Some academic specialties, grouped by subject matter:
Related to firms:
–Industrial organization: IO deals with the profit-maximization problem of the firm. In particular, IO deals with the firm’s strategy in interacting with the market. IO researchers study things like estimating market demand, types of competition between firms (especially the tremendous complexities possible in imperfect competition), limited information, barriers to entry, capacity constraints, etc. Industrial organization also deals with the firm’s response to public policies such as regulation. Even more than other areas of economics, IO makes extensive use of game theory. The findings of the field are useful to corporate management, of course, but also to academics seeking to characterize markets and to regulators seeking to anticipate and prevent unintended consequences and perverse incentives from regulation.
–Operations research / operations management: Likewise concerned with profit maximization by firms. Whereas IO deals more with outward-facing strategy—how the firm interacts with the market—OR, by contrast, is more focused on the internal operations of the firm, choosing strategies to run the firm as efficiently as possible, minimizing its cost to produce any given level of output. OR has large overlap with industrial engineering.
–Managerial economics: Typically taught in business schools, this is the general use of economics to inform the decisions of management.
–Contract theory: Closely affiliated to the field of law and economics. Has some resemblance to mechanism design in its objectives. Contract theory is the study of contracts—agreements that specify the rights and duties of various parties. Lawyers might be interested in which kinds of contracts can actually be enforced given law and precedent, but economists are interested in how a self-interested agent with private information would respond to any given contract, and relatedly, how to design contracts so as to induce certain behavior.
–Economics of specific industries (e.g. pharmaceuticals)
Related to consumers:
Traditional consumer theory models consumers as making rational choices, i.e. choices that can be understood as optimizing some unobserved preference in a way that is logically consistent between possible consumption bundles, possible lotteries, and possible timing. However, psychologists, neuroscientists, and cognitive scientists have long known that humans make decisions in complicated ways which are not perfectly rational and are difficult to fully characterize and quantify. In recent years, economists have started to build on this knowledge and investigate possible successors to rational consumer theory.
–Traditional consumer theory: Consumers are rational—this will be discussed in more detail when I describe microeconomics. Rational choice has significant advantages: we can model consumer choice in a static model as maximizing some function (a “utility function”), and even in a dynamic stochastic model, consumers maximize the present value of their expected utility. The assumption of rationality is basically the assumption that a phrase like “maximizing the present value of their expected utility” is well-defined. If it is, we have a very tractable mathematical model of consumer behavior, which can be combined with our tractable mathematical models of firm optimization and market clearing to produce a simple and elegant theory of the economy. The only problem with this elegant model is that it is wrong. Consumers are roughly rational, and the rational choice model is not useless; in fact, rational choice is a good guide for a sophisticated consumer trying to act optimally.
–Behavioral economics: Real consumers depart from classical assumptions of perfect rationality. Psychologists have found many quirks in human decisionmaking, such as time-inconsistent preferences (e.g. we usually don’t consider a one-day delay in rewards a big deal, but if that one day is today, that makes a big difference) and loss aversion (losing something is a much bigger deal than an equal-sized gain). These quirks present serious difficulties for traditional consumer theory, since it is impossible to represent them as rational optimization strategies without incurring paradoxes. However, by relaxing some of the axioms of rational choice, it may be possible to create a consumer theory that reflects more psychologically realistic human behavior. This is a field of economics rather than psychology—we still want mathematical expressions that tell us how much of each good a consumer will consume, as a function of prices and other economic variables—but we no longer assume that the behavior will be fully rational.
–Experimental economics: Economics traditionally relied on a combination of natural data and reasoning about the incentive structures faced by firms and consumers. It’s often difficult to conduct experiments to answer questions, but in many cases it is possible. Economic experiments can be conducted in the lab—bring subjects in and see how they make decisions and how incentives affect their behavior. They can also be conducted in the field—e.g. partner with a firm to see how experimenting with their pay structure affects employee productivity, or partner with a utility company to see how prices, psychological framing effects, comparison to neighbors, etc. affect electricity usage. A caveat: economic research does not get the billions of dollars of funding given to medical research and experimental physics, but offering large enough incentives to affect behavior is expensive. As a result, researchers often travel to rural villages in the third world, where a $100 reward goes a long way; and researchers as notable as John List, a remarkably prolific experimentalist and current department chair at the University of Chicago, raise research funds from private donors.
