Readers question: What is the importance of economics?
Economics is concerned with the optimal distribution of resources in a society. The subject involves
- Understanding what happens in markets and the macro-economy.
- Examining statistics about the state of economy and explaining their significance
- Understanding different policy options and evaluating their likely outcomes.
Examples of the importance of economics
- Dealing with a shortage of raw materials. Economics provides a mechanism for looking at possible consequences as we run short of raw materials such as gas and oil. Further reading: Effects of a world without oil
- How to distribute resources in society. To what extent should we redistribute income in society? Is inequality necessary to create economic incentives or does inequality create more economic problems?
- To what extent should the government intervene in the economy? Should the government provide health care free at the point of use or is it more efficient to encourage private health care? See also: To what extent should government intervene in the economy.
- The principle of opportunity cost. Politicians win elections by promising more spending and cutting taxes. This is because lower taxes and more spending is what voters want to hear. However, an economist will be aware that everything has an opportunity cost. Spend more on subsidising free university education, and it means higher taxes and lower spending elsewhere. Giving students £4,000 a year to spend at university may be a noble ideal. But, is it the best use of public money? Are there not better uses of money?
- Social efficiency. The free market leads to countless examples of market failure. I feel one of the best uses of economics is to provide solutions to overcoming market failure. For example, driving into the centre of town creates negative externalities such as pollution and congestion. There is overconsumption. An economist can suggest a tax on driving into towns to internalise the externality. Of course new taxes are not popular, but, it would provide a better solution for society. You may not want to pay £10 a week to drive into a city centre. But, if it saved you 2 hours of sitting in a jam, then maybe you would be quite happy to pay it.
- Knowledge and understanding. One of the principle jobs for economists is to understand what is happening in the economy and investigate reasons for poverty, unemployment and low economic growth. For example, in a political debate such as – Should UK leave the EU? There are many emotional arguments made about immigration. Economic studies can try and evaluation the costs and benefits of free movement of labour. Economic studies can try provide the economic effects of immigration. This can help people make a decision about political issues.
- Forecasts. Economic forecasts are more difficult than understanding the current situation. However, although forecasts are not always reliable, they can help give decision makers an idea of possible outcomes. For example, in 2003, the UK took a decision about whether to join the Euro. Many economists suggested the UK could struggle with a common monetary policy. The Euro was not an optimal currency area with the UK in. This analysis was a factor in UK government deciding not to join. In retrospect, the analysis under-estimated the costs of the Euro. But, if it had been taken on purely political grounds, the UK may have joined.
- Evaluation. Economics is not a definitive science like Maths. Because of many unknown variables, it is impossible to be definitive about outcomes, but a good economist will be aware the result depends on different variables and there are different potential outcomes. This should help avoid an overly ideological approach. For example, a government may have the philosophy ‘free markets are always best’, but an economist would be aware of a more nuanced view that in some markets, like health care, transport, government intervention can overcome market failure and improve welfare. But, at the same time, it doesn’t mean state intervention is always best.
- Behavioural theory. Why do people behave like they do? Can governments subtly nudge people into better behaviour, e.g. banning cigarette advertising.
Limitations of Economics
- Economic growth and happiness
- A frivolous look at 10 reasons to study economics
- More reading on importance of economics
More issues to help understand the importance of economics
- Economics – The dismal science
- How to deal / combat global warming.
- Does globalisation help or hinder developing countries?