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.
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:
^ 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:
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.
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:
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
The Robbins’s definition is grounded upon 4 fundamental provisions:
“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.
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:
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.
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.
All 5 functions do not, and cannot, work separately, but only in close interrelation and complementariness.
Positive and normative economic science
Positive economics – descriptive. It answers the questions like “what is” (what is not).
Normative economics – prescriptive. 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
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.