Dictionary:

economics

  (ĕk'ə-nŏm'ĭks, ē'kə-)

1. (used with a sing. verb) The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.
2. (used with a sing. or pl. verb) Economic matters, especially relevant financial considerations: “Economics are slowly killing the family farm” (Christian Science Monitor).

Study of the economy. Classic economics concentrates on how the forces of supply and demand allocate scarce product and service resources. Macroeconomics studies a nation or the world's economy as a whole, using data about inflation, unemployment and industrial production to understand the past and predict the future. Microeconomics studies the behavior of specific sectors of the economy, such as companies, industries, or households. Over the years, various schools of economic thought have gained prominence, including Keynesian Economics, Monetarism and Supply-Side Economics.

Economics is often described as a body of knowledge or study that discusses how a society tries to solve the human problems of unlimited wants and scarce resources. Because economics is associated with human behavior, the study of economics is classified as a social science. Because economics deals with human problems, it cannot be an exact science and one can easily find differing views and descriptions of economics. In this discussion, the focus is an overview of the elements that constitute the study of economics, that is, wants, needs, scarcity, resources, goods and services, economic choice, and the laws of supply and demand.

Every person is involved with making economic decisions every day of his or her life. This occurs when one decides whether to cook a meal at home or go to a restaurant to eat, or when one decides between purchasing a new luxury car or a low-priced pickup truck. People make economic decisions when they decide whether to rent or purchase housing or where they should attend college.

Wants, Needs, and Scarcity

As a society, and in economic terms, people have unlimited wants; however, resources are scarce. Don't confuse wants and needs. Individuals often want what they don't need. In the automobile example used above, someone might want to drive a large luxury car, but a small pickup truck may be more suited to the purchaser's needs if he or she must have a vehicle for hauling furniture. Economic decisions must be made.

A resource is scarce when there is not enough of it to satisfy human wants. And human wants are endless. Because of unlimited wants and limited resources to satisfy those wants, economic decisions must be made. This problem of scarcity (limited resources) must be addressed, which leads to economics and economic problems.

Figure 1 illustrates the relationships that exist relative to wants and scarcity. Many elements influence economic decisions. To better understand economics, it is critical to understand what is shown in this Figure.

Resources

Economic resources, often called factors of production, are divided into four general categories. They are land, labor (sometimes referred to as human resources), capital, and entrepreneurship.

Land.Land describes the ground that might be used to build a structure such as a factory, school, home, or church, but it means much more than that. Land is also the term used for the resources that come from the land. Trees are produced by the land and are used for lumber, firewood, paper, and numerous other products, so they are referred to as land. Minerals that come from the ground, such as oil that is used to make gasoline or to lubricate automobile engines, or gold that is used to make jewelry, or wheat that is grown on the land and is used in the production of bread and other products, or sheep that are raised for the wool they produce that is used to make sweaters are all described as land.

Labor (Human Resources). Labor is the general category of the human effort that is used for the production of goods and services. This includes physical labor, such as harvesting trees for lumber, drilling for oil or mining for gold, growing wheat for bread, or raising the sheep that produce wool for a sweater. In addition to physical labor, there is mental labor, which is necessary for such activities as planning the best ways to harvest trees and making decisions about which trees to harvest. Labor is also involved when a doctor or surgeon analyzes and diagnoses (mental labor) before performing a medical procedure, then performs the procedure (physical labor).

Capital. Capital is input that is often viewed in two ways, much as is labor. Capital might be viewed as human capital—the knowledge, skills, and attitudes that humans possess that allow them to produce. The other type of capital is physical capital, which includes buildings, machinery, tools, and other items that are used to produce goods and service. Traditionally, physical capital has been a prerequisite for human capital; however, because of rapid changes in technology, today human capital is less dependent on physical capital.

Entrepreneurship. One special form of human capital that is important in an economic setting is entrepreneurship (often thought of as the fourth factor of production). Entrepreneurial abilities are needed to improve what we have and to create newgoods and services. An entrepreneur is one who brings together all the resources of land, labor, and capital that are needed to produce a better product or service. In the process of doing this, the entrepreneur is willing to assume the risk of success and failure.

Many people associate entrepreneurship with creating or owning a new business. That is one definition of entrepreneurship but not the only one. An entrepreneur might create a newmarket for something that already exists or push the use of a natural resource to newlimits in order to maximize efficiency and minimize consumption. See "entrepreneurship" for a more general discussion as it relates to business ownership.

