The social science of economics began as a branch of philosophy, but emerged as a separate discipline in the late 18th century after the publication of Adam Smith’s landmark work, “The Wealth of Nations.” Since then, economics has provided a scientific approach to understanding the ways in which families, firms and entire societies allocate resources to satisfy their needs and wants.
People live in a world of scarcity in which all resources—time, money, land and others—are finite. Because people do not have unlimited resources, they must allocate their time, money and other resources in a way that will achieve as many of their needs and wants as possible. For example, consumers want to obtain maximum value for their money, and businesses want to maximize profits subject to their existing capacity for production. Economics provides a systematic way to study production, consumption and resource allocation.
Throughout history, people have dealt with issues of resource allocation; often human survival depended on it. The concept of an economy did not develop until the Middle Ages, although markets and trade have existed since ancient times. Until the era of the Enlightenment in the 18th century, economics was not a discipline of its own, but a branch of philosophy, which also examined political, ethical and religious issues.
Just as biologists and chemists apply scientific methods to understand questions involving biological and chemical phenomena, economists employ scientific methods, including hypothesis testing and quantitative analysis, to understand and explain economic phenomena. Why apartment rents are so much higher in New York City than in Austin, Texas; how government monetary policy will affect retail prices; what factors affect average wages in different countries—these and other questions involve economic phenomena. As a science, economics strives to provide answers and explanations.
Economics plays an important role in the analysis and formulation of government policy. Just as consumers want maximum value for their money, politicians and taxpayers want to maximize the value of their taxes and other government resources at the lowest cost. Economists have an important voice in the policy arena, helping identify the types of policies that maximize benefits at the least cost to the public.
As a scientific approach to policy, economics not only informs the debate over issues related to taxation, government spending and economic policies; it also applies to the full range of public policy issues, including health care, defense, education, energy and the environment.