Economic Modeling

economics

economics, study of how human beings allocate scarce resources to produce various commodities and how those commodities are distributed for consumption among the people in society (see distribution). The essence of economics lies in the fact that resources are scarce, or at least limited, and that not all human needs and desires can be met. How to distribute these resources in the most efficient and equitable way is a principal concern of economists. The field of economics has undergone a remarkable expansion in the 20th cent. as the world economy has grown increasingly large and complex. Today, economists are employed in large numbers in private industry, government, and higher education (see economic planning). Many subjects, such as political science and sociology, which were once regarded as part of the study of economics, have today become separate disciplines, although the study of any one generally implies a working knowledge of the others.

Ancient and Medieval Periods

The first attempts to analyze economic problems appear in the writings of the ancient Greeks. Plato recognized the economic basis of social life and in his Republic organized a model society on the basis of a careful division of labor. Aristotle, too, attributed great importance to economic security as the basis for social and political health and saw the owner of a middle-sized plot of land as the ideal citizen. Roman writers such as Cicero, Vergil, and Varro gave significant advice about the economics of agriculture. The medieval period was marked by the disruption of the flourishing commerce of the ancient world, and its economic life was dominated by feudalism. Economic writings of the age focus on the just price for goods and criticism of usury.

Mercantilism, the Physiocrats, and Adam Smith

In the transition to modern times (16th–18th cent.), European overseas expansion led to the growth of commerce and the economic policies of mercantilism, a system that inspired a substantial body of literature on the subject of economic nationalism. In the late 17th and the 18th cents., protest against the governmental regulation characteristic of mercantilism was voiced, especially by the physiocrats. That group advocated laissez-faire, arguing that business should follow freely the "natural laws" of economics without government interference. They regarded agriculture as the sole productive economic activity and encouraged the improvement of cultivation. Because they considered land to be the sole source of wealth, they urged the adoption of a tax on land as the only economically justifiable tax.

In the 18th cent. important work in economics was done by the Scottish philosopher David Hume. His analysis of the natural advantages that some nations enjoy in the cultivation of certain products and his observations on the flow of commerce became the basis for the theory of international trade. The most important work of the 18th cent., however, was Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations (1776), which is considered by many to be the first complete treatise on economics. Smith identified self-interest as the basic economic force and, through his analysis of the division of labor and his comprehensive study of the development of economic institutions in the West, established economics as a major area of study. John Millar, a follower of Smith, incorporated and developed these ideas into a highly sophisticated economic interpretation of history. Smith's theories, especially his advocacy of free trade, played an important part in the Industrial Revolution then taking place in Britain.

Malthus, Ricardo, and Mill

One of the most influential writers of the 19th cent. was Thomas Malthus, whose predictions that population growth would always tend to outstrip advances in the means of subsistence earned for economics the title "the dismal science." The most important economist to follow Smith was David Ricardo. His analysis of rent long remained the classic account, while his theory of labor value was later adopted by socialists as well as classical economists. Ricardo's "iron law of wages" supplemented Malthus's pessimistic thesis by asserting that wages tend to stabilize at the subsistence level. John Stuart Mill was a follower of Ricardo and contributed to the study of international trade as well as to the study of the economics of industrial expansion. Among critics of free trade outside Britain were the German Friedrich List and the American Henry C. Carey.

The Socialists and Marx

The early exponents of socialism, especially in France, attacked the idea of the necessity of private property and competition and were interested in revamping the economic and social order. Among those were C. H. Saint-Simon, Robert Owen, Charles Fourier, and Louis Blanc. In Germany the historical school arose under Wilhelm Roscher, Bruno Hildebrand, and Karl Knies, who doubted the existence of universal economic laws and emphasized the particular development of economic institutions in individual nations.

The greatest challenge to classical economics came from the followers of Karl Marx. Marx's critique of capitalism was moral and social, as well as economic; but in the exposition of the workings of the capitalist system he and his followers developed important insights into the structural weaknesses of the market economy, especially the recurrence of economic crises (see depression).