Goods and Services

It takes land, labor, and capital that are used by an entrepreneur to produce goods and services that will ultimately be used to satisfy our wants. Goods are tangible, meaning they are something that can be seen or touched. The production of goods requires using limited resources to produce in order to satisfy wants. An example might be a farmer who grows grain. The farmer uses farm equipment manufactured from resources; ground is a natural resource that is used to grow the grain; and because the growth of grain depletes the nutrients in the soil, the farmer must use fertilizers to restore the nutrients. Limited resources are used to produce natural or chemical fertilizers, but they are necessary for crop production. Water might be used to irrigate the crop and enhance production. When the crop is ready for harvest, the farmer uses additional resources to complete the process—equipment, gasoline, labor, and so on—which results in a good that can be used or sold for use by others.

Services are provided in numerous ways and are an intangible activity. There is no doubt that one can often see someone providing a service, but the service is not something that someone can pick up and take home to use. An example of a service is a ride in a taxi through a crowded city. It takes resources for the owner or driver to provide the service, and a passenger is consciously aware of riding in a taxi. When the ride is completed and the provider has been paid, the passenger doesn't have anything tangible to hold except the receipt. However, resources have been used to provide the service. The automobile used as the cab, the fuel used to operate the cab, and the labor of the driver are all examples of resources being used to provide a service that will satisfy a want.

It is important to understand that because goods and services utilize resources that are limited, goods and services are also scarce. Scarcity results when the demand for a good or service is greater than its supply. Remember that society has unlimited wants but scarce resources. It is scarcity, then, that causes consumers to have to make choices. If individuals can't have everything they want, they must decide which of the goods and services are most important and which they can do without.

Economic Choice

Opportunity Cost. When one makes economic decisions, it is because of limited resources. Alternatives must be considered. People make such decisions based on expecting greater benefits from one alternative than another. There is an opportunity cost involved in the choice. Opportunity cost is the benefit forgone from the best alternative that is not selected: Individuals give up an opportunity to use or enjoy something in order to select something else.

Opportunity costs can't always be measured, because it might be satisfaction that is lost. At other times, however, opportunity cost can be measured. Here are examples of each. Perhaps a student is studying hard for a final examination in a difficult course because a good exam score is critical to achieve the desired grade. Friends call to invite the student out for the evening. The alternatives are to study or to have fun. Being wise, the student selects studying instead of going out. It is difficult to measure the opportunity cost of having fun with friends. In the second example, the same studying student is asked to help someone clean a garage. If the person offers to pay the student $50 to clean the garage and the student chooses to study, the opportunity cost is easily measured at $50. In both these examples, opportunity cost is directly related to what was given up, not any other benefits that might result from the decision.

Circumstances also play a role in opportunity cost. Sometimes people are forced into a decision because of circumstances and the results may not always be optimal. For example, if someone is planning to relocate to a newcity to start a new job and wants to sell a house before the move in order to be able to purchase a newhouse in the newlocation, the person may sell the house for less than the market price in order to complete the process. The opportunity cost is the value of what was given up in order to be able to purchase a newhome. Every time a choice is made, opportunity costs are assumed.

Production. Another economic choice that must be made is related to production. This is illustrated in Figure 1. All four of the decisions must be made: What goods will be produced? How will production occur? Howmuch should be produced? Who will be the recipients? All are decisions that influence production efficiency.

Efficiency is the primary element in deciding what to produce and how to go about the production process. Efficiency is producing with the least amount of expense, effort, and waste, but not without cost. If you take something away from a person to satisfy another person, one will be less happy and the other will be more happy. If a way can be found to make one person more happy without making the other person less happy, this would be efficient.

An example of economic efficiency might be the following. Assume someone owns a car and a friend doesn't own a car but does drive. The friend needs transportation regularly for a week. It happens to be a time when the car owner will be away on a business trip and therefore won't be using the car. It makes no sense for the friend to buy a car to use for such a short period of time, so the owner loans the friend the car for that week. The car owner is no worse off and the friend is better off. Economic efficiency has occurred in this situation. If the car owner had not loaned the car to the friend, there would have been waste because the friend would have had to buy or rent a car. It is wasteful to fail to take advantage of opportunities in which there is no loss of satisfaction to either party.

Production efficiency is a situation in which it is not possible to produce any more units of a good without giving up the opportunity to produce another good unless a change occurs in available productive resources. If a farmer is growing wheat to be sold for the production of bread, there is a point at which adding additional fertilizer to the soil would do no good. If the fertilizer were used on an oat crop in a different field, production could be increased for that crop. The way to increase the wheat production is to find different resources to make the crop better, such as irrigating the land to provide more moisture.

