[MUSIC] Hi, in this module, I'm going to introduce the discipline of economics. Economics is the systematic study of the processes that underlie production, distribution and the consumption of goods and services in the economy. Economics as we now understand it got started roughly two centuries ago and there were certain key figures I'd like to introduce. One of the most important was Adam Smith, was Scottish who lived during the 18th century. He wrote among other things, a famous book called The Wealth of Nations that introduced the idea of the division of labor. And in particular, he also emphasized the idea that competition in the market could lead to economic growth. This marked a real departure from the way that people used to think of the economy before his time and it really paved away for the development of what we now think of as the field of economics. Another important economist, although he may not of thought of him such, but he was never the less incredibly influential was Thomas Robert Malthus who lived at the end of the 18th century and the beginning of the 19th century. He wrote an important book that theorized that population and the economy were intertwined. It was essentially Malthus's information that led us to the modern conception of the idea of overpopulation. So he suggested that, essentially as population grew that put pressure on resources which drove up the price of food, and it reduced wages. In turn, as food prices increase, as wages decrease, people found it more difficult to marry and to have children. They also may have experienced higher death rates. In turn, this lowered the rate at which population grew. Eventually, population and resources were brought back into balance. Again, this idea that different parts of the economy. In this case, population and resources could be intertwined or linked together in a loop without any deliberate intervention by a government or anyone else was a really novel idea and a real inspiration about the way that we think about the population even now. And indeed, it was Malthus's concern that population outstripping resources could lead to misery that lead again to the contemporary conception of the idea of over population. During the 19th century, there were a number of other important economists whose influence remains today. One was David Ricardo. He wrote very systematically on trade, on rents, profits and wages. Obviously, he didn't invent these. Well before Ricardo lived and even well before Adam Smith lived, people paid rents. They were paid wages. They earned profits, but what Ricardo did was try to systematize the way that we thought about all of these and understand how they interacted together in the economy. Similarly, John Stuart Mill. A very influential economist of the 19th century wrote about labor and capital, distribution and exchange. Of course, in the past, there was labor and capital and there were inequities in distribution. There were people that were wealthy and people that were poor, and people traded. But again, what was distinctive about John Stuart Mill was his way that he began to think systematically about how all of these things fit together. And he in particular focused on the distinction between labor and capital, and the way in which capital could also promote growth. Now, I'd like to talk about the rational actor paradigm. One of the most distinctive features of economics, something that sets it apart from most of the other social science disciplines is their use or application of what is referred to as the rational actor paradigm. The basic assumption in economics is that individuals, families, firms and other actors that interact and make up the economy have preferences. And that these actors, they make systematic and predictable choices among different possible courses of action in order to maximize the satisfaction of these preferences. So when simple example, economist who have studied decision-making regarded to child bearing, they look at couples as having on the one hand, perhaps a desire to have children. But on the other hand, the desire to spend their time on leisure activities or engaging in labor that makes money for the household. So among these three possible choices of ways to spend time, they each have different costs and different benefits and economists have tried to model child bearing in the decision about how many children to have as the outcome of these costs and benefits and then changes in child bearing, either over time or differences across societies as differences in the relative cost of this different possible behaviors. So one of the important features of economics is that in the rational actor paradigm, it has a set of very strong assumptions about the way that people make choices whether it's individual's families or firms and this allows them to develop, probably mathematical models in order to predict behavior. Again, this is very different from social science and to some extent, political science which tend to be more inductive and have a somewhat broader view of what sorts of things might influence individual or family or other behavior. Another big distinction in economics which you'll be aware of, if you look at the website of an economics department is the one between studies of macroeconomics and microeconomics. Macroeconomics is the study of the economy in its entirety. So this is the area of economics that is concerned with trying to explain things like recessions or depressions, increases or decreases in the rate of unemployment or perhaps, economic growth over time or lack of growth. Microeconomics, on the other hand, focuses on the families, the individuals, the firms that interact in which constitute the economy. So microeconomics of which I just gave an example in terms of the families making decisions about child bearing tries to model or understand how these micro-level units could be people, could be families make choices in response to various constraints around them that affect cost, affect benefits and then what the outcomes of those choices are. Another big distinction within economics is between theory and applied with theoretical, and applied economics. So theoretical economics is heavily deductive, focused on developing mathematical models of either the way that the economy as a whole works. For example, what factors might in a theoretical way influence or influence growth or reduce a chances of a recession and they typically work from very strong assumptions. There's also a lot of theoretical work at the micro-level, as well. Applied economics on the other hand, tends to be much more empirical, much more inductive which relies on the collection and the analysis of data about behavior. It might be the behavior of entire economies if it's macro or the behavior of individuals and families, and firms if it's micro. And then of course, sometimes the results of the analysis again, which is very inductive informs the development of theory. Economics like the other disciplines I've been talking about is divided into sub-fields or sub-disciplines. I'll mention a few of them now, although of course, the field is always changing and you'll be exposed to other ones if you pursue graduate study. So, one of the traditionally big areas within economics has been labor economics. Broadly speaking, this is the attempt to study systematically the factors that shape the composition of the labor force. So, we think that working age adults constitute the labor force. So understanding the things that shape the number and the composition of working age adults, including things like education and health are all important questions for labor economics. The study of population aging and retirement is also part of the study of labor economics, because again, it's all related to labor force. Another very important area within economic Is econometrics. That is the development of statistical tools or other quantitative tools for analyzing economic data. Again, whether at the macro-level for the entire economy as a whole or at the micro-level for families and individuals in firms. One of the big concerns in econometrics is trying to figure out or understand when a relationship is really proof of a causal relationship and when it is simply an association. Another big area in economics is industrial organization, essentially understanding the dynamics of firms, industries, companies that makeup the economy. Why do they grow? Why do they shrink or fail? And how do they make decisions about different things to produce, different people to hire and so forth. Another big area is economic history. This takes a lot of the other questions that are covered in other parts of economics and then looks at them in a historical perspective. One of the biggest areas within economic history is trying to understand the sources of differences in the economic growth of different parts of the world and a particular subject that receives great attention. So in understanding why, especially the West, especially England, Northwest Europe experienced moderate economic growth earlier than the rest of the world. Dozens of books have been written on trying to explain from an economic perspective why the industrial revolution took place in England and Northwest Europe, and not until later elsewhere. Another big area in economics is international economics. This is the study of trade between countries. Of course, this is increasingly important because world trade has grown so much in recent decades. Finally, there is finance. This is closely connected to business and almost every business school will have a department of finance, which people study the underpinnings of the financial system. Banks, loan making activities, stocks, bonds, a lot of these are typically the subject of people doing research in finance. Obviously, economics is a more diverse field than I can summarize here and there are all sorts of changes going on. Some economists now are looking at alternatives to the rational actor paradigm. So if you continue and you go on to graduate study in economics, you'll learn about not only these disciplines, sub-disciplines that I just mentioned, you'll learn about other opportunities as well in other areas.