Further Evolution of Classical Economics

At the same time as Marx was writing, the principles of classical economics were being reformulated and refined—it was at this time that the term "economics" replaced the term "political economy," which had been used through the mid-19th cent. The most important refinement was the doctrine of marginal utility, which asserts that the value of an item is determined by the need for it and by its relative scarcity or abundance at any given time—not by any intrinsic or inherent worth. The leading theorists in the development of the concept were William Stanley Jevons of Britain, Leon Walras of France, and Carl Menger of Austria. In the United States, John Bates Clark was notable in the development of marginal utility theory, forming his own hypothesis regarding the distribution of wealth. Classical economics reached its fullest expression at the end of the 19th cent. in the work of Alfred Marshall. Marshall used mathematics to perfect the application of classical techniques and introduced important modifications to the notions of competition, marginal utility, and rent.

Keynes

Swedish economist Knut Wicksell was influential in the development of monetary theory, which concerned itself with overall price levels and interest rates in an economy. His work foreshadowed the most important modification of classical concepts of the free economy, exemplified in the work of John Maynard Keynes. In his General Theory of Employment, Interest, and Money (1936), Keynes opened up a whole new range of investigation into business cycles. A principal result of Keynes's teaching has been reflected in governmental attempts to control the business cycle by putting money directly into the economy; the "pump-priming" technique, often accompanied by an unbalanced budget, is now a part of most capitalist economic systems.

Since World War II

After World War II, emphasis was placed on the analysis of economic growth and development. Western economists notable for their contributions to the economics of growth and development include Gunnar Myrdal of Sweden, Sir Arthur Lewis of Great Britain, and Joseph Schumpeter of the United States.

In recent years, economic theory has been broadly separated into two major fields: macroeconomics, which studies entire economic systems; and microeconomics, which observes the workings of the market on an individual or group within an economic system. The use of complex mathematical techniques and statistical data in economic forecasting has resulted in a new branch of economics known as econometrics. British economist Arthur Pigou was influential in the development of welfare economics, an important branch of the discipline that suggested that an economic system was better if even one person's satisfaction was increased while no one else's was decreased.

In the 1980s supply-side economics (which sees economic growth as essential for improving the material health of society) was used as a policy tool by the Reagan administration. Another modern economic school that was influential in the Reagan years is monetarism; monetarists, such as Milton Friedman, believe that the money supply exerts a dominant influence on the economy. In the 1990s, Nobel laureate Gary Becker extended the scope of macroeconomic analysis by applying economic reasoning to human behavior, including the use of sociology, anthropology, and other disciplines. Game theory has also been appied to economics (see games, theory of).

Bibliography

See D. Colander and A. W. Coats, ed., The Spread of Economic Ideas (1989); R. L. Heilbroner and L. C. Thurow, Economics Explained (rev. ed. 1998); R. L. Heilbroner, The Worldly Philosophers (7th rev. ed. 1999); P. Samuelson and W. Nordhaus, Economics (18th ed. 2004); S. Nasar, Grand Pursuit: The Story of Economic Genius (2011).

The Columbia Encyclopedia, 6th ed. Copyright© 2014, The Columbia University Press.

Selected full-text books and articles on this topic

How Economists Model the World into Numbers
Marcel Boumans.
Routledge, 2005
Modeling Aggregate Behavior and Fluctuations in Economics: Stochastic Views of Interacting Agents
Masanao Aoki.
Cambridge University Press, 2002
Economic Models of Technological Change: Theory and Application
Rajeev K. Goel.
Quorum Books, 1999
Aggregation and the Microfoundations of Dynamic Macroeconomics
Mario Forni; Marco Lippi.
Oxford University, 1997
Fact and Fiction in Economics: Models, Realism and Social Construction
Uskali MÄki.
Cambridge University Press, 2002
Empirical Modeling in Economics: Specification and Evaluation
Clive W. J. Granger.
Cambridge University Press, 1999
Empirical Models and Policy Making: Interaction and Institutions
Frank A. G.Den Butter; Mary S. Morgan.
Routledge, 2000
The Econometrics of Disequilibrium Models
V. K. Srivastava; B. Bhaskara Rao.
Greenwood Press, 1990
Foundations of Research in Economics: How Do Economists Do Economics?
Steven G. Medema; Warren J. Samuels.
Edward Elgar, 1998
Librarian’s tip: Chap. 16 "The Dark Side of Economic Modeling"
The Business of Economics
John Kay.
Oxford University Press, 1996
Librarian’s tip: Chap. 3 "Economic Models"
Modeling the Sources of Output Growth in a Panel of Countries
Koop, Gary; Osiewalski, Jacek; Steel, Mark F. J.
Journal of Business & Economic Statistics, Vol. 18, No. 3, July 2000
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