In the above example, it was suggested that different or additional resources might be used to increase production. This is necessary only after efficiency has been achieved. Additional resources would have to come from land, labor, capital, or entrepreneurship. It is most common that capital will be used most often to increase production. Capital is productive input that is increased by people. This is known as investment. Investment involves giving up what might presently be consumed in favor of producing something to consume in the future. If the farmer wants to increase wheat production in the future, something will have to be given up now in order to increase the resources available for future production.

Increasing human capital is critical to increasing production. This does not mean that more people must be produced, but rather that the knowledge and skills of humans must be increased. This can happen because of improvements in technology and newways of satisfying wants. This involves the entrepreneurial factor that was described previously—the human element that figures out ways to improve and expand the resources that already exist.

Product Distribution. Getting goods into the hands of those who want them involves many choices. The economic system must decide how to divide the products that are produced among the potential recipients. Sometimes products can be divided equally among recipients, but normally this is not the situation. It must then be determined how the division will take place. In a capitalistic economic system, distribution is often determined by wealth. If two people have the same wants, the person who can most afford something will be able to acquire it.

The Laws of Supply and Demand

Production decisions are made based on demand for goods and services. Supply of goods and services is dependent upon demand for the same. Why do movies that are much more popular stay at theaters longer than those that aren't as popular? Demand for the movie causes the theater operators to supply the showings that the consumer wants. Why does the room rate in a convention hotel go down on weekends? There is less demand on weekends because most convention-goers leave on Friday or Saturday and others don't arrive until Monday, so the supply of available rooms goes up. Hotel operators try to create more demand for their vacant weekend rooms by lowering prices and offering attractive amenities.

The law of demand states that during a specific time period the quantity of a product that is demanded is inversely related to its price, as long as other things remain constant. The higher the price, the lower the demand; the lower the price, the higher the demand. Don't confuse demand with wants. Consumers have unlimited wants, as was established at the beginning of this discussion. Nor are demands and wants the same as needs. A consumer may need to have a crown put on a tooth but may not want to have it done because of the high cost. At some point, the suffering patient may demand the services be provided regardless of the price.

Often when prices are too high and demand for a product or service lessens, it is because consumers have found a suitable substitute. Substitution happens all the time as a result of economic decisions that are made by consumers. For example, if someone needs a winter coat and likes one with a designer name and a price that reflects that name, the purchase may not be made. Instead, the person finds a similar coat that does not have a designer label and purchases it instead at a much lower cost.

Demand for goods or services determines the amount that will be supplied. The law of supply states that the greater the demand, the more that will be supplied; the lower the demand, the less that will be supplied. The amount that will be supplied by a producer of the good or service is based on capacity and willingness to supply the product at a specific price. A producer will not supply goods and services just because there is demand for them—price for the good or service is an important consideration.

If consumers are willing to pay more for a good or service, the producer will likely be willing to shift more resources in order to increase the supply of the demanded product. If a rancher is raising prime beef cattle and there is high demand for this good and consumers are willing to pay more for high-quality beef, then the rancher might be willing to supply more even if it is necessary to shift resources or acquire additional resources to be able to do so.

Demands change, supplies change, and prices change. So how does a producer knowhow much is enough and what price to charge for the goods and services? Very simply, the demand for and supply of goods and services can be plotted on graphs using different prices. The supply and demand for a good or service intersect on the graph at what is called the equilibrium price, or the price where all of what is supplied will be demanded. If the price is belowe quilibrium, there will be a shortage of the good or service, and if the price is above equilibrium, there will be a surplus of the good or service. For a more detailed explanation on this aspect of economics, see the discussion of supply and demand.

Summary

Economics is a complex topic that is studied constantly and thoroughly. This article has given an overview of some of the main tenets of economics; however, there is much that was not even introduced. There are other topics throughout this encyclopedia, such as macroeconomics and microeconomics, that will further define and expand the topic of economics.

Bibliography

Dolan, Edwin G., and Lindsey, David E. (1991). Economics. Chicago: Dryden.

Heilbroner, Robert L., and Thurow, Lester C. (1987). Economics Explained. New York: Simon & Schuster.

Lipsey, Richard G., Steiner, Peter O., Purvis, Douglas D., and Courant, Paul N. (1990). Economics. New York: Harper & Row.

McEachern, William A. (1991). Economics: A Contemporary Introduction. Cincinnati, OH: South-Western Publishing.

[Article by: ROGER L. LUFT]

In dentistry, a broad term that covers all the business aspects of dental practice.

The study of the relation of available scarce means to supply for a proposed end; economists assume that people have wants and needs, and then study how societies are organized to supply them, trying to establish whether one method is better than another. Micro-economics explains how demand and supply affect prices, wages, rentals, and interest rates. Macro-economics focuses on the aggregate (large-scale) demand for goods and services, and especially on the relationship between unemployment and the economy. Marxist economics sees the economy as a reflection of the history and sociology of a society. In particular, it focuses on the historical evolution of, and the conflict between, classes.

