When you hear the term “economics,” what images are conjured to your mind? If you’re like most people, you probably think of stacks of dollar bills, shops, and generally the study of commerce.
This definition of “economics” comports with the definition put forth by Merriam-Webster: “a science concerned with the process or system by which goods and services are produced, sold, and bought.” But this isn’t the only way people think of economics.
An alternative definition for “economics” is “the study of how humans make choices under conditions of scarcity.” This definition focuses on the root word “economize,” which centers on the concept of gaining the most value using the resources one has.
A simple supply/demand model illustrates this conception of economics. Suppliers will create as much of a product as they can until the value they can recoup from sales on the market falls below the cost to produce a product. Consumers will consume more and more of a product until the cost to purchase the product exceeds the value they receive from the product when consuming it.
Though dollar values are often the easiest way to conceptualize value, they are not the only thing that people economize. Another example is time. Surveys like the American Time Use Survey give us a snapshot into how people economize their personal time, one of the most scarce resources people have.
Similarly, economists have turned their focus to a range of topics that people don’t necessarily associate with dollars and cents. This ranges from Gary Becker’s studies of whether discrimination can be statistically detected to Steven Levitt’s study of whether sumo wrestlers throw games.
Understanding economics as the study of human behavior under conditions of scarcity is a helpful framework for people who want to apply economic models to public policy problems. For instance, in our genuine progress indicator study, we estimate the value of unpaid housekeeping and child care and compare it to other sectors of the economy. Even though dollars don’t change hands when someone cleans their house or spends time caring for a child, value is created the same way it would be if a housekeeper were hired or a child care service were utilized. The thing being traded, though, instead of dollars, is time.
Understanding economics in this broader sense helps us to use economic models to improve welfare in new ways. We can’t understand the child care system in a comprehensive way by just looking at the formal market for child care: this market interacts with an informal market that provides a large amount of the child care throughout the country.
In the same way, we cannot understand energy markets without understanding the external costs borne by consumers and the public due to how energy markets function: how pollution impacts public health and environmental assets not involved in the direct economic transaction.
In our genuine progress indicator study, we monetize all of these impacts. But there are other ways to use an economic framework to understand public policy. The Human Development Index does this by focusing on welfare as a collection of basic needs, namely income, education, and health. Subjective well-being measures do this by focusing on welfare as self-reported assessments of personal happiness. Any of these can be maximized given other resources we have.
It’s easy to think of “economics” as the study of dollars and cents. And that is one way to think of it. But when we open our mind and accept that people economize a range of things that are important to living a good life, we start to understand the power of this framework for someone who cares about public policy.