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Wikipedia English, Economics 3

Economic reasoning Main article: Economic methodology Economics as a contemporary discipline relies on rigorous styles of argument. Various methods and beliefs have influenced development of the subject. [40][41] Analysis may begin with a simple model that proposes the hypothesis of one variable to be explained by another variable. Often an economic hypothesis is only qualitative, not quantitative. That is, the hypothesis implies the direction of a change in one variable, not the size of the change, for a given change of another variable..[42] For clarity of exposition, theory may proceed with an assumption of ceteris paribus, which means holding constant explanatory terms other than the one under consideration. For example, the quantity theory of money predicts an increase in the nominal value of output from an increase in the money supply, ceteris paribus. Common objectives of economic analysis include formulating theories that, compared to competing theories, are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research. [43] Economic theory is open to criticisms that it relies on unrealistic, unverifiable, or highly simplified assumptions. An example is the assumption of profit maximization by business firms. Answers of businesspersons to questions about the factors affecting their decisions may show no such calculation. One methodological response invokes hypothesized implications, such as that a profit-maximizing firm would raise total price with an increase in the sales tax. If firms act as if they are trying to maximize profits, the assumption may be accepted, whatever businesspersons say they are doing. More generally, while unrealistic assumptions do not help an unsuccessful theory, many descriptive details might be irrelevant to the predictive success of the theory and omitted for that reason. [44][45] Still, unrealistic assumptions may challenge the epistemic status of economics as a science, even as concepts and models help explain economic phenomena. [46] Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) used mathematical methods to represent the theory, particularly as to maximizing behavioral relations of agents reaching equilibrium. The book focused on examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data. [47] Economic data, broadly or narrowly construed, may permit testing the theory, if the theory has empirical implications. Statistical methods such as regression analysis can represent unknown random influences on the variable to be explained. Practitioners use such methods to estimate the size, economic significance, and statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is provisional, dependent on the hypothesis surviving tests that expose it to rejection. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data sets, and prior beliefs. Here, criticism based on professional standards and non-replicability of results serve as further checks against bias, errors, and over-generalization,[48][41] although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data. [49] Like theories, uses of test statistics are themselves open to critical analysis,[50][51][52] although critical commentary on papers in economics in prestigious journals such as the American Economic Review has declined precipitously in the past 40 years. [53] This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI). [54] Deirdre McCloskey, a longstanding critic of economics, claims that her criticisms have gone largely unheard over the years,[55] although her contention is controversial. [56] In recent decades, the use of experimental methods in economics, including controlled experiments, has greatly expanded. This has removed one long-noted distinction of some natural sciences from economics and allowed more direct tests of what were previously taken as axioms. [57][58] Development of theories, data, and methods have transformed some assumptions into testable models. An example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences. [59][60] Other fields commonly described as sciences use methods similar to those above. Their widespread use in economics underlies an argument that economics is a "genuine science.". [61] Still, critics have challenged the net gains. For example, Friedrich Hayek in his 1974 Nobel Prize lecture attributed policy failures in economic advising to an uncritical and unscientific propensity to imitate procedures used in the physical sciences. He argued that even much-studied economic phenomena, such as labor-market unemployment, are inherently more complex than their counterparts in the physical sciences where such methods were earlier formed. Similarly, theory and data are often very imprecise and lend themselves only to the direction of a change needed, not its size. [62] In part because of criticism, economics has undergone a thorough cumulative formalization and elaboration of concepts and methods since the 1940s, some of which have been toward application of the hypothetico-deductive method to explain real-world phenomena. [63] An example of the latter is the extension of microeconomic analysis to seemingly non-economic areas, sometimes called economic imperialism. [61][64] Areas and classifications in economics Economics is one social science among several but has fields bordering on other areas, including economic geography, economic history, public choice, cultural economics, and institutional economics. One division of the subject distinguishes two types of economics. Positive economics ("what is") seeks to explain economic phenomena or behavior. Normative economics ("what ought to be," usually as to public policy) prioritizes choices and actions by some set of criteria; such priorities reflect value judgments, including selection of the criteria. Another distinction is between mainstream economics and heterodox economics. One broad characterization describes mainstream economics as dealing with the "rationality-individualism-equilibrium nexus" and heterodox economics as defined by a "institutions-history-social structure nexus. "[65] The JEL classification codes of the Journal of Economic Literature provide a comprehensive, detailed way of classifying and searching for economics publications by subject matter. An alternative classification of often-detailed entries by mutually-exclusive categories and subcategories is The New Palgrave: A Dictionary of Economics. [66] Analysis of the economy Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics. Microeconomics Main article: Microeconomics Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. A given market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time. This is broadly termed demand-and-supply analysis. Market structures, such as perfect competition and monopoly, are examined as to implications for behavior and economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that behavioral relations in other markets remain unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for changes in different markets and aggregates across all markets, including their movements and interactions toward equilibrium. [67][68] Macroeconomics Main article: Macroeconomics Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down," that is, using a simplified form of general-equilibrium theory. [69] Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition. [70] This has addressed a long-standing concern about inconsistent developments of the same subject. [71] Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labor force growth. [72][73]

