Economics. The history of economics

Economics is truly considered to be one of the most ancient social sciences. In the prehistoric era people didn’t use to explain natural phenomena or psychological features, but they undoubtedly tried to sustain their lives using limited resources. That is the main idea of economics.

Actually, economics has a rich and complicated history, dating back to the Ancient East times. Hammurabi, a king of Babylon, offered some legal restrictions on trade or exchange operations and created laws that protected slavery. Though ancient Greeks defended the idea of natural economy, they used scientific approach to prove this position. Xenophon was the first to express the idea of the divi­sion of labor – a basic element of capitalism. Aristotle introduced the word ‘economics’ into science. He defined ‘economia’ as a correct way of producing things in agriculture and craft. He criticized wholesale trade and money-lending, saying they contradict with the natural order of things.

Mercantilism was the leading trend in the 16^th-17^th centuries. Usually mercantilists were rich mer­chants, who did suppose that the only source of wealth was foreign commerce. Governments affected by this theory used to imply different custom laws to protect their domestic market, which conse­quently led to conflicts and colonial wars. During the Enlightenment French philosophers created the school of physiocracy, which denied the decisive role of trade. They stated that land and productive la­bor were the keys to prosperity. They underestimated the meaning of industry as in the middle of the 18^th century it wasn’t mechanized and occupied a secondary position.

The first systematic research of capitalism was done by the Scottish professor of philosophy, Adam Smith. In 1776 he published ‘The Wealth of Nations’, where he described the idea of the ‘invisible hand’, meaning that people, pursuing their self-interest, tend to satisfy the needs of their society as well. He developed a concept of economic man, driven by economic interest and rationality. He stud­ied international trade and demonstrated its necessity using the theory of relative advantages.

Throughout the 19^th century many scientists continued Smith’s work. Among them were Thomas Malthus, John Stewart Mill, David Ricardo and Karl Marx. In fact, all of them were more than econo­mists; they were social philosophers who covered all aspects of social science. Our contemporaries usually call them Classical economists. Alfred Marshall changed the question economists ask: he fo­cused on a graphical supply-demand model, which still remains the most vivid presentation of the ex­isting economic reality.

The 20^th century gave birth to many contradictory schools. One of the most influential is the one devel­oped by J. M. Keynes, a famous English economist. He was inspired by the Great depression and sug­gested that interference of state is required to overcome the failures of market economy. He studied mac­roeconomic processes (inflation and unemployment) and supposed that the best way to cope with them is to stimulate aggregate demand through governmental orders. These ideas are still very popular in many countries including Belarus, where we have a developed public sector. Monetarism is also worth being mentioned. Representatives of this school defend the idea of the uncontrolled market economy. They think government should only control the emission of money and provide public goods. Actually, modern economists often combine the ideas of these schools in their practical activity in order to achieve better results.

However, most theories have the same definition of the subject. Economics is the study of how people, individually and collectively, allocate their limited resources to solve the problem of scarcity. It is a complex science, combining mathematical, logical and psychological methods. Economics analyses the allocation of resources, the processes of production, distribution and consumption, finds economic laws and principles, offers practical ways to solve economic problems. Economic theories follow the development of market structures, which are becoming more and more complex every year, which is caused by technological advancements, competition and globalization. Researchers and businessmen offer new ways to reduce costs and to increase profits, but the application of these methods is a real challenge, requiring talent, ambition and patience. That’s why modern economists specialize in different areas of the science in order to achieve better performance. Nowadays we speak of nanoeconomics (studies the behavior of a single consumer), microeconomics, mesoeconomics (analyses large branches of industry), macroeconomics, international economics etc.

Macroeconomics is the study of behavior of the economy as a whole with emphasis on the factors that determine growth and fluctuations in output, employment and the level of prices. The mentioned features form what is called ‘business climate’. Events studied by macroeconomics are largely beyond the control of individual decision makers and affect the entire economic system. Macroeconomics enables to predict financial booms, recessions and business cycles, to plan strategic policy. Specialists in macroeconomics are deeply interested in understanding those factors that determine instability factors: inflation, unemployment and economic growth. This knowledge is extremely important, as many negative consequences descend from insufficiently considered actions taken by the government. Among them are economic problems (low demand, devaluation of savings and bank accounts) and social troubles (increase in crime, deskilling and political crises). All this determines the great role of macroeconomics.

Nevertheless, we cannot forget about the second main sector of economic theory. Microeconomics may be defined as the study of behavior of individual units within the economy. So, the main objects of analysis are firms, enterprises and households. Microeconomics tries to explain the decisions taken by economic units and to create a scheme of adequate actions. It solves the basic questions each society faces: ‘what to produce?’ ‘how to produce?’ ‘how to distribute goods?’ in the most efficient way.

Of course, these two approaches and the topics they cover are interdependent. Households and businesses make their decisions in the context of the economic environment, which has an impact on the constraints the decision makers face as well as their expectations about the future. Macroeconomic equilibrium provides an inflow of foreign and domestic investment stimulates the financial system, raises the standards of living. At the same time, when taken as a whole, the decisions of individuals determine the condition of the overall economy: taxes paid by entrepreneurs and custom duties form the state budget which is used to support social programs, rational behavior of a single producer or trader boosts the entire system. A good understanding of economic events and an ability to forecast them require knowledge of both individual decision making and the way in which individuals react to changes in the economic environment.