From Wikipedia on 10/21/12
URL: http://en.wikipedia.org/wiki/Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, “management of a household, administration”) from οἶκος (oikos, “house”) + νόμος (nomos, “custom” or “law”), hence “rules of the house(hold)”. Political economy was the earlier name for the subject, but economists in the late 19th century suggested ‘economics’ as a shorter term for ‘economic science’ that also avoided a narrow political-interest connotation and as similar in form to ‘mathematics’, ‘ethics’, and so forth.
A focus of the subject is how economic agents behave or interact and how economies work. Consistent with this, a primary textbook distinction is between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firms or as buyers and sellers) and markets, and their interactions. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.
Other broad distinctions include those between positive economics (describing “what is”) and normative economics (advocating “what ought to be”); between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics (more “orthodox” and dealing with the “rationality-individualism-equilibrium nexus”) and heterodox economics (more “radical” and dealing with the “institutions-history-social structure nexus”).
Economic analysis may be applied throughout society, as in business, finance, health care, and government, but also to such diverse subjects as crime, education, the family, law, politics, religion, social institutions, war, and science. At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism. An increasing number of economists have called for increased emphasis on environmental sustainability; this area of research is known as Ecological economics.
My Own Writing
How about this definition, from Wikipedia: “Keynesian economics argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, particularly monetary policy actions by the central bank and fiscal policy actions by the government [e.g. capital investments in infrastructure and education] to stabilize output over the business cycle.”
… Individually-rational microeconomic-level actions–if taken collectively by a large proportion of individuals and firms–can lead to inefficient aggregate macroeconomic outcomes, wherein the economy operates below its potential output and growth rate. … Most Keynesians advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. Government policies can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation. … Keynes argued that the solution to the Great Depression was to stimulate the economy through some combination of two approaches: 1: A reduction in interest rates, and 2: government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy. This in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.”
A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium. In the ‘neoclassical synthesis’, which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
Balancing the budget rarely happens–because it’s not necessary. In fact, not even desirable in a recession, when private demand has dropped significantly and must be replaced with public demand to avoid a downward spiral. It may be counter-intuitive, but trying to balance a national budget (through drastic public spending cuts) during a recession actually slows economic activity still further. This is exactly what happened during the Great Depression (in fact, one of the main reasons a recession turned into a depression) and has been happening for the last five years in Greece. As long as spending to service the public debt does not become so great that it displaces significant investment capital from the private sector, it is no worse for a nation to run a deficit than it is for an individual to owe a mortgage on a house. And right now, the private sector is actually awash in capital. They’re just not investing it, due to lack of private demand.
All the political incentives favor overspending. Ideally, in recessions you’d run deficits and in expansions, you’d run surpluses, with which you’d pay down the debt you accumulated during the recessions. But in reality, we rarely run surpluses–which is why the debt has grown to the point where it is now a serious problem.
The U.S. has definitely practiced the deficit spending. And did briefly run surpluses during the Clinton administration. But the dot-com crash followed by the 9/11 attacks, followed by tax cuts and two expensive wars put an end to that. Keynesian tools were used to stimulate economic activity (e.g. the Fed created more money, thereby lowering short-term interest rates) which worked for awhile, but also helped to inflate a massive asset bubble in real estate, which was made far worse by poor regulation of the banking system and derivative instruments. Eventually that collapsed like a house of cards, leaving the economy in even worse shape than before, thereby cutting tax revenues, which worsened the debt situation from both the revenue and spending side (e.g. aid to states, unemployment insurance), leaving us in the mess we are now in.