–Neuroeconomics: Neuroeconomics uses lab experiments and techniques from neuroscience, such as magnetic imaging (MRI), to study the correlates of economic decision making in the human brain.
–Preference formation: Our preferences are in principle malleable. In fact, marketers, who work in the same business schools and corporations as economists, have the job of trying to influence consumer preferences so as to increase the demand for their employer’s product. However, I’m not aware of an economic theory of how consumer preferences form and how they can be modified—the economic analysis I’ve seen tends to take consumer preferences as given. Some political scientists have thought about the formation of political preferences (likely come from social cues), and some psychologists have considered the question more generally. For instance this paper (http://papers.nips.cc/paper/5224-magnitude-sensitive-preference-formation.pdf ) presents a statistical model in which the person evaluates options based on the available choice set, and eventually develops contexts based on previously encountered choice sets. Within a context, preferences are fairly consistent, but change the context (by changing option sets, framing effects, loss aversion etc) and you change preferences. Money helps provide a semblance of economic rationality by providing a very general, easily observed and easily quantified context—you can compare the dollar price of different things, allowing you to behave like a rational consumer who always wants to get the best bang for your buck. This is useful for reconciling behavioral economists’ findings of irrationality with more conventional economists’ findings that rational-choice theory does a decent job of explaining the economy (normal markets provide a familiar context, and the lab provides a variety of weird and rapidly-changing contexts), but I’m not sure their model is right, and it does nothing to explain why some options are preferred within a choice set in the first place.
A thought I’ve had—we effectively define utility as “that which is maximized by the consumer’s choices”, and then fields like behavioral economics try to fit utility functions to describe preferences that violate the axioms of rational choice.
Related to markets:
–Labor economics studies the labor market. How do individuals decide how much to work and what jobs they’re willing to take? How do employers decide how many people to hire? What determines wages? What determines labor force participation, and employment vs unemployment?
–Financial economics studies the capital market. Typically the assets studied are not physical capital (e.g. tools and machines) but rather more abstract forms of capital, like money and financial instruments.
Related to government
–One of the major focuses of macroeconomics is government policy and its economic effects.
–Law and economics: related to contract theory, political economy, political science, etc. A partial list of topics studied includes: economic effect of legislation; which laws are economically efficient, etc. I know little about this field.
–Public Economics: Public economics studies government policy and its economic effects, specifically its effects on social welfare. It builds on the concepts of welfare economics, which attempts to define the social efficiency and equitability of market outcomes. This field is affiliated with macroeconomics, which also studies government policy. In addition, public economics deals with instances of market inefficiency, such as externalities, public goods, and market failures, where it is possible for a policy maker to produce strict improvements over the market outcome.
–Mathematical economics: All economics makes heavy use of math, but mathematical economists are almost applied mathematicians. They formulate and analyze mathematical structures that can be used to study the economy, and are interested in the mathematical properties of the structures themselves, where other economists are mostly interested in how the math describes the behavior of firms, consumers, prices etc.
–Computational economics: What it sounds like. The development of computer models for the economy. It intersects with almost every specialty—computers are useful for everything.
–Game theory: Really a branch of mathematics, game theory is the study of strategic decision making in contexts where there are two or more independent players, each trying to maximize their own individual payoff. Players’ payoffs may interact in intricate ways, forcing each player to anticipate the ways other players will respond to their choices. Finite games can be solved by backward induction; for infinite games, it is sometimes (not always) possible to find a Nash equilibrium or a subgame-perfect equilibrium. Game theory is older than many people think—Ernst Zermelo published an almost game-theoretic analysis of chess in 1913—but it took on its modern form in the 1940s and 1950s with the work of John von Neumann, Oskar Morgenstern, John Nash, and others. Some of the best known applications of game theory are in economics, and economists have made significant contributions to the field (in fact, 11 Nobel Memorial Prizes in economics have been awarded to game theorists, including the most recent prize in 2014)—but game theory also has applications in biology, computer science, psychology, and political science.
