The emergence of economics and of economies
The conception of the economy as a distinct object of study dates to the 18th century. In the 18th century, Hume/Smith/Cantillon posited that "there are laws that govern the complex set of interactions that produce and distribute consumption goods and the resources and tools that produce them."
Central to this new science was the effort to trace the unintended consequences of human economic behavior, for example, the increase in prices that results from an increase in currency (Hume). "In spending their additional gold imported from abroad, traders do not intend to increase the price level. But that is what they do nonetheless.")
Smith takes this idea further in 'Inquiry into the Nature and Causes of the Wealth of Nations' and advances the popular theory of the "invisible hand".
Smith: "He intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." These unintended economic consequences are often productive: "By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it." These unintended consequence show regularities which are studied by economics.
Economics are concerned with production, consumption, distribution and exchange, particularly via markets. In Mills view, economics is mainly concerned with the consequences of the individual, rational pursuit of wealth.
However, Mills lacked a theory of consumtion or rational economic choice: gaps which were filled by the "neoclassical or maginalist revolution". This linked the choice of objects of consumption to marginal utility, instead of total utility (e.g. water is useful but also plentiful, therefore it is cheap.) Early neo-classical economists held that people make consumption choices to maximize their happiness.
This idea was interogated in the 20th century. Instead of supposing that all consumption choices can be ranked by how much they promote consumer happiness, economists focused on the ranking itself, and suppose that comsumers are able to consistently rank the alternatives they face (the consumer prefers x to y, y to x, or is indifferent). Economics also assume that these rankings are transitive, i.e. if a consumer prefers y to x and x to z, the consumer prefers x to z.
Economists ignore incidents such as people seeking happiness in poverty, maintaining that such events are rare and unimportant. Economists are concerned with "the phenomena deriving from rationality coupled with a desire for wealth and for larger bundles of goods and services."
Other economic theories are more expansive, for example Robbins, who associated economics with "an aspect of all human action". His theories help understand how economics relates to things like voting behavior and legislation.
- Banks emerged before money in ancient mesopotamia
- People could store assets with the bank, and gain a receipt they could use as collateral in financial transactions. The bank would loan the assets out (and gain interest), and later during the persian period, were issuing credit.
- "In Sumer in 8000 B.C., clay tokens were baked into a spherical sort of “envelope” and used as a promise to a counterparty to deliver a quantity of goods by a certain date. Based on the timeframe imprinted into the envelope vessel and the tokens themselves, sellers promised to deliver the assets. This exchange essentially functioned as a sort of forward contract, which was settled once the seller delivered their goods by the date baked onto the token."
Contemporary economics and its several schools
Economics is a diverse field consisting of "orthodox" and "mainstream" economics, "microeconomics", "macroeconomics" and "econometrics". (Econometrics: devoted to the elaboration and testing of microeconomic and macroeconomic models).
Microeconomics is focused on relations between individuals (including firms and households) which have complete and transitive preference that govern their choices. Consumers prefer more commodities to fewer and have "diminishing marginal rates of substition" which means they will pay less for a commodity if they have a lot of it than if they had a little of it. Firms try to maximize profits in the face of diminishing returns; "output increases when there is more of the remaining input, but at a diminishing rate." Economists argue that firms and individuals cannot influence prices in a competitive market. Economists are also interested in "strategic interactions, in which the rational choices of seperate individuals are interdependent."
Game theory, which is devoted to the study of strategic interactions, is increasingly important in microeconomics. Economists can model the outcomes of profix-maximizing activities and consumer choice in an "equilibrium" in which there is no excess demand on the market. In this case, anyone who wants to buy anything at the going market price is able to do so. "There is no excess demand, and unless a good is free, there is no excess supply."
... still to write