Economic Theory as a Theory of Commercial Activities Examples - Essay Example

Final exam law, economics and business ethics Author Grade course Tutor Institution Date Introduction A theory refers to an explanation which is well substantiated with regard to a given aspect of the natural world. It could also be defined as a system of organized knowledge which has been accepted. A theory is used to explain why a set of phenomena is the way it is. Economic theory is a theory of commercial activities examples being production and consumption of goods. There are various economic theories which provide different approaches to how a country should handle its economic affairs. Consumerism theory puts forward the proposition that it is beneficial economically when there is a higher consumption of goods. Liberalism is a theory which supports a self regulating market and free competition (Nelson 2008, p.11). Keynesianism refers to theories which were advanced by John Maynard Keynes. Keynes supported fiscal and monetary programs which would have the effect of stimulating business activities in a country and create more opportunities of employment (Gerring et al 2005, p.329). This paper focuses on whether economic theories are useful in our understanding and solving major social problems. In determining the value of economic theories in providing solutions to social problems, the paper focuses on a number of social challenges. These challenges include unemployment, pollution, ill health, crime and debt. The paper relies on works by experts who have conducted extensive research and written extensively on the subject. The research also explores the divergent views advanced by different experts and assesses the soundness of the theories that each writer proposes. Discussion Economics refers to the study of the way people choose to do things one way or the other and the choice made is based on a number of constraints. Choices have to be made owing to scarcity of resources. Scarcity arises as a result of the finite nature of factors of production (Webster 2003, p.1-10). In the history of human history, there was little or no growth in economic growth. After sometime, a number of countries began to move out of the economic stagnation which existed. These countries had constant growth in their economies and the standards of living of the populations rose to levels that had never been experienced before. These changes brought about a change in the way that wealth was distributed in the globe (Gerring et al 2005, p.331). The change in economics also brought changes in health across the globe, population and the levels of education (Nelson 2008, p.16). There is need to answer the question why the situation is the way it is. There is need to give a comprehensive explanation as to what has led to the process of growth since the beginning of civilization. An interaction between various factors such as education and progress in technology has led to fertility rates reducing. As a result, these countries have been able to use their resources in activities which ensure growth of the economy and as a result of this such countries have been able to experience constant growth in their economies (Schumpeter & Backhaus 2003, p.73). There are many advocates for using economic incentives so as to solve problems of the society. Using incentives has been characterized as advanced basic values in a society which include human dignity, economic welfare and freedom (Tabuchi & Thisse 2002, p.166). Incentives are usually discussed as an ideal situation. Those who advocate for this policy change do not consider the difficulties that are bound to be experienced while implementing such a scheme. Subsidies is one of the most important tools that are used by governments to aid their citizens and in the process, help avoid social problems (Society for the advancement of economic theory 2001, p.26). A subsidy assures people of lower cost of production and they are hence able to have an assured source of income. This kind of arrangement not only gives the producers a reason to continue being in business but also many jobs that might otherwise have been lost are preserved (Schumpeter & Backhaus 2003, p.75). Economic theory can be used to understand the problem of global climate change. Economic theories can be use to understand optimal levels of permits which can be traded and the issues of carbon taxes (Gomez-Baggethun et al 2010, p.1213). Economic theorists are able to understand the paths, which are not constant, that should be considered so that costs can be distributed not only between countries but also between the present and the future. Economic theories can be used to understand the major sources of greenhouse gases (Gomez-Baggethun et al 2010, p.1214). Climate change poses a great challenge and problems for economists. The importance of this is due to the fact that the climate change is a great threat to the drivers of the economy in the world. Conventional economic theory was structured to look into the processes of production and consumption of services and goods. After the Second World War, there was a growth of welfare programs in a number of countries and there arose a need for management of demand (Negishi 2005, p.61). Economic theory increased its scope to look into the role of the state. The theory looked at how the government's role should be managed in dealing with economic growth, equity and social problems (Ross 2005, p.25). Conventional economics refer to an actor who is rational. The individual is seen as having self interest and seeks to maximize utility on human consumption items. Empirical evidence shows that duty, obligation