What is economics?
Economics is a social science principally concerned with the interpretation and analysis of production, distribution, and use of money, goods, and services. Economics can also be defined as the study of the social organization through which individuals meet their wants. When people are in the process of fulfilling their wants, economic institutions, formulate mechanisms and strategies that regulate individuals’ economic interactions. These institutions include government organizations, business organisations, unions, and laws that enhance the production, distribution, and use of goods (Colander, 2015). This essay holds that economics is a scene by discussing how economics works, why macroeconomics may fail during a recession, economics as a science, and why to stop awarding top economists.
One thing that lies at the core of the economic theory is the price theory. The price theory explains the methods of determining relative prices and how prices work to coordinate economic activity. Understanding the price theory helps in understanding the world around us works and how prices are determined, which is critical in comprehending critical economic issues (Friedman, 1986). The price system coordinates a market economy. The prices for which goods are sold reflect the costs of production, the cost of paying the workers, and the opportunity cost of using resources. The price that purchasers of a particular product are willing to pay for them reflects the value that these purchasers place on the goods. If a good is worth more to a consumer than it costs to produce, it gets produced, and if it worth less than it costs to produce, it is not produced. To understand how prices are determined requires understanding a set of interrelated issues. The quantity a consumer chooses to consume is dependent on the resources available to the consumer, his/her income, and how much of other things the consumer has to forego to get that product. In other terms, the quantity a consumer chooses to consume is dependent on how much it costs. The cost of a product is dependent, among other things, on how much a consumer consumes since his/her demand influences what producers can sell it for. The quantity and price at which producers sell a product influence how much productive resources the producers buy and at what price. Since the consumers get their income by selling their labour, the decision by the producers affects the consumers’ income, creating a full circle.
Economics as a science
The question of whether economics is science has not been sufficiently addressed as some quarter argue that it is a social science while some critics argue that economics does not fit the definition of science because it lacks consensus, political overtones, and hypothesis. Murphy (2010) holds that economics is an independent science. As a social science, it implies that economics discover basic economic principles through mental reasoning and not “testing” the economic laws. Economic science is the study of exchanges that take place in a normal market, where a seller offers a physical item or service, and the buyer gives the seller money that is equal to the value of the item or service rendered. Economics also deals with scenarios of barter, which involves traders exchanging products and services directly without any exchange of money. Exchanges occur due to scarcity, limited resources, and desires.
Economics qualifies as a science because, like in other sciences, economists observe a scenario, formulate a theory, and collect data to evaluate the theory. For instance, an economist may observe inflation and formulate a theory that exorbitant growth in money leads to inflation and then collect data about money growth and to determine the relationship between the two (Mankiw, 2016). Economics applies scientific thinking in deciding which economic assumptions to make. In the same way, some issues in science are based on assumptions; some aspects of economics are based on assumptions.
A contrary opinion is that economics is not a science. The individuals holding this position argue that the largest proportion of its knowledge is not founded on facts derived using scientific methods, in which facts make or break theories (Sy, 2015). In addition, economics is not a science because it borrows a lot from the rationalist-scholastic tradition, which argues that innate knowledge, reason, and the application of dialectical methods are the primary knowledge sources.
Why macroeconomy may fail during a recession
During a recession, a country may be in critical need of jobs and macroeconomics applied in universities, and a country’s central bank may fail to offer any insight on how to resolve the economic problem. One reason that macroeconomics may fail to offer solutions during an economic crisis is that the Dynamic Stochastic General Equilibrium (DSGE) models do not pass the smell test. The DSGE model has several critical ingredients such as that a set of diverse economic agents as such government, families, labour, finished good producers, and manufacturers of immediate goods who increase their distinct anticipated utility functions based on their budget and resource limitations (Nachane, 2016). Other features are that the improvement procedures result in non-linear Euler equations, the model is log-linearized around its steady point, and the system is influenced by stochastic shocks.
These models may fail to offer a macroeconomic solution during a recession because they assume the existence of cognitive capabilities for the individual agents mentioned above. These models also work on the assumption that an entire economy is similar to a single person implementing a rationally formulated long-term plan sometimes disrupted by unexpected shocks but continually adapt to them in a consistent, rational manner (Solow, 2010). This individual who makes all decisions essentially manages the economy according to his/her preferences. In other words, the DSGE model likens the economy to an individual trying to rationally and consciously achieve the best on behalf of the representative agent. This description does not adequately fit the economy. The DSGE model has no room for unemployment, as seen during a recession. This position prevents the DSGE model from offering a solution to the unemployment problem. DSGE can only deal with unemployment by creating a voluntary choice of leisure or a desire to achieve and maintain flexibility for the future. Therefore, the DSGE model can help in dealing with recession as it says nothing about anti-recession policy and founded on the assumption that a macroeconomic role.
How economics became a religion
In the past, the role of guiding people on how to get to the promised land with material abundance and long-lasting satisfaction was held by church leaders. Over time, the role has shifted from church leaders to economists and tends to be succeeding in the role due to the world experiencing rising incomes, new inventions, and cures. This outcome created what can be equated to heaven, and the world reacted by rewarding the economic priesthood with wealth, status, and power to continue guiding the world to prosperity. Towards the end of the 20th century, there was an economic boom, which resulted in western economies becoming richer, which created the perception that economics had conquered the world. Due to this perception, every nation in the world started complying with the recommendations of economists, students registered for economic degrees implying that economics was having a greater influence on the world than any other religious doctrine (Rapley, 2017). No religious doctrine has managed to convert the universe to its faith. Once an economic principle is established as orthodox, its adherence is executed like the manner a religious doctrine sustains its integrity.
Why economists should not receive the Nobel prize in economics
After economists made significant contributions to the growth of world economies, economists have been receiving the top prize in the field of economics. Broughel (2019) argues that the Nobel Prize in economics should be cancelled. The author argues that elevating economists to the level of influence and prestige given by the Nobel Prize is dangerous as it treats economics similarly to the physical science that was traditionally the focus of the Nobel Prize. The prize goes to economists who have developed models that offer considerable insight. Rewarding economists for developing a model places so much faith on a single model, yet the model may not be a solution to all economic issues. If a model is incorrect in some respects, it can cause adverse outcomes. Therefore, the Nobel Prize in economics should be cancelled as no single economic model fits all situations and may be incorrect in some aspects.
