Economics is everywhere! As workers, consumers, and sometimes business owners all of us have through our daily activities gained some knowledge of how the economy functions. This knowledge, however, is not systematic and precise. The modern economy is an extremely complex system of social institutions. The systematic study of economics helps one to better understand this complex system of markets, enterprises (profit-motivated, government, and private, not-for-profit), unions, and many other economic and political interest groups that influence the economy and the role of government.
Here are a few basic practical questions the study of economics helps one to understand.
Why are wages and salaries so different? Some workers work for $5 per hour while others thousands of dollars per hour. Why does the price of housing different so much across cities? One can buy a very nice house in Green Bay for $200,000. That very same house would cost five or ten times more in many parts of the east and west coasts. Why do airfares differ so much for the same flight? For example, on a flight from, say, Chicago to Los Angeles in economy class, some people are paying a $200 fare while others are paying $800.
Questions on a broader level include the following:
Why are countries such as the United States so rich while others are so poor? Workers in the poorest countries of the world earn only about 10 cents per hour.
What can be done to improve their standard of living? And even in rich countries such as the United States, 12 to 15 percent of the population lives in poverty.
What can be done to improve the lives of the poor?
Why is it that some countries at times have had inflation rates of 10,000 percent or even more than one million percent per year whereas others tend to have inflation rates of one or two percent.
Why is it that the unemployment rate fluctuates from year to year and sometimes economic recessions and depressions arise?
And can the government successful fight high unemployment? If so, how?
Economics used to be called “political economy” and for good reason. Most political issues are linked, directly or indirectly, to economics. Resources are scarce and political choices must be made. Should more or less money be spent on the military? Or should more resources be devoted to health care, education, a cleaner and more sustainable environment, and so on? Should the legal minimum wage be raised?
Should taxes be raised or lowered? But there are many taxes. For example, there is the personal income tax, the payroll tax, the corporate income tax, various sales and excise taxes, tariffs, and inheritance taxes, to name a few. Any tax changes will have different impacts on the efficiency of the economy as well as the distribution of income and wealth.
In short, there is an endless number of questions that voters and politician must decide on. Consequently, studying economics helps a person become a more informed voter.
Finally, studying economics will help a person make better economic decisions throughout their life. Two key questions of personal finance are very relevant to everyone. Throughout your life, you will be faced with choices with respect to various kinds of insurance products. But there are many kinds of insurance: auto insurance, health insurance, homeowners insurance, life insurance, etc. The costs and benefits of these insurance products require significant economic knowledge.
Moreover, studying economics will greatly help you make better saving and investment decisions. Again, these are rather difficult decisions but good saving and investment decisions can greatly increase your wealth. For example, the yearly income of the average American household is about $52,000. If a household can save some $8,000 per year and invest this amount in broadly diversified investments in 30 to 40 years their wealth is likely to range from $500,000 to $1.5 million.
One must note, however, that economics as a discipline is far broader than the economy itself.
At the most fundamental level, economics is the study of human choices and behavior grounded on the crucial assumption that humans choose with a purpose and consequently respond to incentives, economic and noneconomic. Consequently, in recent decades economics has become increasingly interdisciplinary. Economists have increasingly made important contributions in many other social and behavioral sciences including history, sociology, political science, and geography. Likewise, the methods and insights of other disciplines have been increasingly introduced into economics. Psychology is most prominent in this respect. Indeed, just a few years ago a leading psychologist was awarded the Nobel Prize in Economics. Moreover, an examination of the Nobel Prize contributions over the last several decades shows that approximately 40% of the winners have received their award for research clearly outside the conventional boundaries of economics.