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1

4th (autumn) trimester

2005-2006 acad. year

Lecture 1, Topic 1a (abstract)

Lecture 1 (abstract)

Topic 1a. THE NATURE AND METHOD OF ECONOMIC THEORY



Бранил Гомера, Феокрита;

Зато читал Адама Смита

И был глубокий эконом,

То есть умел судить о том,

Как государство богатеет,

И чем живет, и почему

Не нужно золота ему,

Когда простой продукт имеет.

А.С. Пушкин, «Евгений Онегин»


Все знают, чего не должно быть, и все знают, что должно быть. Перехода не знает никто.

М. Жванецкий


Xenophon (Xenophanes) – He was the first to use the term “economy” for household operations.

Aristotle – Economy means organization of slave-owner’s business.


Mercantilism – the first more-or-less clear-cut economic theory. The key principles:

  • The money and commodity circulation (especially foreign trade) is the key contributor to creation of added value or surplus product;

  • Wealth of nations is determined by availability of the precious metals.


^ 1615: Antoine de Montcretiens – “Treatise on Political Economy” – thus he coined the term “political economy”.


XVII-XIX centuries – Adam Smith (classical political economy; “Wealth of Nations”); William Petty (law of diminishing returns); David Ricardo (theory of labor value), Karl Marx (theory of surplus value); Carl Menger (theory of marginal utility); and others.


1890: Alfred Marshall – “The Principles of Economics”.


Approaches of political economy towards the subject-matter’s definition:

  1. In the course of production, people enter into economic (production) relations

  2. Each level of production relations fit respective socioeconomic superstructure




  1. economic (production) relations

Production of material goods is a deliberate and expedient action of human beings, i.e. labor.

This action or process (labor) involves the following elements:

^ Objects (items) of labor cover primary objects of labor given by nature and raw materials, i.e. objects earlier processed by human beings.

Means (instruments) of labor cover the items applied to the objects of labor. Consists of mechanical means of labor (machines, mechanisms, equipment) and material conditions of labor (buildings and structures, irrigation canals, pipelines, etc.).

Objects of labor and means of labor  means of production.

Means of production and manpower (labor force)productive forces of the society.

In the course of production, exchange, and distribution, people enter into the relations named production (economic) relations.

Production relations is the essence of the subject-matter of political economy.

Political economy views unity of and contradictions between productive forces and production relations. This unity at the different stages of the societal development amounts to a particular mode of production and economic basis of the society.


  1. sociopolitical superstructure

Sociopolitical relations, establishments, political system. Sociopolitical superstructure and economic basis of society interact and influence upon each other, thus contributing to mutual development of both basis and superstructure.


^ Political economy studies production (economic) relations that are established among people in the course of production, exchange, distribution and consumption of various economic goods.


Approaches (vykhidni polozhennya) of economics (analytical economy) towards the subject-matter’s definition:

  1. Humankind’s wants are infinite

  2. Resources for the human wants satisfaction are finite/limited


One can satisfy certain needs for a certain period of time, but it is impossible to satisfy all needs for all times.


One can have enough resources of a certain kind for a certain period of time, but it is impossible to have all needed resources in sufficient amounts for all times.


“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

^ Lionel Robbins

“An Essay on the Nature

and Significance of

Economic Science”,

1932


The Robbins’s definition is grounded upon 4 fundamental provisions:

  1. Human behavior – i.e. taking decisions concerning usage of scarce resources toward satisfaction of human infinite needs

  2. Infinite human needs

  3. Finite (or scarce) resources

  4. Alternative uses of scarce resources.



^

“comprehensive” definition –

The subject-matter of economic theory is the economic relations which are subject to the influence of the sociopolitical superstructure and established among people in the course of usage of limited resources for satisfaction of unlimited human needs.




^

Methods, methodology


The unity of dialectic approaches and certain elements of metaphysics amounts to the methodological basis of economic theory

Methodological approach is also based upon transition from the abstract to the concrete. This makes it possible to clarify contradictions between essence and appearance, form and content, as well as consider differences between evolutionary and revolutionary changes.

