the past or present that you think the problem of scarcity gave rise to.



Some say that many of the environmental problems our world faces to day can be solved by economics. If that’s the case, then they must have to do with scarcity. Identify one environmental problem and explain how it relates to scarcity.



Time is one of the scarcest resources. Explain how the decisions you make regarding your limited time in and out of school can be considered economic decisions.

Mr Bentley

Structural Unemployment

In the US, the end of the recession has not brought about a fall in unemployment. In fact July figures showed a rise in unemployment, currently at 9.5%

In a strange twist, there has been a rise in job vacancies not matched by a corresponding fall in unemployment. This suggests there could be a growing mismatch of skills / demand for labour leading to cyclical unemployment being replaced by structural unemployment.

Cyclical unemployment is the unemployment that increases during a recession. Firms produce less so lay off workers. As you might expect unemployment has risen in all the major economies affected by the recession.

Structural unemployment occurs when there are vacancies but people don't have the right skills / motivation to take the job. (this includes occupational and geographical immobilities)

A recession could contribute towards a rise in structural unemployment if skill requirements change during the downturn.

Recessions tend to hit certain sectors of the economy more. For example, In this recession, finance has been hard hit requiring a shift in labour to other sectors. This could require a significant geographical and occupational change.

In Recessions, there is often a fall in the participation rate. e.g. people become demoralised from the labour market and take early retirement or move onto non-unemployment benefits. This is certainly an issue in UK with 5 million people on non-unemployment benefits.

Lagging Factor. It may be too early to make assessments on a change in structural unemployment. Unemployment is often a lagging factor. e.g. firms try to avoid making redundancies during a recession, but, then are reluctant to take workers on in the recovery.

Long Term Trends. There are long term trends in a global economy towards a mixture of high skilled professions (e.g. health and legal) and very low skilled service sector jobs (e.g. cleaning). There has been a steady decline in manufacturing jobs with mid-level skills. These long term trends do put upward pressure on structural unemployment.

Why we hate tax.......

The following is a comment from a New York Times Article:

'I don't care if every street light stays off, I don't care if public employee rolls get cut in half, I don't care if unemployment goes to 15 percent. Not a penny more in higher taxes'.

America is one of the richest countries in the world. It is a country that can put a man on the moon, it spends billions on the most upto date military spending in the world. Yet, the US is currently cutting back essential welfare services. Why can the richest country in the world have disintegrating road and public transport services?

The above comment may sound extreme, but, it is merely the honest statement of the current conservative philosophy of tax cuts and state involvement.

It is simply a choice. If you insist on tax cuts for the rich, you won't be able to afford public spending. If you choose tax cuts at all costs, it means you have a society with crumbling roads, lack of investment and increasing social division. You may not care about a divided society, you may not care about a crumbling infrastructure network. But, if you follow the religion of tax cuts at all costs this is what you are choosing.

Unfortunately, in America, the philosophy of tax cuts is seen as a win win situation.

•Cut taxes and you get more revenue (because people work harder)

•Cut taxes and you will get higher economic growth.

Like a mantra the conservative commentators repeat government bad, tax cuts good.

It is lazy economics, of course government spending can be inefficient. But, government spending can also overcome market failure, it can help create social cohesion.

It is not a clear black and white issue. It is not a question of government good or bad. It depends on how it is spent and on what projects. The issue is to maximise the efficiency of spending and make sure it is directed to those areas of the economy (health, education, public transport) where the free market invariable fails to create a socially optimal level.

It doesn't seem to matter than the US economies greatest decades were in periods of relative high tax (70%) in the 40s and 50s. Nor do the tax cuts to the richest 2% of the population during the Bush years seem to have promoted job growth in a way that occured during the Clinton year's of higher tax.

Just to make things worse, in recent years, the biggest tax cuts in America were directed at the richest people in society. But, when you cut taxes for the rich, it is more likely the tax cut is saved. If you cut taxes for the poorest, a higher % would spending the money and it would have a bigger impact on economy.

Credit Crunch 3 years on.....

Remember when markets were on the brink and banks had to be bailed out from imminent bankruptcy(credit crunch)? Remember when we could get joy from jokes like:

Q: What’s the difference between Investment Bankers and London Pigeons?
A: The Pigeons are still capable of making deposits on new BMW’s.

It seemed the free market had finally hit its brick wall, requiring huge change. Step forward a few years and the major UK banks are back to what they are doing best at - making a hefty profit - a combined profit of £15bn hardly sounds like an industry in crisis - or an industry which needs bailing out by UK taxpayers.

There has been talk of regulatory reform along the lines suggested here - Free Market Fails - reforming financial sector. But, it has got bogged down in detail and the need for global co-operation. For example, the idea of tobin tax (tax on risky financial transactions) has been mooted, but, without strong international co-operation there is an incentive to switch business to those countries who opt out.

Self-Regulation

One legacy of the credit crunch is to knock off the excess arrogance of much bank lending. Gone are the days of lending huge sums without deposit or checks on income. Banks are being pretty strict about requiring deposits and proof of income. It is a return to the 'boring' banking of the post war period. But, it is this boring banking which is less likely to lead to a rash of sub-prime mortgage defaults from people who took out mortgages they could never repay. In a sense this was an essential if inconvenient change.

The irony is that by pursuing 'boring' banking the banks have been able to nicely improve their profit margins. Also, another cry is that banks are being too mean in not lending.

On the one hand, a restriction of bank lending threatens the recovery. On the other hand, banks need to avoid irresponsible lending they were making a few years ago.

Monopoly Power

One consequence of the banking crisis was the swift merger of Lloyds TSB / HBOS group. At the time, the government baulked at the idea of yet another nationalisation. The idea of a super bank with 30% of market share seemed the least worst option. At the time, it dealt with the crisis. But, the problem is that it led to an even more concentrated banking sector. (Monopoly Power banks) Banks have great power to set interest rates above the Bank of England base rate - another reason for their return to supernormal profits.

Moral Hazard

Another problem with the banking crisis and bailout is that the banks have not really suffered from their incompetence. In many cases, banks gambled. They lost. They got bailed out and they are back to making large profits. If banks are too big to fail where is the disincentive to try gambling on risky loans again? It seems if you are an investment banker, there is still a one way bet. In banking incompetence pays. Bailing out banks and moral hazard

Easy To Criticise - But, What to Do?

The lessons of the credit crisis is that you cannot trust banks to self-regulate. In the midst of a recession, it is not surprising banks return to better lending practises. But, people can have short memories. The shock of the credit crunch will wear off. Risky lending practises can easily make a return. There are still ways to avoid a boom and bust in asset prices / lending. Just because it is not straightforward doesn't mean that it shouldn't be attempted.