Development of Economic Analysis
Most economist since early times of Adam Smith have sought to give the most acceptable definition of economics. Many economists have also critised the ideas of their predecessors and instead they have proposed different definitions which are more refined and updated. Economics have then become a subject that changes everyday. Everyday happenings and challenges in the world has been going through has prompted many economic thought and analysis as economists try to offer a solution to the world. In a summary economics can be defined as the study of how scarce resources can be used to satisfy the needs and wants of the current generation and the future generation.
Various ideas and explanation that were brought forward to explain various phenomenons related to economic issues constitute economic thought and economic analysis.
Economic analysis study demand and supply, how choices are made (consumption and production) by economic agents and the underlying incentives e.g. taxes and prices so that resources are efficiently utilized and allocated. It employs scientific methods such as mathematics and statistical analysis, simulation, modeling and optimization. Various economic analysis methods used include cost benefit analysis, cost minimization, cost effectiveness and cost benefit analysis, marginal analysis and equilibrium analysis. Economic analysis explains economic happenings and behaviors of economic agents as well as forecasting the outcome of a certain economic happening. According to Rima in the Development of Economic Analysis work, economic analysis dealing with balance of payment (B.O.P) and balance of trade (T.O.T) is one of the developments by the mercantilists. The action of analyzing how economic growth and development can be achieved entails economic analysis. Cost Benefit Analysis is another modern economic analysis used in determining whether a certain decision is economically viable.
The development of economic analysis can be traced back in the era of mercantilism. Mercantilists suggested that, through foreign exchange state wealth can be accumulated. The issues which have lead to the development of economic analysis have resulted from freedom from political and religious dogma, a characteristic of ancient society. The questions of how all who are willing to work at current prevailing wages and prices calls for economic analysis. The issue of how to contain inflation without increasing unemployment is another problem that is solved through economic analysis.
Walrasian theory of general equilibrium and marginalism analysis are some of economic analysis methods that have been refined for use in economic analysis. As stated in Rima work, historical concepts about what the issues of economics are and the methods by which answers shall be sought have been the base of modern economics. Economics questions and how to answer them have entailed economic analysis. (p5). Modern economic analysis involves fact, hypothesis statement, data collection and analyses, testing the hypothesis and finally making informed conclusions.
The history of economic analysis is the history of the intellectual efforts that men have made in order to understand economics phenomena or, which comes to the same thing the history of the analytic or scientific aspects of economic thought. The history of economic analysis seem to have been largely the product of bitter years to and during the war (Schumpeter and Boody 2)
Any economic analysis will have its limitation but it will always shed some light to the economic problem at hand. Economic analysts will borrow ideas from various economic theories which most of them have been arrived at through progressive refinement of various economic thoughts and then apply scientific methods to obtain economic explanation of an economic phenomenon.
Various analytical methods have been employed. One of this is the equilibrium analysis. This can be used to study the consumers and producers behaviors. The hypothesis that demand is inversely related to price and that supply is directly related to price can easily be tested. Data can be collected easily from a well selected sample then analyzed and tested against the hypothesis stated. Economic analysis has prompted the birth of econometric as a subtopic in economics. Econometrics usually deals with economic measurements.
On the other hand, economic thought are ideas of various people on matter related to economics. The Mercantilists believed that the only source of wealth was profit obtained when selling goods and services. Silver and gold were used as a store of wealth. On the hand Physiocrates believed in laissez faire and that agriculture was the source of wealth.
Classical economists formed another school of thought. Classical economists postulated that only a perfect market will guarantee smooth economic activities flow. To them the economy will always be under full employment. Adam Smith was one of classical economists. Adam Smith postulate that economic activities run smoothly through an invisible hand.
Another economic thought was the capitalism. The economists who supported this thought recommended intensive production. The government was not supposed to control the economic activities. In fact this thought lead to the great depression of 1930. Says law that supply creates its own demand did not save the world from this great depression. There was overproduction in the economy while demand for produced goods was very low.
Keynesian approach was another economic thought which proposed for a balance between government controls and free market as postulated by Keynes (1936). Keynes suggested that free markets could not guarantee smooth flow of economic activities. However Keynes employs more of economic analysis in explaining his ideas. Using economic analysis he was able to explain how fiscal policies i.e. government expenditure and taxation would ensure economic growth and development.
Monetarism lead by Milton Friedman was also another economic thought proposing monetary policies instead of fiscal policies to ensure smooth economic growth. To Monetarists the government intervention should be through regulation of supply and demand for money. They believe that government expenditure and taxation cannot guarantee stability in the economy. It is after fail of one economic thought to the test of time that prompted revolution of another theory.
Many early societies in the world had some common characteristics which hindered economic analysis. These characteristics include
The church and culture
Some teachings by theologians were misleading. Charles Aquinas postulated activities involved in money making and commerce were compromising peoples spiritual life. Lust for earthly thing i.e. acquisition of wealth was viewed as deadly sin. This definitely hindered economic activities and also the development of economic analysis.
They were guided by strict religious and cultural believes which only encouraged religious education. Efforts to study economic phenomena using scientific approach was either never there or very little. Those with great knowledge in matters of religion were highly respected.
High regard to politics
Most thinkers especially in Greek were absorbed by matters related to politics. It was widely perceived that only the state matters. Happiness was perceived to be achievable within the city state. This ideology could not prompt development of economic analysis to explain how happiness could be attained in absence of a central authority.
High regards to ethics.
Early communities valued ethics a great deal. To some communities like Hindu and Chinese any effort to accumulate wealth was viewed as a vice. This made it hard to develop any economic analysis to explain wealth acquisition
Socialism was also employed and allocation of resources was planned. Economic analysis of supply and demand had no place in this case
High regard to philosophy
During ancients time philosophy was more emphasized and philosophers were highly respected. However most of philosophers never employed any scientific methods to analyze their work Philosophy of Stoicism like stated be satisfied with what your business and learn to love what you were bred to do, and as to the remainder of your life, be entirely resigned. (Rima 11). This is a philosophy that will prompt any little effort and thinkers to use economic analysis. After all one should be satisfied with what life gives himher.
Conclusion
Economic thought is different from economic analysis. Economic thoughts are different idea which some economist thought will explain economic phenomena. Economic analysis seeks to explain economic phenomena when at the same time validating the explanation through scientific methods like mathematics and statistical analysis. This means that economics is both a science and an art. It is clear that economic thought alone will be of little help to our contemporary world. We need to employ economic analysis so as to have a clear knowledge of many economic phenomena.