Why Economics is a Social Science

In the previous post, I stated that economics is a social science, no mater how badly economists want it to be a physical science, it is not.  What do I mean by this?

Economics is the measure of an economy.  But what is the economy?  Simply put, the economy is a group of people bound together socially.  Maybe you are a truck driver, you get paid to drive a truck.  The money you earn you take to the economy to find things you are not.  The truck driver might spend money at a grocery store, or a barber, or even an electronics store, finding the things he cannot make like food, TVs etc.  The money he leaves there then is spent by those parts of the economy for things they are not.  Like to pay a truck driver to deliver food from the farmer to the grocery store.  In its simple form, you are the economy.  It is what you do with your money that determines economic growth, or recession or even depression. 

Think for a moment, how do you determine what to spend, where and how much?  Of course you need a place of shelter (mortgage or rent), you need water (water company bill), food (grocery store or clubs) and the ability to communicate are essentials for human life to thrive.  Do you not apportion your money to cover these very basic things first?  What is left over then is either saved or spent in a discretionary way.  "Hey Honey, can I buy a new car?"  It is mostly what each of us does with that left over segment that is what we need to discuss here.

For instance, your best friend is laid off.  Your neighbor losses his house to foreclosure, and your parents need to go to a nursing home.  Think of the frame of mind you would be in... You would probably not even consider a new car under those circumstances, its just too risky.  But what about less expensive things like a new TV or even a new bed.  Depending on your ability to accept risk, you may or may not do any of those, or some of them.

Now, add to that what every other person in the world is doing, based on individual circumstances.  When a majority of people are worried about providing shelter, food and water, the economy goes into recession.  Why?  Because they stop spending, companies lower production because they are not selling as much, which means more lay offs or under utilized employees, which can cause the spiral to deepen.  The economy does not grow.

Now let's assume that your best friend just found a new job, your neighbor sells his house at a 30% profit after just one year, and your parents are aging well, and have enough money to care for themselves until death.  Easier to spend that discretionary money, isn't it?  You feel better that the basics are covered, then it is time for the extras.  TV manufacturers hire employees to make more TVs, grocery stores carry more convenience types of foods, and fancy bottled water sellers are able to sell better versions of what you have coming out of the tap.  The economy grows.

So what I see is that the psychological mindset of the people making up the economy is the most important factor in whether the economy booms or busts.  Which is exactly why FDR was able to encourage people saying "we have nothing to fear, but fear itself" or Ronald Reagan "I see America as a shining city on a hill..." And interestingly, those two are political extremes of each other.  Both understood econ101.