1 Chapter 1

The big issues

Economics is the study of human behavior. Since it uses scientific methods it is called a social science. We study human behavior to better understand and improve our world. During his acceptance speech, a recent Nobel Laureate in Economics suggested:

This is an elegant definition of economics and serves as a timely caution about the perils of ideology. Economics evolves continuously as current observations and experience provide new evidence about economic behavior and relationships. Inference and policy recommendations based on earlier theories, observations and institutional structures require constant analysis and updating if they are to furnish valuable responses to changing conditions and problems. Much of today’s developed world still faces severe challenges as a result of the financial crisis that began in 2008, and these crises are only exacerbated by the global pandemic of COVID-19. Unemployment rates among young people are at historically high levels in several economies, many government balance sheets are in disarray, and inequality is on the rise. In addition to the challenges posed by this severe economic cycle, the world simultaneously faces structural upheaval: Overpopulation, climate change, political instability and globalization challenge us to understand and modify our behavior.

These challenges do not imply that our world is deteriorating. Literacy rates have been rising dramatically in the developing world for decades; child mortality has plummeted; family size is a fraction of what it was 50 years ago; prosperity is on the rise in much of Asia; life expectancy is increasing universally and deaths through wars are in a state of long-term decline. These developments, good and bad, have a universal character and affect billions of individuals. They involve an understanding of economies as large organisms with interactive components.