–Asymmetric information: Some important information is known to some players in the market, but not to others. For instance, a seller may or may not know how much an individual buyer is willing to pay for a good—this affects the price. Or for a different example, the seller of a used car will know if it’s good or a lemon, but the buyer does not—and in this case, this can lead to adverse selection. Details to follow.
–Mechanism design: Somewhat like game theory in reverse. We still have strategic players, like traditional econ or game theory. The difference is that in game theory, you start with the structure of the game as a given and study the players’ strategies; but in mechanism design, the structure of the game is initially unknown—and in fact, the point is for the designer to find a game structure, or “mechanism,” that would induce the desired behavior.
For instance, players may have private information that affects market outcomes (say, the players’ private valuations for the good being traded). One agent, called the “principal,” announces (step 1) a mechanism y() that grants an outcome y as a function of reported type. (step 2) The players then report [theta hat]—they claim that this is their type, and they may or may not be telling the truth (depending on which one they expect will make them better off). After reporting, they receive (step 3) the outcome y([theta hat]), ie the outcome assigned to people who claim to have the type the player claimed to have. Example: A first-price auction. Step 1: The mechanism is announced: all players submit bids; the player that submits the highest bid pays their bid and receives the good; all other players pay nothing and receive nothing. Step 2: All players submit bids, which are in effect claims about their private information (in this case, their valuation for the good). Step 3: The mechanism (declared in step 1) is carried out, and the good is sold to the highest bidder.
In cases like this of private information, the desired behavior is often to make the players want to truthfully report their private information. In this case, the first-price auction does not achieve that—players should bid less than their valuation, and the exact expected-surplus-maximizing bid can be computed if you know your valuation and have beliefs about the distribution of other players’ valuations. However, if the mechanism is a type of second-price auction called the Vickrey auction, then in fact it is a (weakly) dominant strategy for each player to bid their true valuation; and thus the principal can learn every player’s private information.
Auction theory ties closely to mechanism design—it’s easy to analyze auctions in a way that illustrates principles like revealing private information.
Note that mechanism design is quite general—it can extend to trying to induce any sort of behavior (for instance, behavior that would lead to a socially optimal allocation of public goods; or behavior that maximizes the revenue of a given seller; etc) by means of a payoff structure. See Wikipedia and other online resources.
–Economics of Technology: What drives technological innovation? How can a policy maker encourage it? Roles of human capital, roles of patents, etc.
–Development economics: Some countries have become quite wealthy in the past few centuries, others have dramatically increased in wealth and production in recent years, and yet other countries remain poor. Many macroeconomic models predict that all countries follow the same trajectory with different timing, poor countries will grow faster than rich countries, and all countries will converge to the same level of wealth—yet this does not seem to have happened. Why not? What can be done to promote economic development in the world’s poorer countries?
–Economic History: the study of economic events in the past. An economic historian might study the events of the Industrial Revolution, the Great Depression, or the ongoing economic growth of China, and try to determine the causes of these events. Economic history can use the methods of history—reading original sources and records, studying old artifacts, trying to understand the motives of important actors and the social, cultural, and historical environment in which they operated—as well as the methods of econometrics, statistical analysis of quantitative data. Historically, the London School of Economics has been a major proponent of the separation of economic history into its own department; at most American universities, it is subsumed within the economics department.
A few subfields found in industry:
–Corporate economists (business strategy, economic analysis of data)
–applications of industrial organization, operations management, econometrics (eg estimating demand), game theory, finance etc.
–In academia, economists study the theory of how a firm can maximize its profits in response to the input market, the output market, and the firm’s competitors; as well as how to estimate things like market demand. In industry, economists can put this theory into practice, and may be well compensated for it.