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Definition of 'Economics'
A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behavior of the aggregate economy; and microeconomics, which focuses on individual consumers. Economics is often referred to as "the dismal science."
of the T-shirt I'm wearing, but because a slamming car door on my hand translates into pain through my nerves. So, a law has been formed: the Andrew Law, which states that if I slam my hand in a car door with "X" amount of force, my hand will absorb "Y" amount of energy causing my nerves to relay "Z" amount of pain to my brain (a gross simplification). The Uncertainty of Economics Economics cannot ascertain any clearly defined laws because in the market some unidentifiable factor always may be influencing a particular event or phenomena. It's nearly impossible to isolate any given variable in economics, so the dismal science is mainly based on theories. These theories may contradict each other, like efficient market hypothesis (EMH) and behavioral finance, but they may be proven true in certain cases or even at the same time. Furthermore, when studying economics, evidence often turns out to be coincidence more than a fact. Typically, these unreliable characteristics are a result of three specific things that economists cannot control: Un-testable Economy Unlike other scientists, economist don't have special laboratories where they can create isolated models to test their hypotheses. A vacuum of the economy just doesn't exist and cannot be created. Because of this, economists can't verify or prove their hypotheses as easily as other scientists. For instance, when Sir Isaac Newton had to repeat his tests for the existence of gravity, all he needed to do was find more apples to drop from different trees. For my law, all I needed to do was wear different T-shirts (and eventually stop slamming my hand in the door). For an economist to test a theory, he or she has to appeal to different governments to implement a specific change in the economy or, even worse, wait for them to do so under their own accord and then take the necessary measurements.
Homo Economicus Aside from the many different assumptions that economists make when debating their theories, probably the most hotly debated one is the idea of homo economicus, or the rational human. Nearly all economic theories assume that people are rational at all times, that they always prudently allocate their resources in a predictable manner that is beneficial. Unfortunately, this doesn't always hold water in the real world. People will gamble even though the odds are against them; they will forget to go to the supermarket with a calculator to see if the 32 oz. can of soup is cheaper than the 16 oz. can, and they don't routinely analyze the opportunity cost of different goods. Blind Man's Bluff Imagine you were blind with a deck of cards laid in front of you and someone expected you to be able to sort out the three of hearts. We know that there is a one-in-52 chance of being right and that, if the cards are randomly sorted, there is no scientific methodology that can help you improve those odds. However, if you pull the right card, you might attribute it to anything: the way you reached out, how many breaths you took, the twitch in your right eye - anything.
Once again you are stuck slicing and applying variables, but you can't repeat the test with any kind of consistent controls. This is similar to economics: the number of testable variables is enormous due to the sheer size of the economy. As a result, there has been little success not only in predicting phenomena but also in proposing reasons for why observable things happen. The economy can't be controlled like a math equation or a science experiment, and there are simply too many variables to test with any sort of reliability and verifiability.
The Bottom Line So there you have it. Next time you see someone dropping the phrase "dismal science" you can check if he or she uses it correctly; furthermore, you know that the person using the term could not possibly predict or explain market events with any smug confidence. Read more: http://www.investopedia.com/articles/basics/03/071103.asp#ixzz2MaOWRrbR