For more information on economics, visit Britannica.com.

General Characteristics

Economics studies human welfare in terms of the production, distribution, and consumption of goods and services. While there is a considerable body of ancient and medieval thought on economic questions, the discipline of political economy only took shape in the early modern period. Some prominent schools of the seventeenth and eighteenth centuries were Cameralism (Germany), Mercantilism (Britain), and Physiocracy (France). Classical political economy, launched by Adam Smith's Wealth of Nations (1776), dominated the discipline for more than one hundred years. American economics drew on all of these sources, but it did not forge its own identity until the end of the nineteenth century, and it did not attain its current global hegemony until after World War II. This was as much due to the sheer number of active economists as to the brilliance of Paul Samuelson, Milton Friedman, and Kenneth Arrow, among others. Prior to 1900, the American community of economists had largely been perceived, both from within and from abroad, as a relative backwater. The United States did not produce a theorist to rival the likes of Adam Smith (1723–1790), David Ricardo (1772–1823), or Karl Marx (1818–1883).

Several factors in American economic and intellectual history help explain this fact. First, the presence of a large slave economy before the Civil War resulted in a concentrated effort to weigh the arguments for and against free labor. The landmark study in American economic history of the last century, Robert Fogel and Stanley Engerman's Time on the Cross (1974), speaks to this unfortunate legacy. Second, the belated onset of industrialization (in 1860, 80 percent of the population was still rural), and the founding of many land-grant colleges with the Morrill Act of 1862 resulted in the emergence of a field of specialization that endures to this day: agricultural or land economics. Even in the interwar years, the Bureau of Agricultural Economics was a major center of research in the field. Third, American federalism, by decentralizing the management of money and credit, had direct and arguably dire consequences for the development of banking and capital accumulation. Persistent debates on the merits of paper currency can be traced from the latter half of the eighteenth century right up to 1971, when American fiat money replaced the gold standard once and for all.

The relatively high standard of living and the massive wave of immigration during the latter part of the nineteenth century might also have played a part in the diminished role of socialist thinking. A liberal ideology coupled with the absence of an aristocracy meant that socialism never became as rooted in America as in Europe. In the few instances that it did, it tended to be of the more innocuous variety, such as Robert Owen's (1771–1858) 1825 settlement of New Harmony, Indiana, or Richard T. Ely's (1854–1943) Christian socialism. The most popular reform movement in late-nineteenth-century economics was inspired by Henry George's (1839–1897) Progress and Poverty (1879), which argued for a single tax on land. Economic theory tended then as now toward liberalism if not libertarianism, with its deeply entrenched respect for individual rights, market forces, and the diminished role of the government.

What probably most explains the form and content of American economics is its resistance to the influence of other disciplines. Because of the sheer size of the economics profession (there are some 22,000 registered members of the American Economic Association, and that by no means exhausts the number), it tends to be very inward-looking. Not since before World War II have economists eagerly borrowed from the other sciences. Even prewar economists were more likely to assimilate concepts and methods from physics and biology than from sociology or psychology. Instead, "economic imperialists" such as Gary Becker take topics that have traditionally been in other social sciences, such as voting, crime, marriage, and the family, and model them in terms of utility maximization.

The Colonial and Antebellum Period

In colonial America, most contributors to economics, such as Thomas Pownall (1722–1805), governor of Massachusetts, and Samuel Gale (1747–1826) were inspired by the British economists John Locke (1632–1704), David Hume (1711–1776), and Adam Smith. Benjamin Franklin (1706–1790) befriended both the British and French political economists of the time. Because of the shortage of American money, Franklin advocated the circulation of paper money as a stimulus to trade, and he even convinced Hume and Smith of the relative soundness of paper issue in Pennsylvania. Although Franklin wrote on the importance of the development of manufacturing for the American economy, he believed, as would Thomas Paine (1737–1809) and Thomas Jefferson (1743–1826), that the true destiny for America lay with agriculture.

The American republic called for concrete measures on money and banking, as well as policies on trade and manufacturing. In the early years of the new regime, Jefferson and Alexander Hamilton (1757–1804) loomed large as forgers of economic ideas and policy. Jefferson was a friend of Pierre Samuel du Pont de Nemours (1739–1817), Destutt de Tracy (1754–1836), and Jean-Baptiste Say (1767–1832), and he supervised the translation of Tracy's Treatise on Political Economy (1817). In a series of tracts, he argued that commerce ought to remain a handmaiden to agriculture, and he took seriously Hume's caveats about public debt. Hamilton, by contrast, advocated the growth of commerce and manufacturing. He sought means to improve the mobility of capital as a stimulus to trade, and with his National Bank Act and Report on Manufactures (1791), he went very much against Jefferson's policies.

