Economics is a subject that is highly relevant to our everyday lives.
In the past three centuries, our understanding of economics has been instrumental in lifting the bulk of humanity out of abject poverty and a life that was nothing but nasty, brutish, and short.
The study of economics started with the Industrial Revolution in the mid-1700s. Suddenly there were factories. Entrepreneurs organized labor, machines, and power to manufacture products. These large-scale enterprises took investment money (capital) to create.
The first person to understand what was going on and put it on a conceptual footing was Adam Smith. He published his grand opus "The Wealth of Nations" in 1776, the same year Thomas Jefferson composed the Declaration of Independence in the U.S.
The primary project of economics has been to try and understand how productivity increases lead to wealth generation. And how to optimize this process to lift the most people out of poverty and provide them with better lives and opportunities.
The ideal has been to make economics a science like physics and chemistry using math as its structure and framework. There have been remarkable strides in this direction that have provided deep insights into economic activity. Still, so far, economics has proved too messy to conform to formulas and equations that have predictive power.
Economics is a social science like political science and sociology. Economics deals with decisions about the allocation of resources. Economics provides a conceptual framework for understanding the decisions of firms and consumers.
The dream to engineer, optimize, and predict economic behavior and trends, has proven elusive. Laurence Peter, of the famous Peter principle, said,
"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
Economics has explanatory power after the fact but no predictive power.
With that caveat about the limits of economics to predict the future, let's explore what we do know about the nature of economic activity and behavior.
Economics can be divided into four categories:
- Micro
- Macro
- Managerial
- Behavioral
Let's look at the basics of each category in turn, starting with microeconomics.
