Economics is a social science that studies the broader management of goods and services, including their production and consumption, and also the factors affecting them whereas Finance is the science of managing available funds.
Differences in Topics covered
Economics serves to explain the factors involved in scarcity or surplus of goods and services that affects and can be applied to almost every sphere in society, business in general, and also governments. Finance mainly involves saving and lending money, keeping in mind the time available, cash at hand, and the risk involved. Finance can thus be considered a small subset, or a cousin, of economics.
Branches of Economics vs Finance
The branches of economics include macro and microeconomics. Macroeconomics takes into account the broader aspects of economy as a whole including national income and output and also considers the unemployment rate, inflation of items, and the effects of monetary and fiscal policy of the government. Microeconomics is the analysis of supply and demand of goods. This involves studies of market to examine the quantity of goods in demand and those supplied, to reach equilibrium at a price point under government regulations. Economic efficiency depends on how this equilibrium is adjusted with changing markets over time.
The key areas in finance include personal, business, and public finance. Personal finance relates to the income, source and expenditure of individuals and families, including debts and other loan obligations. Public finance is concerned with the administration and paying of collective or government activities. Business finance or corporate finance includes managing funds for a business or corporation. This includes balancing risk and profitability, to maximize the company’s wealth and value of stock in the market.
History and evolution of Economic Thought and Finance
The history of economic thought can be divided into three phases, premodern, early modern and modern era. Premodern era can be traced back to Mesopotamia and other civilizations like Chinese, Indian, Greek, Arab, Persian, and more. The most notable work that deserves special mention is “Arthashastra”, written by Chanakya (c. 340-293 BCE), which is now considered one of the forerunners of modern economics.
In the premodern era from the 16th to 18th century two groups emerged, mercantilists and physiocrats. The former believed that a nation’s wealth was determined by the amount of gold and silver it held and the latter group believed that agriculture was the basis of wealth.
Classical economics was defined by Adam Smith in 1776 in the modern era. According to him, an ideal economy was self-regulating, and the personal interests of the individuals led to the benefit of the whole society.
Marxism, derived from the works of Karl Marx (1867), and professed the labour theory which believed that the value of an item depended on the labour that went into producing it. This thought descended from classical economics, and differed from other neo-classical theories of economics.
Neo-classical economy or marginalism which developed between 1870 and 1910 believed that the price and quality of a product was determined largely by its supply and demand. Other schools of thought include Keynesian economics which introduced macroeconomics as a main subject and Chicago school of economics which was a modernized version of the principles of Adam Smith.
Modern economics is divided into mainly two schools of thought, Saltwater school (which is associated with Harvard, MIT, Berkeley, Pennsylvania, Yale and Princeton) and Freshwater school (represented by Chicago School of Economics, Carnegie Mellon University, University of Rochester and University of Minnesota). Both these schools of thought follow the neo-classical synthesis. Theories in Finance also have a history in economics. Earlier, detailed analysis of financial markets was not done by economists. The main pioneers of Finance Theory are Irving Fisher, John Maynard Keynes, John Hicks, Nicholos Kaldor and Jacob Marschak.
Other theories include Modern Portfolio Theory, Arbitrage and Equilibrium Theory and others.
Differences in roles
Professional economists are hired as consultants to work in the private sector including banking and finance and also by various government departments and agencies like the Treasury or Central Bank.
Personal finance is generally managed by individuals and business and public finance areas by banks and other institutions.
Professional Qualifications in Economics vs Finance
Academic institutions offer courses in economics and related subjects like Philosophy of Economics, Laws and Economics, Political Economy and more.
Related courses in finance include Accountancy, Chartered Financial Analysts, Business qualifications and more.