and utility motivate people (Mandel 2002, p.41). Human beings are therefore concerned about welfare of other people as well. Human beings take seriously issues of dignity and equity in their relations with other people. Human beings therefore act as a result of how the economic institutions in their countries are structured (Negishi 2005, p.62). These are aspects that were traditionally ignored by the economic theory. However, there are modern problems which include drug abuse and crime. Economic theories must address issues of equity in society since lack of fairness might be the cause of antisocial behaviour (Ross 2005, p.33). Currently, when making policy recommendations, these are usually based on an economic model in which preferences of an individual are determined through processes which are biological and social. The traditional economic theory acknowledged that people produce both goods and services (Helm 2000, p.11). The traditional economic theory fails to acknowledge that determined the values and preferences of the people. The economic theory therefore fails to recognize that institutions and the policies they make ought to be judged by the personal development they produce in additional goods and services that they produce (Helm 2000, p.13). There are some developments which raise optimism that it is possible to broaden the economic model of individual action. The rational actor model has been applied by economists in many and different range of personal behaviour (Mandel 2002, p.29). Economists have come to know of what limitations there are with the models they have previously used. Another development is with regard to the concern of erosion of social capital. Some approaches have contributed to the notion that there are preferences which are superior to others (Ogus 2004, p.27). Social theorists and policy makers tend to be more concerned with people's preferences. A third development has to do with the widening of rational actor model. New and compelling evidence is being released from laboratory experiments. Psychologists have also been instrumental in informing what areas of research are given priority (Mandel 2002, p.33). Models which are broader and more accurate regarding individual choice are expected to iron out the flaws which exist in standard economic theory. The changes envisaged are expected to bring about a foundation which is more secure for economic and social policy (Helm 2000, p.24). Economists do not understand criteria which seem irrational and they are to be found in public discussions on economic policy. Traditional economics fails to appreciate the fact that people get more concerned when there are job losses as a result of relocation even if such relocation results in creation of more jobs elsewhere (Calvo-Armengol & Jackson 2007, p.36). Economic theory developed measures about the measure and gains on social policy whose basis is that the welfare of an individual happens to be a function of commodities which are marketable. There is need to have a model which is broader and focuses on the welfare of the individual as an important element in realigning the economic theory of environmental policy (Gowdy 2005, p.214). Argument about utility functions of the individual should replace the notion of marketability. The models should be judged on the ability to promote the welfare of an individual and change the variables which affect how human beings are likely to behave in the future (Jones, Felps & Bigley 2007, p.144). Conclusion The world is a complex place. Economists have to make a number of assumptions which are meant to simplify the understanding of how markets operate. Without making of assumptions, it would be very difficult to predict the cause and effect relationships. An example of a law of demand is that the price of a commodity is inversely proportional to quantity if all the other factors are left constant. Economics is a social science and therefore its experiments cannot be verified in a laboratory unlike the case with physical sciences. A theory is rated based on its accuracy in making predictions. In the nature of scientific progress, good theories are supposed to progressively replace bad theories. Economic theories attempt to explain complex phenomena in the world. Although these theories cannot produce results which are beyond challenge, they nevertheless are useful in explaining the world as it is and helps in predicting the future. Changes in the economy do happen and as a consequence adequacy of social policies are affected. This leads to changes in economic theory. This is something that theorists strive to explain. Economic laws state a relationship which is true only under certain conditions. However, when new information is acquired, there is bound to be changes in the law. Most of the world inherited the tradition of Adam Smith and another economist, Ricardo. These two gentlemen represent the early stages of industrial revolution. This is a time when forces in the emerging economic systems were just developing and it was not certain what the long term outcome would have been. There were already struggles between those who benefited from the forces of control and the effect was that the poor people in the society were regarded like any other instrument of production. References Calvo-Armengol, A & Jackson, M 2007, ‘Networks in labor markets: Wage and employment dynamics and inequality’, Journal of Economic Theory, vol.132, no.1, pp 27–46. Gerring, J, Bond, P, Barndt, W & Moreno, C 2005, ‘Democracy and Economic Growth: A Historical Perspective’, World Politics, vol.57, no.3, pp 323-364. 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