In antebellum United States we find dozens of contributors to political economy, notably Jacob Cardozo (1786–1873), Daniel Raymond (1786–1849), Francis Way-land (1790–1865), Henry C. Carey (1793–1879), Amasa Walker (1799–1875), and Charles Dunbar (1830–1900). Many of these tailored their analyses to the American context of unlimited land and scarcity of labor. Malthusian scenarios held little sway. The two most prominent European writers in America, both adherents to Smith, were Say, whose Treatise on Political Economy was widely read and circulated after its first translation in 1821, and John Ramsey McCulloch (1789–1864). Jane Marcet's (1769–1858) Conversations on Political Economy (1816) sold in the thousands, thereby disseminating some of the more central principles of British and French political economy to the inquiring American. The prominent German economist of the period, Friedrich List (1789–1846), first made his name while living in the United States; his Outlines of American Political Economy (1827) helped sustain the enthusiasm for protective tariffs. Carey is usually viewed as the most original American-born thinker of the period, and the first to gain an international reputation. His three-volume Principles of Political Economy (1837) did much to challenge Ricardo's doctrine of rent, as well as propel him into a significant role as economic advisor to the government in Washington.

The Gilded Age (1870–1914)

Homegrown economic theorists became much more common in this period, spurred into controversies over banking and trade and the onset of large monopolies. The most prominent measure taken in this period, the Sherman Antitrust Act (1890), was not received enthusiastically by the more conservative economists such as Arthur Hadley (1856–1930) because it violated the central principle of laissez-faire. But others, such as Ely, saw the Act as a necessary measure.

Steps were also taken to professionalize, with the formation of the American Economics Association (1885) and the Quarterly Journal of Economics (1887). Two more journals of high quality were formed in this period, the Journal of Political Economy (1892) and the American Economic Review (1911). Economics also made its way into the universities. Before the Civil War, numerous colleges taught the subject under the more general rubric of moral philosophy, or even theology. But explicit recognition first came with the appointment of Charles Dunbar to the chair of political economy at Harvard in 1871. The prolific economist and son of Amasa, Francis A. Walker (1840–1897) gained a chair at Yale in 1872 and then served as president of MIT in the 1880s and 1890s. By 1900, hundreds of institutions were offering graduate degrees in economics, though the majority of doctorates came from a small set of universities, notably Chicago, Columbia, California, Harvard, and Johns Hopkins. The expansion of institutions of higher learning in this period served to reinforce the propensity to specialize within the field. While the economics profession mostly honors its contributors to pure theory, the majority of doctorates in American economics are and have been granted in applied fields, notably labor, land, business, and industrial economics.

In the area of theoretical economics, the names of Simon Newcomb (1835–1909), Irving Fisher (1867–1947), and John Bates Clark stand out. Newcomb was better known for his work in astronomy and coastal surveying, but his Principles of Political Economy (1886) did much to endorse the advent of mathematical methods. Fisher was without question the most renowned and brilliant of his generation of economic theorists. As a doctoral student at Yale, Fisher worked with the eminent physicist J. Willard Gibbs (1839–1903) and the social Darwinist William Graham Sumner (1840–1910). His first book, Mathematical Investigations in the Theory of Value and Prices (1892), was a significant landmark in the rise of mathematical economics, and it treated the utility calculus in terms of thermodynamics. His later efforts, The Purchasing Power of Money (1911) and The Theory of Interest (1930) became two of the most significant works of the twentieth century. The Fisher Equation is still taken to be the best rendition of the quantity theory of money, noted for its efforts to distinguish different kinds of liquidity and to measure the velocity of money.

Clark reigned at Columbia for much of his career, and he is most noted for his analysis of the concept of marginal productivity as an explanation of factor prices, wages, interest, and rent. His Philosophy of Wealth (1886) and Distribution of Wealth (1899) blended the new marginalism with sociological and ethical concerns. Clark earned international renown for his concept of marginal productivity and helped inspire the next generation of American marginalists, notably Frank Taussig (1859–1940) at Harvard, Frank Fetter (1863–1949) at Princeton, and Laurence Laughlin (1871–1933) at Chicago.

