From booms and busts to wealth and poverty, economics helps us to understand the material well-being of society. Its impact can be felt in almost every sphere of daily life, from the pound in your pocket to the cost of a can of beans, the influence of education on pay, why unemployment rises and falls, and how to 鈥渕ake poverty history鈥�.
It鈥檚 also about how we get the services and goods we need, how we allocate our time and money, and how we deal with people and organisations. It鈥檚 all about incentives and how we respond to them.
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Much of economics evaluates public policy, including tricky issues such as why we are getting fatter: it鈥檚 becoming cheaper to eat calories and more expensive to burn them off, driving a dramatic rise in obesity.
And it鈥檚 about progress too: economics shows that today鈥檚 young people really have never had it so good. We now expect to live on average 30 years longer than we did a century ago, to work almost half the amount of time we used to every year, and to enjoy a much greater choice of goods and services, including air travel, antibiotics, computers and televisions.
Misleadingly labelled the 鈥渄ismal science鈥�, it is a subject that needs clear analysis and sober judgement, which is why a major figure in the field, (1883 鈥� 1946), remarked: 鈥淚f economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.鈥�
Birth of the free market
The most famous book in economics is the (1776), the magnum opus of the Scottish philosopher-economist . Written at the dawn of the industrial revolution, it advocates a free market.
He set out the 鈥渋nvisible hand鈥� mechanism, by which each person strives to become wealthy 鈥渋ntending only his own gain鈥�, but through which they also advance the public good.
Much of economic research since then has focused on how to blend self-interest and incentives with the need for trust, law, order and regulation.
Goodhart鈥檚 law
British economist pointed out that as soon as the government bases its policy on the performance of a given economic indicator 鈥� such as the money supply 鈥� it ceases to be a reliable guide to the economy.
The simple way to put it is that once you try to control one sort of money, people will just use others instead. They respond similarly in other parts of the economy.
When new regulations are introduced to a market, firms respond by finding creative ways to get around them. When success in the NHS is shown by a shrinking waiting list, wily managers refuse to admit patients to overstretched lists. And so on.