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Economic reasoning

Main article: Economic methodology

Economics as a contemporary discipline relies on rigorous styles of argument. Various methods and beliefs have influenced development of the subject.[40][41] Analysis may begin with a simple model that proposes the hypothesis of one variable to be explained by another variable. Often an economic hypothesis is only qualitative, not quantitative. That is, the hypothesis implies the direction of a change in one variable, not the size of the change, for a given change of another variable..[42] For clarity of exposition, theory may proceed with an assumption of ceteris paribus, which means holding constant explanatory terms other than the one under consideration. For example, the quantity theory of money predicts an increase in the nominal value of output from an increase in the money supply, ceteris paribus. Common objectives of economic analysis include formulating theories that, compared to competing theories, are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research.[43]

Economic theory is open to criticisms that it relies on unrealistic, unverifiable, or highly simplified assumptions. An example is the assumption of profit maximization by business firms. Answers of businesspersons to questions about the factors affecting their decisions may show no such calculation. One methodological response invokes hypothesized implications, such as that a profit-maximizing firm would raise total price with an increase in the sales tax. If firms act as if they are trying to maximize profits, the assumption may be accepted, whatever businesspersons say they are doing. More generally, while unrealistic assumptions do not help an unsuccessful theory, many descriptive details might be irrelevant to the predictive success of the theory and omitted for that reason.[44][45] Still, unrealistic assumptions may challenge the epistemic status of economics as a science, even as concepts and models help explain economic phenomena.[46]

Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) used mathematical methods to represent the theory, particularly as to maximizing behavioral relations of agents reaching equilibrium. The book focused on examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data.[47]

Economic data, broadly or narrowly construed, may permit testing the theory, if the theory has empirical implications. Statistical methods such as regression analysis can represent unknown random influences on the variable to be explained. Practitioners use such methods to estimate the size, economic significance, and statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is provisional, dependent on the hypothesis surviving tests that expose it to rejection. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data sets, and prior beliefs. Here, criticism based on professional standards and non-replicability of results serve as further checks against bias, errors, and over-generalization,[48][41] although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data.[49] Like theories, uses of test statistics are themselves open to critical analysis,[50][51][52] although critical commentary on papers in economics in prestigious journals such as the American Economic Review has declined precipitously in the past 40 years.[53] This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).[54] Deirdre McCloskey, a longstanding critic of economics, claims that her criticisms have gone largely unheard over the years,[55] although her contention is controversial.[56]

In recent decades, the use of experimental methods in economics, including controlled experiments, has greatly expanded. This has removed one long-noted distinction of some natural sciences from economics and allowed more direct tests of what were previously taken as axioms.[57][58] Development of theories, data, and methods have transformed some assumptions into testable models. An example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences.[59][60]

Other fields commonly described as sciences use methods similar to those above. Their widespread use in economics underlies an argument that economics is a "genuine science.".[61] Still, critics have challenged the net gains. For example, Friedrich Hayek in his 1974 Nobel Prize lecture attributed policy failures in economic advising to an uncritical and unscientific propensity to imitate procedures used in the physical sciences. He argued that even much-studied economic phenomena, such as labor-market unemployment, are inherently more complex than their counterparts in the physical sciences where such methods were earlier formed. Similarly, theory and data are often very imprecise and lend themselves only to the direction of a change needed, not its size.[62] In part because of criticism, economics has undergone a thorough cumulative formalization and elaboration of concepts and methods since the 1940s, some of which have been toward application of the hypothetico-deductive method to explain real-world phenomena.[63] An example of the latter is the extension of microeconomic analysis to seemingly non-economic areas, sometimes called economic imperialism.[61][64]

Areas and classifications in economics

Economics is one social science among several but has fields bordering on other areas, including economic geography, economic history, public choice, cultural economics, and institutional economics.

One division of the subject distinguishes two types of economics. Positive economics ("what is") seeks to explain economic phenomena or behavior. Normative economics ("what ought to be," usually as to public policy) prioritizes choices and actions by some set of criteria; such priorities reflect value judgments, including selection of the criteria.

Another distinction is between mainstream economics and heterodox economics. One broad characterization describes mainstream economics as dealing with the "rationality-individualism-equilibrium nexus" and heterodox economics as defined by a "institutions-history-social structure nexus."[65]

The JEL classification codes of the Journal of Economic Literature provide a comprehensive, detailed way of classifying and searching for economics publications by subject matter. An alternative classification of often-detailed entries by mutually-exclusive categories and subcategories is The New Palgrave: A Dictionary of Economics.[66]

Analysis of the economy

Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics.

Microeconomics

Main article: Microeconomics

Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. A given market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time. This is broadly termed demand-and-supply analysis. Market structures, such as perfect competition and monopoly, are examined as to implications for behavior and economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that behavioral relations in other markets remain unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for changes in different markets and aggregates across all markets, including their movements and interactions toward equilibrium.[67][68]

Macroeconomics

Main article: Macroeconomics

Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down," that is, using a simplified form of general-equilibrium theory.[69] Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.[70] This has addressed a long-standing concern about inconsistent developments of the same subject.[71] Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labor force growth. [72][73]