restricted access What Is Economics?
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What Is Economics? Christopher Snyder Economics Is about More Than the Stock Market When people I meet learn I am an economist, often one of the first questions they ask is, “What’s the stock market going to do?” That’s a great question. If on the day I was born my parents had invested $100 for me in Altria, the stock that has turned out to be the top performer since then, I would be a millionaire today (see figure 1). “What’s the stock market going to do?” is a million-dollar question we would all like to know the answer to. The people I meet are often surprised to learn that I—and most other economists—spend very little time thinking about the stock market. This article will give you a glimpse into the diverse set of topics we do think about and, just as important, a glimpse into how we think about them. All that said, I do have some wisdom to share about the stock market, but I am not going to simply blurt it out. One general area of study in economics is incentives—what drives people to make the choices they do—so I know that if I give away the answer to the million-dollar question here, you won’t have an incentive to read the rest of the article. If you want my wisdom on the stock market, you will have to read through to the end of the article. Maybe you will find the other topics just as rewarding. Fitting Economics among the Sciences Economics is one of the social sciences, along with sociology, political science, psychology,and others,devoted to the study of human behavior.Some scientists in the “hard” sciences like physics and chemistry consider economics and the other social sciences “soft” sciences, if indeed they consider them sciences at What Is Economics? 121 all. I won’t argue with that view. Humans are complex; they sometimes act on whims; they certainly don’t behave as systematically as particles. Organizations of individuals such as companies, universities, or a country’s whole economy are yet more complex. Devising simple theories to explain their operation is hard,and conducting experiments on them to test these theories is even harder. Economists and other social scientists sometimes have to be content with looser theories than they would like, or less-than-perfect tests. So, yes, they are “soft” sciences. But social scientists are trying harder than ever to be rigorous both in the theories they propose and the statistical analysis of these theories. Economics is distinct in its focus on aspects of behavior related to people’s material well-being. Other social sciences, some covered in other chapters of this book, might study what groups people join, how they vote, what spiritual beliefs they hold, how they form a thought. Economics asks a different set of questions.How do people earn a living? What do they buy with the money they earn? These questions are not to everyone’s taste. Some noneconomists might Figure 1 Huge gains from Altria stock investment. Author’s calculations using historical stock-return data from the Center for Research in Security Prices $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Altria stock price (adjusted for splits and dividends) Year 122 Christopher Snyder find such questions about the “business side”of life pedestrian.For some reason economists find them fascinating.Perhaps the fascination lies in the opportunity for concrete measurement: hard data on income and spending may be easier to come by than ideas or religious beliefs. Perhaps the fascination lies in the opportunity to make material improvements in people’s lives with a good answer to an economic question.Perhaps the fascination lies in the opportunity to tease out philosophical issues buried in pedestrian questions. Take the question of what people buy with the money they earn. Behind that question is the more fundamental question of what determines an object’s value.Why are diamonds, mere decorations,perfectly easy to live without,so prized,while water,essential for human life, can be drunk for free from public water fountains? (Give this philosophical question some thought yourself; we will revisit it when we discuss some broad economic principles below.) Although I have dwelled on the distinction between economics and other social sciences,the dividing lines have blurred over time.For example,crime was once...