Two Definitions of Economics

Economics is (according to these two economists):

1. Lionel Robbins: the study of the allocation of scarce resources among competing ends
2. Allan Gruchy: the science of the social provisioning process.

I argued that how you view economic issues will depend upon which of these definitions you have in mind when you think about the economy. The allocative definition lends itself to problems chiefly associated with exchange. That is, concepts related to purchase and sale, and more generally, the problem of what to do when you have to make a choice between one of two options. You can't have your cake and eat it to! This definition is associated with (orthodox) neoclassical economics.  Hint: Soon we'll introduce the production possibilities frontier, which will allow us to see where this definition comes into its own.

I will argued that the second definition is more general than the first. This is because it emphasizes more than just the problem of exchange, which is one of many problems we study in economics. The first definition does not make much of the problems associated with production, institutions, and what happens when sometimes contradictions emerge in the system that "gum" things up. The second definition considers issues such as the distribution of income and wealth, the possibility that one party may possess more power than the other in an exchange relation, and it questions how effective the economic system is in maintaining full employment. This definition is associated with heterodox economics.

On economic method

Recall, Milton Friedman's "Positive Economics" is an attempt to conduct objective, unbiased economics. Positive economics stands in contrast to normative economics, which occupies much of the space taken up by heterodox economists. Positive economics consists of the following four tenets:

1. Make reasonable, simplifying assumptions about the economy
1. e.g. people are rational, calculating, and fully informed.
2. ID key economic concepts & variables
1. Prices, incomes, consumer confidence, etc.
3. Construct hypotheses, models
1. Which allow us to predict economic behavior
4. Test the theory based on real world experiences

This approach seems reasonable enough, but it can be very difficult to get 1 - 3 right. It turns out, human beings are very complex, social creatures, which requires that our assumptions not stray too far from reality. If we abstract too much, then all of the conclusions that obtain from the model will generally be invalid. As a consequence, economists are notoriously bad forecasters! 

As time permits through the course we will consider other methods in economics. But for now, and despite the limitations of Friedman's method above, it is the prevailing method in economics, therefore it deserves to be mentioned.