Although the contributions of Fisher and Clark were more enduring, the school that was most distinctively American from approximately 1890 to 1940 was the one known during the interwar years as Institutionalism. The most prominent founders were Ely, Veblen, Mitchell, and John R. Commons (1862–1945). Later contributors included the son of John Bates, John Maurice Clark (1884–1963), and Clarence E. Ayres (1891–1972), but there were many more foot soldiers marching to the cause. Inspired by evolutionary biology, the Institutionalists took a historical, antiformalist approach to the study of economic phenomena. Veblen's Theory of the Leisure Class (1899), the most enduring text of this group, examines consumption patterns in terms of biological traits, evolving in step with other institutions—political and pecuniary. Commons focused on labor economics and helped devise many of the measures, such as workmen's compensation, public utility regulations, and unemployment insurance, that resulted in the social security legislation of the 1930s.

Interwar Years 1919–1939

American economics was invigorated by the war and benefited enormously from a wave of immigration from Europe's intellegentsia. Of the three most prominent grand theorists of the period, and arguably of the entire century, namely John Maynard Keynes (1883–1946), Joseph Schumpeter (1883–1950), and Friedrich Hayek (1899–1992), the latter two came and settled in the United States: Schumpeter to Harvard (1932–1950), and Hayek to New York (1923–1924) and later to Chicago (1950–1962). Both did most of their critical work while in Europe, but were part of a larger migration of the Austrian school of economics, notably Ludwig von Mises (1881–1973), Fritz Machlup (1902–1983), and Karl Menger (1902–1985). Other prominent immigrants from Europe were Abraham Wald (1902–1950), John Harsanyi (1920–2000), Tjalling Koopmans (1910–1985), Oskar Lange (1904–1965), Wassily Leontief (1906–1999), Jacob Marschak (1898–1977), John von Neumann (1903–1957), Oskar Morgenstern (1902–1977), Franco Modigliani, Ronald Coase, and Kenneth Boulding (1910–1993).

Notwithstanding the inestimable stimulation of foreign-trained economists, the most prominent figures of this period were American born and educated, notably Fisher, Mitchell, Frank Knight (1885–1972), Henry Ludwell Moore (1869–1958), and Edward Chamberlain (1899–1967). Chamberlain's landmark study, The Theory of Monopolistic Competition (1933), contributed to the recognition of the mixed economy of mature capitalism. Fisher's The Making of Index Numbers (1922) made important headway on the measurement of key economic indicators. Mitchell stood out as the one who blended a still vibrant community of Institutionalism with the more ascendant neoclassicism. He and Moore's studies of business cycles helped foster the growth of econometrics, resulting in the formation of the National Bureau of Economic Research (1920) and the Cowles Commission (1932), which proved to be an important spawning ground for econometrics and, more generally, mathematical economics. Some leading economists associated with the Cowles Commision are Fisher, Koopmans, Marschak, Lange, Arrow, Gérard Debreu, James Tobin (1918–2002), and Simon Kuznets (1901–1985).

Knight's Risk, Uncertainty and Profit (1921) remains a classic in the study of capital theory and the role of the entrepreneur. Together with Currie, Jacob Viner (1892–1970), and Henry Simons (1899–1946), Knight helped to push the economics department of the University of Chicago into the top rank. With the subsequent contributions of George Stigler (1911–1991), Hayek, and Friedman, Chicago became the leading voice of the status quo. Among Nobel prizewinners in economics, roughly one-half have at some point in their career been associated with the "Chicago School."

Postwar Era

Here we see the clear ascendancy of mathematical economics as the dominant professional orientation. Economists shifted away from the literary pursuit of laws and general principles that characterized nineteenth-century political economy, in favor of models and econometric tests disseminated in the periodical literature. The number of U.S. journals began to surge in the postwar years to 300 by the year 2002, and the number of articles has grown almost exponentially.

No one stands out more prominently in the 1950s to 1960s than Paul Samuelson, not least because of his best selling textbook, Principles of Economics (1948). His precocity for mathematics resulted in a series of papers, which were immediately acclaimed for their brilliance. Published as The Foundations of Economic Analysis (1947), Samuelson's opus contributed to almost every branch of microeconomics. He devised a solution to the longstanding problem of price dynamics and formulated the axiom of revealed preference, which stands at the very core of neoclassical theory.

Other major contributors to mathematical economics, starting from the interwar period, were Wald on decision theory, Koopmans on linear programming, Leontief on input-output analysis, L. J. Savage (1917–1971) on mathematical statistics, and Harold Hotelling (1895–1973) and Henry Schultz (1893–1938) on demand theory. Arrow and Debreu, who moved to the States in 1949, devised through a series of papers in the 1950s an axiomatic rendition of the general theory of equilibrium—the doctrine by which prices bring about market clearance. In many respects, this put a capstone on the neoclassical theory that had commenced in the 1870s.

