What Are Conventional Economic Principles?
Conventional economics, the study of how people make decisions about how to spend their resources on needed goods and services, relies on a series of assumptions that haven't changed much in more than 80 years.
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Definition
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In a seminal book first published in 1932, Lionel Robbins, a professor of economics at the University of London, defined the science as the study of what circumstances affected material welfare.
The fundamental tenets of conventional economics, which was the first set of economic principles posited, have not changed much in nearly 80 years. Economics investigates the ways that people satisfy their unlimited desires with their scarce resources.
Economic Problem and Theory
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The economic problem, says William A. McEachern, is that people's wants are boundless, but the resources to satisfy those wants are scarce. An economic theory, he continues, simplifies economic reality to make predictions about the real world.
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Resources
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In focusing on the interactions of competing interests to meet their desires, conventional economics assumes several principles are true.
A key assumption out of which all economic theory proceeds is that resources are too scarce to satisfy all demand. The notion of "scarcity" is in many ways the linchpin from which all conventional economics evolves.
Resources fall into 3 categories: human resources (labor and entrepreneurship), natural resources and capital goods.
A second presumption is that all goods and services cost something, and that people have to give up something of value to them--usually their time, labor or money--to procure goods and services.
A third is that in any economic equation, the variables are the competing interests of the players, and nothing else in the equation changes. McEachern calls this the "other-things-constant" assumption.
Human Behavior
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Conventional economics takes it for granted that people act out of rational self-interest, which means that they make economic decisions about what they will and won't buy based on the best information they have and to their greatest personal benefit. Rational self-interest does not, according to McEachern, rule out being concerned about how one's decisions will affect others.
Money and Markets
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Conventional economics stipulates that paying interest on borrowed money is always necessary. This is a key point that other, later economic theories tend to reject.
Markets are the intersection of buyers and sellers, where price is determined by supply and demand. The science promotes a completely free, unregulated market, assuming that such a market is the fairest and most efficient arena for allocating resources.
Branching Out
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With these premises as the basis of economic thought, conventional economics goes on to examine the market economy, including demand, supply, market forces and structures; market institutions, including businesses, labor markets and financial markets; the national economy, which includes economic performance, growth and challenges; public policy and its impact on the national economy, which has to do with government spending, fiscal policy, money and banking and the creation of money and monetary policy; and the international economy, which is comprised of international trade and economic development.
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