Unit 1.2 - Economic Methodology and the Evolution of Economic Thought

All 89 cards in this deck

Every term and definition, free to read. Hit study above to practice them as flashcards.

A metaphor describing how self-interest benefits society.

invisible hand

An economic approach that advocates for minimal government intervention in transactions and market activities.

laissez-faire

Adam Smith

The founder of modern economics. In The Wealth of Nations he argued that markets left largely to themselves allocate resources well, while still giving the state a role in defence, justice and public works.

Competition

The market condition where multiple producers vie for consumers' business, leading to improved goods and services. It encourages producers to meet consumer demands effectively, which can benefit society by ensuring efficient resource allocation and maintaining reasonable prices.

National prosperity

The overall economic well-being of a nation, which is influenced by factors such as production, exchange, and specialization. It reflects the ability of a country to generate wealth and improve living standards, often linked to the effectiveness of market mechanisms.

The Wealth of Nations

A seminal work in modern economics, The Wealth of Nations discusses the roles of production, exchange, and market dynamics. It highlights how self-interest and competition can coordinate economic activity, fundamentally shifting perspectives on economic theory during the 18th century.

Rationality and reasoning used to explain economic phenomena.

logic

The study of economic realities and how the economy functions in practice.

positive economics

The study of what should be and how the economy ought to work.

normative economics

John Neville Keynes

A British philosopher and economist recognized for distinguishing between positive and normative economics. His framework has shaped economic methodology, particularly regarding how theories can be validated through empirical evidence and the testing of hypotheses.

Milton Friedman

An influential economist known for his work on positive economics, which emphasizes the need for empirical evidence in economic analysis. Friedman’s writings, particularly in Essays in Positive Economics, highlight the importance of distinguishing between positive and normative economic statements.

rational choices

Decisions made by individuals or firms based on logic and available information, aiming to maximize utility or profit. This concept assumes that economic agents act rationally rather than emotionally.

tax on plastic carrier bags

A fiscal measure aimed at reducing plastic waste by discouraging the use of plastic bags. This tax serves as an example of how behavioral economics applies incentives to influence consumer choices, contributing to environmental sustainability efforts.

An economic system where resources are used sustainably to generate output.

circular economy

The ability to meet current needs without compromising future generations.

Sustainability

The environmental leg of sustainable development — planet, beside profit and people — concerned with keeping natural systems able to support production indefinitely.

ecological sustainability

The integration of psychological insights to better understand economic behavior.

Behavioural economics

Millennium Development Goals

A set of eight international development goals established by the United Nations aimed at addressing global challenges such as poverty, education, and health. These goals were later upgraded to the Sustainable Development Goals to enhance focus on sustainability and interdependence.

green technologies

Innovative technologies designed to mitigate environmental impact and promote sustainability. These technologies often involve the use of renewable energy sources and efficient resource management, playing a crucial role in the shift towards a circular economy.

over-production

A situation where the quantity of goods supplied exceeds demand, leading to waste and environmental harm. This imbalance poses challenges for sustainability and the long-term viability of economic activities.

recycling

The process of converting waste materials into reusable materials, which is a key component of sustainable practices. Recycling helps reduce resource consumption and waste, supporting the principles of a circular economy by enabling the regeneration of materials.

renewable energy

Energy derived from resources that are naturally replenished, such as solar, wind, and hydroelectric power. The transition to renewable energy is essential for sustainability, supporting a circular economy by reducing reliance on finite resources and minimizing environmental impact.

The belief that market economies tend to move toward full employment in the long run if prices, wages, and interest rates are flexible.

Classical macroeconomics

The idea that overall output generates sufficient income to purchase all goods produced in the economy.

Classical view on total production

The principle that asserts supply inherently generates its own demand.

Say's Law

Aggregate demand

The total demand for goods and services within an economy at a specific price level. Classical economists prioritized supply-side factors, believing that production automatically generates demand, contrasting later views that emphasized the significance of aggregate demand for economic growth and stability.

Flexible wages and prices

The classical assumption that wages and prices adjust freely to changes in market conditions, returning the economy to full employment on its own. Keynes disputed it, arguing both can be sticky.

self-correcting markets

The idea that markets can naturally adjust to eliminate unemployment and excess supply through changes in prices and wages, leading to equilibrium without the need for significant government intervention.