Arrow also made significant contributions to welfare economics with his Social Choice and Individual Values (1951). His book targeted the role of strategizing in economics, an idea that was of parallel importance to game theory.

The landmark works in the field of game theory came out of Princeton during and immediately after the war—namely, von Neumann and Morgenstern's Theory of Games and Economic Behavior (1944) and two seminal papers by the mathematician John Nash (1950, 1952). Strategic thinking also fostered the pursuit of Operations Research at the RAND Corporation in Santa Monica (founded in 1946). The World War II and the Cold War had much to do with the funding of these new fields, with Thomas Schelling's Strategey of Conflict (1960) as one of the best-known results. Related investigations are Rational Choice Theory, associated most closely with James Buchanan, and experimental economics, launched by Vernon Smith and Charles Plott. Herbert Simon's (1916–2001) concept of satisficing has also linked up with the emphasis in Game Theory on suboptimal behavior. In a nutshell, neither utility nor social welfare are maximized because information and cooperation prove to be too costly.

Keynes had traveled to the United States during and after World War II both to advise the American government and to help launch the International Monetary Fund that came out of the famous Bretton Woods gathering of 1944. Keynes's General Theory of Employment, Interest, and Money (1936) is widely viewed to this day as the single most influential book of the last century, and his ideas were widely disseminated by Alvin Hansen (1887–1975), Lauchlin Currie (1902–1993), Lawrence R. Klein, Tobin, Galbraith, and Samuelson. Nevertheless, Keynesianism was superceded in the 1950s by Friedman's monetarism—and then in the 1970s by the New Classicism of John Muth, Neil Wallace, Thomas Sargent, and Robert Lucas. McCarthyism may have also reinforced this shift since it became expedient for survival to avoid any controversial political issues that might stem from economic analysis. While Keynes was not a socialist, his inclinations toward a planned economy and his skepticism about market forces were seen as suspect.

Two other areas of specialization to which Americans made considerable postwar contributions are consumption theory and economic development. Of the first field, the names of Samuelson, Friedman, Modigliani, Hyman Minsky (1919–1997), James Duesenberry, and William Vickery (1914–1996) belong in the front rank. Of the second field, Kuznets, W. Arthur Lewis (the first major African American economist, originally from St. Lucia), Theodore W. Shultz (1902–1998), Robert Solow, and Albert O. Hirschman are noteworthy. Almost all of these men garnered the Alfred Nobel Memorial Prize in Economic Science, which commenced in 1969.

Until the latter part of the twentieth century, women had been grossly under-represented in American economics, but from those decades forward they have included roughly 25 percent of the profession. More women entered the profession in the interwar years, so that by 1920, 19 percent of Ph.D.'s went to women, though this figure dropped dramatically after World War II. Three who made important insights in consumption theory during the 1940s were Dorothy Brady (1903–1977), Margaret Reid (1895–1991), and Rose Friedman. Both Rose Friedman and Anna J. Schwartz have coauthored major works with the more famous Milton Friedman, making them the most widely read of contemporary American women economists. Many of the economists listed in this article advised the government—particularly on money, banking, and trade. Significant guidance from economists was widely acknowledged during the Great Depression with Franklin Roosevelt's New Deal. But it was in the postwar period that economists were extensively instituted into the government rather than brought in on an ad hoc basis. The Council of Economic Advisors, established in 1946, oversaw the fiscal reforms of the Kennedy era and took credit for the subsequent economic growth. The American government is replete with committees forging economic policy on virtually every applied field in the discipline. The chairman of the Federal Reserve Board, founded in 1914, is often taken from academic ranks and now stands out as the most powerful player in the American economy. Keynes once remarked of economists that "the world is ruled by little else." For better or for worse, the power that economists now hold in the American government epitomizes the triumph of the economics profession and the widespread view that the economy—and hence human well-being—is within our control.

Bibliography

Allen, William R. "Economics, Economists, and Economic Policy: Modern American Experiences." History of Political Economy 9, no. 1 (1977): 48–88.

Barber, William J. From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, 1921–1933. New York: Cambridge University Press, 1985.

Barber, William J., ed. Breaking the Academic Mould: Economists and American Higher Learning in the Nineteenth Century. Middletown: Wesleyan University Press, 1988.

Carver, Earlene, and Axel Leijonhufvud. "Economics in America: the Continental Influence." History of Political Economy 19, no. 2 (1987): 173–182.

Coats, A.W. On the History of Economic Thought: British and American Economic Essays. Volume 1. London and New York: Routledge, 1992.

Conkin, Paul. Prophets of Prosperity: America's First Political Economists. Bloomington: Indiana University Press, 1980.

