Due to the financial meltdown, the term ‘economic crisis” has dominated headlines in recent years. This event has exposed shortcomings in economic theory, calling into question the very nature of economics as a discipline. Despite these flaws, economics plays a vital role in shaping our understanding of how society operates.

According to a standard textbook definition, economics is ‘the study of how people choose to allocate scarce resources.” For example, we often speak of wishing we had more free time to spend on leisure activities, but in the end, we must allocate our time more productively. The word ‘scarce” implies that the world’s resources are finite and cannot possibly satisfy all of our wants and needs. For this reason, choice and decision-making must be properly understood to optimize the use of limited resources.

Economics has many other useful applications. Through economics we understand and appreciate that currency is a far more viable system than bartering. For instance, let us suppose that a guitar maker can manufacture guitars but needs corn, which he cannot grow. Let us also suppose that there are farmers who can grow corn, but have no need for guitars. This would make it difficult for the guitar maker to obtain corn. Rather than barter, it is more convenient to use currency: He can sell his guitars for monetary units, such as dollars, and use them to buy whatever goods he chooses.

Economics enables us to see the benefits of trade between countries as well as the impact of externalities, the unintended effects of one party’s actions on another party. Pollution is a prominent example of an externality. When people drive cars, for instance, they contribute to air pollution. However, externalities can also have beneficial effects. For example, an externality associated with the activity of a beekeeper is the pollination of surrounding crops by the bees. The value generated by the pollination may be even more important than the value of the harvested honey.

However, economics clearly has its limitations. Economic statistics, such as GDP and per capita income, do not completely describe wealth, nor can they completely measure the benefits of technological developments. While currency is used to buy items that people want, such as computers, cell phone service, food, etc., it has very little intrinsic value. Thus, if you were stuck in the middle of Antarctica away from civilization, where there is nothing to buy, it wouldn’t matter how much money you had. Likewise, I would rather be a person of modest income today than a wealthy person 200 years ago, because today we enjoy modern amenities (such as airplanes and Internet access) that were simply not available back then. Money, the primary economic unit of measurement, cannot fully capture these very real differences.

Economics is inevitably intertwined with other fields of study. The early British economists David Hume and Adam Smith were philosophers as well as economists. John Maynard Keynes once notably wrote: ‘Economics is a moral science. It deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogenous.”

The most apparent example of this interdisciplinary relationship is government policy. The economic policies and system that the government implements have an enormous impact on all facets of society. Furthermore, psychology can be applied to economics, since it serves as a guide to understanding human behavior and choice. As seen in the fields of advertising and marketing, psychological analysis can be used to increase product sales. To fully understand and appreciate economics, we must explore other fields of study such as psychology, politics and philosophy.

As these examples illustrate, economics is a complex field that is irrevocably connected to other disciplines. In the end, economics’ relevance lies in real world applications that affect our everyday lives. Whatever its limitations, economics will continue to play an important role in society.

Khan is a member of
the class of 2011.

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