The cumulative satisfaction achieved from consuming various goods.

Total utility

The study of additional benefits and costs from small changes.

Marginal analysis

Marginal thinking

A decision-making approach that involves assessing the additional benefits and costs of producing or consuming one more unit of a good. This analysis helps consumers optimize their choices by comparing the utility gained from different expenditures.

A macroeconomic strategy employed to manage and influence the economy's overall performance through adjustments in the money supply and interest rates.

Monetary Policy

The school of thought advocating interventionist macroeconomic policies.

Keynesian economics

The strategy of using government expenditure and taxation to influence economic activity.

fiscal policy

demand-side theory

Keynesian theory that government should use interventionist macroeconomic policy in the short run to manage total demand and pull the economy out of a recession. Keynesians hold fiscal policy to be the more powerful tool, though monetary policy is demand-side too.

economic cycle

The fluctuations in economic activity characterized by periods of boom and slump, highlighting the need for government intervention to stabilize the economy during downturns, as argued by Keynes.

macroeconomic stabilization

Policy aimed at smoothing the fluctuations of the economy as a whole. Keynesians hold fiscal policy — taxation and government spending — to be the more effective stabilisation tool, while monetarists argue that monetary policy is.

A broad term describing the dominant economic theories and principles that were prevalent in the eighteenth and nineteenth centuries.

Classical economics

An approach to economic policy that prioritizes the needs of the masses over the interests of capitalists.

Marxism

An economic perspective that emphasizes the importance of labor in economic development while neglecting entrepreneurs.

Marxist economics

The additional satisfaction gained from consuming one more unit of a good or service.

Marginal utility

The level of satisfaction a consumer derives from using a product.

Utility

The principle that states that as more of a product is consumed, the satisfaction from each additional unit decreases.

Law of diminishing marginal utility

Capitalism

An economic system in which the means of production are privately owned and directed towards profit, with prices and output settled by markets rather than by the state.

Entrepreneurial capitalists

Individuals who earn profits by efficiently organizing production and taking calculated risks, as opposed to exploiting workers. This concept highlights the positive role of capitalists in a free market economy.

Exploitation

The situation where capitalists gain profits from workers' labor while disregarding their well-being. This practice is criticized for prioritizing profit over the needs and rights of laborers in a capitalist system.

Labour theory of value

Marx's labour theory of value claims that the value of a good or service can be objectively measured by the average number of hours needed for its production. This theory suggests that the value is tied to labor input, although it has faced criticism for ignoring production cost variations.

Market economy

An economic system in which the self-regulating forces of supply and demand allocate resources through the price mechanism rather than central planning — Adam Smith's invisible hand, and the opposite of a command-and-control system.

Surplus value

The concept developed by Karl Marx, referring to the excess value produced by labor over the cost of labor, which capitalists exploit for profit. This idea critiques the capitalist system, highlighting the exploitation of workers.

A school of thought that highlights the importance of monetary policy and the money supply in economic analysis.

Monetarism

The act of removing rules and restrictions in an industry to enhance competition and efficiency.

Deregulation of markets

The process involving the sale of public sector assets to private entities.

Privatization of state-owned enterprises

Laissez-faire Economics

An economic philosophy advocating minimal government intervention in markets, emphasizing free markets and competition. This approach gained traction in response to interventionist policies, particularly during the late 20th century, influencing economic strategies in various countries.

Monetarists

A group of economists who argue that monetary policy is more effective than fiscal policy for stabilizing the economy. They emphasize the control of money supply and interest rates as key factors influencing economic performance.

New Classical Counter-Revolution (NCCR)

The late twentieth-century movement in which new classical economists, alongside monetarists, refuted Keynes's theories and revived classical doctrine — free markets, laissez-faire, privatisation of state-owned enterprises and deregulation — citing the Asian Tigers as evidence.

