Branches of economics

 

Economics is a broad subject concerned with the optimal distribution of resources in society. Within the subject, there are several different branches which focus on different aspects. Also, there are different schools of thought which generally have different views on aspects of economics.

 

The Major classification

1. Microeconomics
   • Microeconomics studies how individual consumers and firms make decisions to allocate resources.
   • Whether a single person, a household, or a business, economists may analyse how these entities respond to changes in price and why they demand what they do at particular price levels.
   • Further, within the dynamics of supply and demand, the costs of producing goods and services, and how labour is divided and allocated, microeconomics studies how businesses are organized and how individuals approach uncertainty and risk in their decision-making.

2. Macroeconomics
   • Macroeconomics is the branch of economics that studies the behaviour and performance of an economy as a whole.
   • Its primary focus is the recurrent economic cycles and broad economic growth and development.
   • Also, it focuses on foreign trade, government fiscal and monetary policy, unemployment rates, the level of inflation, interest rates, the growth of total production output, and business cycles that result in expansions, booms, recessions, and depressions.

 

Other Classification

1. Classical economics
   • Classical economics is often considered the foundation of modern economics. It was developed by Adam Smith, David Ricardo, Jean-Baptiste Say.
   • It is based on:
     • Operation of free markets. How the invisible hand and market mechanism can enable an efficient allocation of resources.
     • Classical economics suggests that generally, economies work most efficiently when government intervention is minimal and concerned with the protection of private property, promotion of free trade and limited government spending.
     • Classical economics does recognise that a government is needed for providing public goods, such as defence, law and order and education.

2. Neo-classical economics
   • Neo-classical economics built on the foundations of free-market based classical economics. It included new ideas such as:
     • Utility maximisation.
     • Rational choice theory
     • Marginal analysis. How individuals will make decisions at the margin – choosing the best option given marginal cost and benefit.

3. Keynesian economics
   • Keynesian economics was developed in the 1930s against a backdrop of the Great Depression.
   • The existing economic orthodoxy was at a loss to explain the persistent economic depression and mass unemployment. Keynes suggested that markets failed to clear for many reasons (e.g. paradox of thrift, negative multiplier, low confidence).
   • Therefore, Keynes advocated government intervention to kick-start the economy.
   • Keynes argued that the aggregate economy may operate in very different ways to individual markets and different rules and policies were needed.

4. Monetarist economics
   • Monetarism was partly a reaction to the dominance of Keynesian economics in the post-war period.
   • Monetarists, led by Milton Friedman argued that Keynesian fiscal policy was much less effective than Keynesians suggested.
   • Monetarists promoted previous classical ideals, such as belief in the efficiency of markets. They also placed emphasis on the control of the money supply as a way to control inflation.

5. Austrian economics
   • This is another school of economics that was critical of state intervention, price controls.
   • It is broadly free-market.

6. Marxist economics
   • Emphasises unequal and unstable nature of capitalism.
   • Seeks a radically different approach to basic economic questions.
   • Rather than relying on free-market advocate state intervention in ownership, planning and distribution of resources.

7. Neo-liberalism/Neo-classical
   • A modern interpretation of classical economics.
   • Considerable overlap with monetarism. Essentially concerned with the promotion of free-markets, competition, free trade, privatisation, lower government involvement, but some minimal state intervention in public services like health and education.

 

New Branches of economics

1. Environmental economics/welfare economics
   • This places greater emphasis on the environment. This can include:
     • Neo-classical analysis of external costs and external benefits. From this perspective, it is rational for man to reduce pollution
     • Market failures – tragedy of the commons, Public goods, external costs, external benefits.
     • Environmental economics can take a more radical approach – questioning whether economic growth is actually desirable.

2. Behavioural economics
   • It examines the psychology behind economic decision making and economic activity. Behavioural economics examines the limitation of the assumption individuals are perfectly rational. It includes:
     • Bounded rationality – people make choices by rules of thumb
     • Irrational exuberance – People get carried away by asset bubbles.
     • Nudges/Choice architecture – how the framing of decisions affects the outcome

3. Development economics
   • Concerned with issues of poverty and under-development in poorer countries of the world. Development economics is concerned with both micro and macro aspects of economic development. Issues include
     • Trade vs aid
     • Increasing capital investment.
     • Best ways to promote economic development
     • Third World debt

4. Econometrics
   • Use of data to find simple relationships.
   • Econometrics uses statistical methods, regression models and data to predict the outcome of economic policies.

5. Labour economics
   • Concentration on wages, labour employment and labour markets.
   • Labour economics starts from the neo-classical premise of labour supply and marginal revenue product of labour.
   • Recent developments in labour economics have placed greater emphasis on non-monetary factors, such as motivation, enjoyment and labour market imperfections.