Dorfman, Joseph. The Economic Mind in American Civilization. 5 volumes. New York: Viking, 1946–1959.

Goodwin, Craufurd D. "Marginalism Moves to the New World." History of Political Economy 4, no. 2 (1972): 551–570. Hirsch, Abraham, and Neil De Marchi. Milton Friedman: Economics in Theory and Practice. Ann Arbor: University of Michigan Press, 1990.

Mehrling, Perry. The Money Interest and the Public Interest: The Development of American Monetary Thought, 1920–1970. Cambridge, Mass.: Harvard University Press, 1997.

Mirowski, Philip. Machine Dreams: Economics Becomes a Cyborg Science. New York: Cambridge University Press, 2002.

Morgan, Mary S., and Malcolm Rutherford, eds. From Interwar Pluralism to Postwar Neoclassicism. Durham: Duke University Press, 1998.

Rutherford, Malcolm. Institutions in Economics: The Old and the New Institutionalism. New York: Cambridge University Press, 1996.

———, ed. The Economic Mind in America: Essays in the History of American Economics. London and New York: Routledge, 1998.

Ross, Dorothy. The Origins of American Social Science. New York and Cambridge: Cambridge University Press, 1991.

Vaughn, Karen I. Austrian Economics in America: The Migration of a Tradition. New York and Cambridge: Cambridge University Press, 1994.

Yonay, Yuval P. The Struggle over the Soul of Economics: Institutionalist and Neoclassical Economists in America Between the Wars. Princeton: Princeton University Press, 1998.

—Margaret Schabas

The economics of the Middle East can be divided into oil producers and nonproducers.

The main oil producers in the Middle East include Saudi Arabia, Iran, Kuwait, Iraq, Qatar, the United Arab Emirates (U.A.E.), Oman, Algeria, and Libya. There are three marginal producers: Bahrain, Yemen, and Syria. The nonproducers or minimal producers are Egypt, Turkey, Jordan, Sudan, Tunisia, and Morocco.

Another taxonomic variable is population. The Middle East has countries with large populations - Iran, Egypt, Turkey, Morocco, and Algeria. Others, such as Qatar and the U.A.E., have minimal indigenous populations.

The production of oil per capita tends to define the type of economy to which each Middle Eastern country belongs. Countries with oil production of more than 0.25 barrels per day per capita tend to emphasize the development of low-labor, high-capital industries. Saudi Arabia, U.A.E., and Qatar have sought to develop alternatives to their dependence on crude oil by investing heavily in industry, mainly in petrochemicals, which require large amounts of natural gas or crude oil, energy, and capital, but minimum labor. Until 1995 most of the development in oil and petrochemicals was spear-headed by the governments, with some support from the private sector. Due to lessening income streams from lower oil prices, efforts are being made to include private industry more fully.

The non-oil economy in the countries with high per capita oil output tends to be liberal, except in Libya. None of the countries in this group has any foreign-exchange controls, restriction on import or export of capital by nationals, or limits on imports and exports of products (except pork products and alcohol). Most prices are set by supply and demand, although some food staples are subsidized by the governments.

The countries with production between zero and 0.10 barrels per day per capita mostly have large populations. Some are minor oil producers, but major producers like Iran, Iraq, and Algeria have a low production per capita. These low per capita producers tend to emphasize centrally planned industrial growth with more labor content. They have very stringent regulations on investments and on foreign-exchange and capital export by residents. Large segments of their economy tend to be nationalized, including banks, mining, and large manufacturing plants. Their economic growth has been minimal, and most are attempting to deregulate their economies.

The final group (Turkey, Egypt, Morocco, Jordan, etc.), with very limited earnings from oil,

relies on private local and foreign investment as well as foreign aid to fund their development.

A large segment of the population in the Middle East is active in agriculture (35.35%). However, this average is skewed by the large numbers of people employed in that sector in Egypt (43%) and Morocco (50%). Mining, manufacturing, and construction employs about 20.57 percent; public administration and services employs 23.54 percent; and trade, transport, and communication employs 9.27 percent.

Oil producers tend to have a much larger percentage of their population in public administration and services, suggesting that oil resources are downstreamed to the population through the creation of jobs in the civil service (34% in Saudi Arabia, 40% in Qatar, 39% in Iraq, 53% in Kuwait).

Bibliography

Gause, Gregory. Oil Monarchies: Domestic and Security Challenges in the Arabian Gulf States. New York: Council on Foreign Affairs, 1994.

Seznec, Jean-François. The Financial Markets of the ArabianGulf. London: Croon Helm, 1988.

— JEAN-FRANÇOIS SEZNEC

The science that deals with the production, distribution, and consumption of commodities.