A Latin term indicating that all other variables are held constant.

ceteris paribus

A comprehensive explanation supported by evidence and data derived from models.

theory

A hypothesis that has been repeatedly tested and accepted by economists, and can then be used to explain the real world.

model

A state in which economic opportunities are unevenly distributed among different groups in society.

inequality

An educated assumption or guess made prior to conducting research.

hypothesis

Beliefs held by individuals and societies regarding what is considered right or wrong.

Value judgements

First-hand data and information acquired through observation or experimentation of certain behaviours and patterns.

empirical evidence

The act of a statement or theory being proven wrong or false by data.

refutation

The concept of social fairness and collectivism, holding that every person matters and deserves the same recognition regardless of gender, age, ethnicity, religion or disability.

equality

The principle concerned with fairness in the distribution of resources.

Equity

alternative hypothesis

A proposition in economic research that contradicts the null hypothesis. It plays a critical role in hypothesis testing by providing a basis for using empirical evidence to either validate or refute economic theories, thereby guiding research outcomes.

collectivism

A concept concerned with social fairness, collectivism emphasizes that individuals in society should have equal recognition, which contrasts with equality that focuses solely on being equal. It is often discussed in the context of planned economic systems and addresses issues of inequality in economic opportunities.

distribution of resources

The allocation of resources among individuals and groups in society, which is influenced by personal preferences and societal values, affecting fairness and equity.

economic analysis

The systematic examination of economic data and theories to understand and predict economic phenomena. Economic analysis contrasts with normative economics, as it relies on objective evidence rather than subjective opinions about what should be.

economic fairness

The principle that resources should be distributed in a manner that is just and equitable, taking into account individuals' qualifications and efforts. Economic fairness emphasizes the need for a fair allocation of resources, which may differ from strict equality.

economic opportunities

The access individuals have to resources and services that can enhance their economic status. Unequal distribution of these opportunities can lead to significant societal inequalities, restricting access to essential services like education and healthcare.

national minimum wage

A legally mandated minimum amount that workers must be paid, which is intended to ensure a basic standard of living for all employees.

objectivity

The principle that economics should be free of personal opinions and value judgments, allowing for a focus on facts and logical reasoning to inform policymaking and predictions about economic outcomes.

progressive tax rates

A tax system where the tax rate increases as the taxable amount increases, aimed at reducing income inequality by taxing higher earners at higher rates.

rational expectations

The theory that individuals form expectations about the future based on all available information, which influences their current economic behavior and decisions.

social fairness

The concept that emphasizes equitable treatment and recognition of all individuals in society, contrasting with equality, which focuses on uniformity in treatment.

subjectivism

The belief that personal opinions and value judgments influence economic decisions, which can distort objective analysis and policymaking.

value judgments

The subjective opinions or beliefs that influence economic decision-making, which can distort objectivity in policymaking. Value judgments can lead to different conclusions about economic policies, as they are based on personal beliefs rather than purely factual evidence.

welfare economics

The branch of economics that evaluates the well-being of individuals and societies, focusing on fairness and resource distribution. Welfare economics considers how different policies impact social welfare and the subjective nature of value judgments in policymaking.

zero interest rate policy (ZIRP)

A monetary policy where interest rates are set at or near zero to encourage borrowing and spending, though its effectiveness can vary based on consumer confidence and other factors.

A statement assumed to be true until evidence suggests otherwise, often used as a basis for testing.

null hypothesis

Representations that clarify relationships and interactions in economics.

Economic models

The assumption that other relevant factors remain unchanged.

Ceteris paribus assumption

A historical account of economic ideas, beliefs, and principles.

Economic thought

Factors of production that are limited in supply.

Finite resources

The idea that a nation's wealth and economic power is constrained by its limited resources.

Mercantilism

command and control

An economic approach where the government tightly regulates all aspects of economic activity, prevalent before classical economic theory emerged. This method contrasts with more market-driven approaches, emphasizing state control over market forces.

margin

The concept that addresses the additional benefit or cost generated by the production or consumption of one more unit of a good or service. Understanding the margin is crucial for making informed economic decisions.

utility theory

A framework in economics that studies how individuals make choices based on their preferences and the satisfaction (utility) they derive from goods and services. Utility theory helps explain consumer behavior and the decision-making process regarding resource allocation.