^ The main methods of the economic theory are: induction and deduction, analysis and synthesis, research of the economic processes and developments with regard to inseparable connection between their quantitative and qualitative aspects.

Methods applied to the economic theory are interconnected. Induction does not work without deduction. Analysis has no point without synthesis. Quantitative indicators is just a set of facts without qualitative characteristics. Qualitative aspects have no meaning without quantitative indicators.

Economic theory also applies statistical methods, economic-mathematic methods, elements of psychology (behavioral economics), etc.


Deduction of a great number of economic laws applies a “ceteris paribus” approach, or “other things being equal”.


Functions of economic theory:

  1. cognitive

  2. practical

  3. methodological

  4. ideological

  5. world outlook (weltanschauung)




  1. Cognitive function – laws, principles, models, etc.

Economic law constitutes objective, internally necessary ,stable and significant cause-and-effect relations between certain phenomena, processes and elements of economic system.

^ Economic laws cannot be made up, they can be revealed/discovered. Economic laws cannot be repealed. One can follow them or ignore them. In the latter case, one is not held legally responsible, but has to bear economic responsibility.

Economic law means generalization that tells us that under such and such circumstances a certain behavior can be expected from a social group. – Alfred Marshall


Economic theory is both retrospective and actual science. Besides, it plays a futurological role.


  1. Practical function: practicality of the economic theory allows any economic entity to reveal its potential on the basis of objective economic laws. The more business entities and governments take economic laws into account in the course of development of business strategy or national policy, the better results can be expected.




  1. Methodological function:

  1. Sectoral (галузеві) economic disciplines – industrial economics, agricultural economics, economics of trade, etc.

  2. Functional economic– management, marketing, accounting, economic analysis, auditing, economic statistics, finance, banking, etc.

  3. Inter-sectoral (inter-disciplinary) and natural-economic disciplines – economic geography, economic psychology, ecology, managerial economics, economic-mathematic methods, econometrics, etc.

Under any classification, use of economic theory as a basis is in common for all economic sciences. On the other hand, special economic disciplines “feed” the economic theory with the facts and figures via research and development, thus contributing to improvement and perfection of economic theory.


  1. ideological function: the members of every economic school – whether they want it or not – reflect and defend interests of certain social classes, nations, groups, etc.



  1. world outlook function: economic theory conduces to formation of economic way of thinking and general world outlook of people. To a certain extent, this function counter-balances the ideological function, in case the latter tends to dominate over all others.


All 5 functions do not, and cannot, work separately, but only in close interrelation and complementariness.

^

Positive and normative economic science


Positive economicsdescriptive. It answers the questions like “what is” (what is not).

Normative economicsprescriptive. It “prescribes” what should be” (what should not be).

[“Arts” of economics: how to move from “what should not be” to “what should be”.]

Theoretically, though not always in practice, people can agree upon what this world IS like, but they in many cases tend to disagree as to what it SHOULD BE like, and especially HOW to change it for better.

When one and the same economist, on the basis of gathered and processed data, is trying to change the actual state of things, he/she acts like a policy-maker, rather than like a scholar/scientist.

^ IMPORTNANT POINT: – both positive and normative statements can relate to present, past and future.


Goals (everyday objectives)of econmic policy

  • EFFICIENCY

  • Economic (allocative) efficiency:

  • Full employment of labor force,

  • Full utilization of available adequate resources

  • Economic (technical) efficiency

  • Economic (distributive) efficiency

  • EQUITY

  • Economic freedom

  • Fair distribution of incomes

  • Economic security

  • STABILITY

  • Economic growth

  • Macroeconomic stability:

  • Stable price level

  • Stable national currency unit

  • Maintaining foreign trade balance

GOALS are set by policy-makers. MEANS to achieve them are developed by economists.

Microeconomics and macroeconomics


Microeconomics is the study of economics at the level of economic units like individual consumers, individual households, specific groups of consumers, entrepreneurs, groups of firms and other micro-units.

Macroeconomics is the study of the entire economic system at the level of households, business firms, both aggregated in the entire macro-units “households” and “business firms” respectively, as well as government and foreign trade (???) macro-units aggregating households.

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