Philosophy of Economics

The philosophy of economics is the branch of philosophy which studies philosophical issues relating to economics. It can also be defined as the branch of economics which studies its own foundations and status as a moral science.

Scope of the philosophy of economics

Definition and ontology of economics

The first question usually addressed in any subfield of philosophy (the philosophy of X) is "what is X?" A philosophical approach to the question "what is economics?" is less likely to produce an answer than it is to produce a survey of the definitional and territorial difficulties and controversies.

Ontological questions continue with further "what is..." questions addressed at fundamental economic phenomena, such as "what is (economic) value?", "what is a market?". While it is possible to respond to such questions with real verbal definitions, the philosophical value of posing such questions actually aims at shifting entire perspectives as to the nature of the foundations of economics. In the rare cases that attempts at ontological shifts gain wide acceptance, their ripple effects can spread throughout the entire field of economics.

Methodology and epistemology of economics

An epistemology deals with how we know things. In the philosophy of economics this means asking questions such as: what kind of a "truth claim" is made by economic theories - for example, are we claiming that the theories relate to reality or perceptions? How can or should we prove economic theories - for example, must every economic theory be empirically verifiable? How exact are economic theories and can they lay claim to the status of an exact science - for example, are economic predictions as reliable as predictions in the natural sciences, and why or why not? Another way of expressing this issue is to ask whether economic theories can state "laws". Philosophers of science have explored these issues intensively since the work of Alexander Rosenberg and Daniel Hausman in the 1970s.

Game theory and economic agents

Game theory is shared between a number of disciplines, but especially mathematics, economics and philosophy. Game theory is still extensively discussed within the field of the philosophy of economics. Decision theory is closely related to game theory and is likewise very strongly interdisciplinary. Philosophical approaches in decision theory focus on foundational concepts in decision theory - for example, on the natures of choice or preference, rationality, risk and uncertainty, economic agents.

Ethics of economic systems

The ethics of economic systems deals with the issues such as how it is right (just, fair) to keep or distribute economic goods. This area overlaps strongly with other disciplines. Approaches are regarded as more philosophical when they study the fundamentals - for example, John Rawls' A Theory of Justice (1971) and Robert Nozick's Anarchy, State and Utopia (1974).

Utilitarianism, one of the ethical methodologies, has its origins inextricably interwoven with the emergence of modern economic thought. Today utilitarianism has spread throughout applied ethics as one of a number of approaches. Non-utilitarian approaches in applied ethics are also now used when questioning th e ethics of economic systems - e.g. rights-based (deontological) approaches.

Many political ideologies have been an immediate outgrowth of reflection on the ethics of economic systems. Marx, for example, is generally regarded primarily as a philosopher, his most notable work being on the philosophy of economics.

Non-mainstream economic thinking

The philosophy of economics defines itself as including the questioning of foundations or assumptions of economics. The foundations and assumption of economics have been questioned from the perspective of noteworthy but typically under-represented groups. These areas are therefore to be included within the philosophy of economics.

Environmental Economics

Environmental economics is a subfield of economics concerned with environmental issues. Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007) in their textbook Environmental Economics: "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." Common forms of market failure include externalities, non excludability and non rivalry.

Externality: the basic idea is that an externality exists when a person makes a choice that affects other people that are not accounted for in the market price. For instance, a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution in excess of the 'socially efficient' level may occur. A classic definition is provided by Kenneth Arrow (1969), who defines an externality as “a situation in which a private economy lacks sufficient incentives to create a potential market in some good, and the nonexistence of this market results in the loss of efficiency.” In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an efficient outcome.

Common property and non-exclusion: When it is too costly to exclude people from accessing a rivalrous environmental resource, market allocation is likely to be inefficient. The challenges related with common property and non-exclusion have long been recognized. Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion and common property. "commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in th e sense that property everyone owns nobody owns. The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation. See, however, Ostrom's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons.

Public goods and non-rivalry: Public goods are another type of market failure, in which the market price does not capture the social benefits of its provision. For example, protection from the risks of climate change is a public good since its provision is both non-rival and non-excludable. Non-rival means climate protection provided to one country does not reduce the level of protection to another country; non-excludable means it is too costly to exclude any one from receiving climate protection. A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.

Economic Theory

Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term ecomomics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from oikos (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science. The expanding domain of economics in the social sciences has been described as economic imperialism.

Common distinctions are drawn between various dimensions of economics: between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; and between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"). However the primary textbook distinction is between microeconomics, which examines the economic behavior of agents (including individuals and firms, consumers and producers), and macroeconomics, addressing issues of unemployment, inflation, economic growth, and monetary and fiscal policy for an entire economy.

Industrial Ecunomics

Industrial economics is a field of economics that studies the strategic behavior of firms, the structure of markets and their interactions. The study of industrial organization adds to the perfectly competitive model real-world frictions such as limited information, transaction cost, cost of adjusting prices, government actions, and barriers to entry by new firms into a market. It then considers how firms are organized and how they compete. Perhaps a most appropriate term is the "Economics of Imperfect Competition". The development of industrial organization as a separate field owed much to Edward Chamberlin, Edward S. Mason and Joe S. Bain.

