Why study Economics/ Econometrics

So, you think you might want to study economics or econometrics, but you are not sure what it is or what it might do for you?

In the 2010 spring issue of The American Economist, a journal published by Omicron Delta Epsilon, an international honor society dedicated to economics, included an article written by Patricia M. Flynn and Michael A. Quinn, both of Bentley University, in the United States. In their article, “Economics: Good Choice of Major for Future CEOs,” they examined the relative success of economics majors in achieving the top spot in S&P 500 companies. They found that, overall, engineering majors, business administration (similar to business management) majors, and economics majors, were the most likely to be CEOs of S&P 500 companies. However, when they further accounted for the relative popularity of the degrees, they found that economics majors were the most likely to have made it to the boardroom, followed by engineering (2/3 as likely as economics), business administration (2/5 as likely as economics) and political science (1/3 as likely). In other words, the critical analysis skills developed through the study of economics are highly appreciated by multinational corporations.

Unfortunately, similar studies are not available for South African corporations, at least those that are not included on the S&P 500 list. However, economists are very important in the South African context. Economists help develop policies that are consistent with growth objectives. Economists work within the South African Reserve Bank to develop and implement monetary policy. Economists also work for National Treasury, the dti, the Competition Commission and many other very important government agencies responsible for taxation, economic policy and regulation. Economists are important contributors to the banking, finance and insurance sectors of the economy. Economists find themselves in important research positions throughout the country, working for consultancy firms, market analysts, and many other firms interested in improving outcomes for their firms or their clients. Finally, economists work with many aid organizations and non-government organizations that are interested in community development, health, and other areas of social importance to South Africica.

What is Economics?

Economics is both a social science and a business science, and, in the broadest sense, it is concerned with understanding what economies produce, how economies produce what they produce, and who in the economy is able to access what is produced. Within economics, there are two extreme views of this understanding, although economics, as it is practiced, typically lies somewhere in between these two extremes. On one end of the spectrum, market-oriented economists assume that individuals are the most capable of deciding what is best for them, and that free and unfettered markets make available the sort of information that individuals need in order to make the correct decisions, and that those decisions, when aggregated, lead to the best outcome for the greatest number of individuals in society. On the other end of the spectrum are economists that favour hierarchical command and control. These economists tend to believe that markets are inherently incapable of providing the appropriate information to individuals, and, therefore, benevolent planners are capable of bringing about the best outcome for the greatest number of individuals in society. In reality, neither extreme is correct, as markets can fail in a number of circumstances, while the benevolence necessary for success within a planned economy is not a common human trait and often creates unintended negative consequences.

With that as an introduction, it can hopefully now be understood that there is both a philosophical and an analytical aspect to economics. Along those lines, a degree in economics is meant to develop skills related to critical thinking that allows the students to understand the underlying assumptions, interpret data and develop the various chains of logic that are required to advance, support or renounce a particular policy intervention or non-intervention. As an example, one might ask whether or not it is a good idea to avail young South Africans with a wage subsidy to improve their chances of employment. A market-oriented economist would tend to support a wage subsidy, if the subsidy obviously alleviated a market failure, unless that failure was caused by a minimum wage that was set above the equilibrium price. A benevolent planner would tend to support a wage subsidy as long as the subsidy increased youth employment. However, such a policy cannot be considered entirely within a vacuum. It is, unfortunately, plausible that a wage subsidy would increase youth employment, while simultaneously reducing employment opportunities for non-youths. In other words, proper economic analysis is complex and requires one to think “outside the box”, regardless of your philosophical preferences.

What is Econometrics?

Econometrics is a social science, a business science and a natural science, and, in the broadest sense, it is concerned with the measurement of economic behavior, economic outcomes and the impact of economic policies. It is an important complement to economics, as proper measurement underpins critical analysis. The scientific method involves: first, the advancement of a theory or set of hypotheses; second, the testing of those theories or hypotheses; and third, the adjustment of those theories and hypotheses for further testing. Karl Popper, the brilliant 20th century philosopher, has argued that theories can never be proven, only falsified. Along these lines, economic measurement can provide support to theories, but never prove them; however, economic measurement can result in the complete rejection of economic theory. Therefore, the understanding of econometrics and the application of econometrics are extremely important in advancing our understanding of economics.

Returning to the wage subsidy example above, a simplistic economic theory might argue that a wage subsidy will lead to increases in employment. The goal of the econometrician, then, would be to examine the success of that theory. In all likelihood, the economic measurement preformed by the econometrician would show that a wage subsidy offered to youths would raise youth employment, but simultaneously reduce non-youth employment. Therefore, the simplistic economic theory would need to be altered. One possible alteration to economic theory could argue that wage subsidies create distortions in the labour market that lead to increased opportunities for those with access to the subsidy, while decreasing opportunities for those that do not have access to the subsidy.

Published by Liesl Oosthuizen

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