There are two major approaches to the study of industrial organization: the first approach is primarily descriptive and provides an overview of industrial organization. The second, price theory, uses microeconomic models to explain firm behavior and market structure.

Business Economics

Business economics is that part of economic theory which focuses on business enterprises and inquires into the factors contributing to the diversity of organizational structures and to the relationships of firms with labour, capital and product markets.

Business Economics is concerned with economic issue and problems related to business organization, management and strategy. Issues and problems such as the following:an explanation of why firms emerge and exist; why they expand: horizontally, vertically and specially; the role of entrepreneurs and entrepreneurship; the significance of organizational structure; the relationship of firms with employees, the employees, the providers of capital, the customers, the government; the interactions between firms and the business environment. The term Business Economics is used in a variety of ways. Sometimes it used as synonymously with - Industrial Economics - Industrial Organisation - Managerial Economics - Economics for Business. Industrial Economics is the mostly closely over-lapping of these terms whilst there may be more substantial differences with Economics for Business and Managerial Economics. One view of the distinctions between these would be that Business Economics is wider in its scope than Industrial Economics in that it would be concerned not only with "Industry" but also businesses in the service sector and that it also takes seriously the insights of the "business strategy" literature. Economics for business looks at the major principles of economics but focuses on applying these economic principles to the real world of business. Managerial economics is the application of economic methods in the managerial decision-making process.

Many universities offer courses in Business Economics and offer a range of interpretations as to the meaning of Business Economics. The University of East London defines the subject matter of its degree as looking at the application of economic theory to business activities and organizations arguing that "In general terms, Business Economics deals with issues such as: the ways markets work; what firms do, what their motives are, how they perform; and the role of government in regulating business activity". The program at Harvard University uses economic methods to analyze practical aspects of business, including business administration, management, and related fields of economics. The University of Miami defines Business Economics as involving the study of how we use our resources for the production, distribution, and consumption of goods and services. This requires business economists to analyze social institutions, banks, the stock market, the government and they look at problems connected with labor negotiations, taxes, international trade, and urban and environmental issues. Courses at the University of Manchester interpret Business Economics to be concerned with the economic analysis of how businesses contribute to welfare of society rather than on the welfare of an individual or a business. This is done via an examination of the relationship between ownership, control and firm objectives; theories of the growth of the firm; the behavioural theory of the firm; theories of entrepreneurship; the factors that influence the structure, conduct and performance of business at the industry level.

Agricultural Economics

Agricultural economics originally applied the principles of economics to the production of crops and livestock — a discipline known as agronomics. Agronomics was a branch of economics that specifically dealt with land usage. It focused on maximizing the crop yield while maintaining a good soil ecosystem. Throughout the 20th century the discipline expanded and the current scope of the discipline is much broader. Agricultural economics today includes a variety of applied areas, having considerable overlap with conventional economics.

The field of agricultural economics has evolved over many decades. One scholar summarizes its development as follows:

"Agricultural economics arose in the late 19th century, combined the theory of the firm with marketing and organization theory, and developed throughout the 20th century largely as an empirical branch of general economics. The discipline was closely linked to empirical applications of mathematical statistics and made early and significant contributions to econometric methods. In the 1960's and afterwards, as agricultural sectors in the OECD countries contracted, agricultural economists were drawn to the development problems of poor countries, to the trade and macroeconomic policy implications of agriculture in rich countries, and to a variety of production, consumption, and environmental and resource problems."

Agricultural economists have made many well-known contributions to the economics field with such models as the cobweb model, hedonistic regression pricing models, new technology and diffusion models (Zvi Griliches), multifactor productivity and efficiency theory and measurement, and the random coefficients regression. The farm sector is frequently cited as a prime example of the perfect competition economic paradigm.

Since the 1970s, agricultural economics has primarily focused on seven main topics, according to a scholar in the field: technical change and human capital; agricultural environment and resources; risk and uncertainty; consumption and food supply chains; prices and incomes; market structures; and trade and development.

Economic Welfare

Welfare economics is a branch of economics. It uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution. associated with it. It analyzes social welfare , however measured, in terms of economic activities of the individuals that comprise the theoretical society considered. As such, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units. Welfare economics.

Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms from social state A to social state B if at least one person prefers B and no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare.

Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinarily in terms of Pareto efficiency. The cardinal method in "utils" is seldom used in pure theory today because of aggregation problems that make the meaning of the method doubtful, except on widely challenged underlying assumptions. In applied welfare economics, such as in cost-benefit analysis, money-value estimates are often used, particularly where income-distribution effects are factored into the analysis or seem unlikely to undercut the analysis.

Since the early 1980s economists have been interested in a number of new approaches and issues in welfare economics. The capabilities approach to welfare argues that what people are free to do or be should also be included in welfare assessments and the approach has been particularly influential in development policy circles where the emphasis on multi-dimensionality and freedom has shaped the evolution of the Human Development Index.

Economists have also been interested in using life satisfaction to measure what Kahneman and colleagues call experienced utility.

What follows, for the most part, therefore refers to a particular approach to welfare economics, possibly best referred to as 'neo-classical' or 'traditional' welfare economics.