Introduction about Economics

What is Economics?

Economics is a social science that deals with production, allocation and consumption of goods and services in an economy in order to satisfy unlimited wants from scarce resources. The word Economics is derived from a Greek work οἰκονομία (Okios-nomos) which means “rules of the house”. Thus economics is the science of forming rules for managing a household. Earlier the definition of Economics was not separate from the discipline of “political economy” however, soon the concept of a separate branch of Economics as a science in itself evolved. Researchers often define Economics as the study of behaviour and interactions of various agents in an economy (households, firms, government and international markets).

Definition of Economics

Economics as a science has assumed a role of greater importance as it is used to study the concepts a variety of growth models for initiating and accelerating growth in economies as well as eradicating problems related to poverty, unemployment, inflation, food scarcity, stagnation, recession and BOP deficits. The Economic Science as we study today is a relatively new branch and is merely two hundred years old. In the year 1776, Adam Smith, also known as the father of economics, in his famous book “The Nature and Causes of Wealth of Nations” revealed the science of economics as an independent discipline and provided an independent definition of Economics. Prior to Adam Smith many notable philosophers and thinkers such as Chanakya, Aristotle had talked of important economic ideas in conjunction with the running of state affairs but never defined Economics as a separate branch of knowledge. Even at the time of Adam Smith, Economics was studied in the form of Political Economy.

With the passage of time, there have been significant developments in the economic theory and many branches of economics have emerged as well. Various Economists have proposed several different Economics definition.

These definitions of economics can be majorly grouped as:

1. Wealth Definition of Economics: Economics as a Science of Wealth

David Ricardo in his book “On the Principles of Political Economy and Taxation” shifted the emphasis of economics definition from production of wealth to distribution of wealth. According to Ricardo “The produce of the Earth – all that is derived from its surface by the united application of labour, machinery and capital is divided among three classes of the community, namely, the proprietor of land, the owner of the stock of capital necessary for its cultivation, and the labourer by whose industry it is cultivated.” “To determine the laws which regulated this distribution, is the principle problem in Political Economy.”

Apart from Adam Smith and Ricardo other classical economists including J.B Say and F.A. Walker also gave definition of economics as a knowledge of wealth.

Since during the eighteenth century, material wealth accumulation was viewed incompatible with the moral, religious and ethical values of the society and thus economics was also labelled as a ‘ Pig Science’ and a ‘Dismal Science’. However, for classical economists such as Adam Smith and Malthus, wealth was not merely the riches, but included all the goods and services produced in an economy and thus expansion/distribution of wealth was related with social welfare. Most of the classical economists including Adam Smith, Ricardo and Malthus defined wealth as synonymous to material goods. According to Malthus, inclusion of Material goods provided a “precision in the enquiry” and makes it easier to measure the “increase or decrease” of this wealth. Adam Smith was distinguished between Productive and Unproductive labour as the former being the one which produces material goods and the latter producing immaterial services. Political Economy was thus restricted to the study of productive labour only as it is their fruits of labour which produce material wealth, necessary for a nation’s growth and well-being. This restriction in the scope of economics by leaving out the important economic utilities of immaterial services such as health and education is a critical drawback of the classical definition of economics as a science of wealth.

Classical economists also define Economics based on private property institution. Gunnar Myrdal pointed out that classical economists such as Ricardo treated Private Property rights as a natural right of humans over factors of production as well as the produced and distributed goods. However in modern times, most private property rights are conferred by the society/ the government in national interest, lending little support to the classical definition of Economics.

Thus classical Economists provided the definition of economics as a study of the problems of production, distribution and exchange of wealth.

2. Welfare Definition of Economics: Economics as a science of Material Welfare

According to Alfred Marshall, Economics definition based on wealth ignored man’s relation to wealth, overlooked social welfare. Thus Alfred Marshall, an English Economist (also called the father of neo-classical economics) is credited with shifting the focus of definition of economics from wealth to man and his welfare. Marshall defines Economics as “on the one side a study of wealth; and on the other, and more important side, a part of the study of man.” Marshall thus gave the definition of economics as: “Political Economy of economics is the study of mankind in the ordinary business of life, it examines that part of the individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being”.

In the Marshallian definition of Economics, two things are prominent:

  • It is the study of man, not of wealth: Economics is concerned with wealth but only in so far how man earns wealth and how he spends this wealth.
  • The primary object of economics is promotion of material welfare, not welfare in totality.

For various other economists including Cannan and Pigou the definition of Economics is concerned with causes of material welfare, thus restricting the scope of economics from total human welfare to only that portion of welfare that can be measured in terms of money. However, Lionel Robbins (an English Economist) criticised this limitation and pointed out that economics is equally concerned with material as well as immaterial goods and services and “A theory of wages which ignored all those sums which were paid for immaterial services or were spent on immaterial ends would be intolerable”. Robbins also mentioned that a science of welfare in itself is not a definite one as the concept of welfare differs from person to person. Thus, welfare cannot be objectively and universally measured. Also, economics studies pricing problems of objects such as Liquor, Opium, which are hardly conducive to any measure of welfare. Thus Robbins remarks, “Why talk of welfare at all? Why not throw away the mask altogether”. Thus Robbins proposed the scarcity definition of Economics.

3. Scarcity Definition of Economics: Economics as a Science of Scarcity

Lionel Robbins in his famous book, “An Essay on the Nature and Significance of Economic Science” defined Economics as the science of problems which have arisen from the scarcity of resources. Thus, Robbins’ definition of Economics is, “Economics is the science which studied human behaviour as a relationship between ends and scarce means which have alternative uses”. Three important aspects of scarcity definition of economics are:

  • Unlimited Wants: Man’s wants (ends) are unlimited but are of different intensity. Thus humans are able to allocate the resources to satisfy their different wants based on their differing intensities.
  • Scarce Means: Scarcity of resources is the ultimate element which gives rise to all problems of economics. If resources were unlimited then all wants could be satisfied and the problem of allocation of resources would disappear. The scarcity of resources requires humans to make allocation decisions to fulfil their wants and achieve satisfaction. The resources refer to the natural productive resources, man-made capital goods, consumer goods, money and time etc. The scarcity of resources also gives rise to the phenomenon of paying price to achieve them.
  • Alternative uses of means: Resources have alternative uses. Say coal can be used as a fuel in industries as well as for domestic cooking purposes. Thus, it is through economics that resources are best allocated towards their alternative uses.

Thus Economics studies man’s activity with regards to all goods and services, whether material or immaterial, and does not distinguish between welfare or non-welfare aspects, till the wants of people are satisfied. Also Economics is neutral between ends as it does not study which wants should be satisfied or what ends should be achieved. Thus, one can define Economics as a science of choice, and given the ends, economics only points out how resources can be allocated to achieve that want with the minimum possible resources.

This scarcity definition of economics is also supported by other economists such as Wicksteed, Stigler and Scitovosky, amongst others.

However, Robbins’ scarcity definition of Economics is devoid of normative and welfare aspects. Without the satisfaction (or welfare) requirement, allocation problem would not matter. Also, economists regularly prescribe what is good and bad for the economy, economic growth or development, thus Economics cannot be neutral between ends. Robbin’s theory also lacks comments on economic growth and development and treats the base of resources as given. Problems dealing with initiation and acceleration of economic growth are central to the study of economics.

Various other recent definitions of economics have emerged to encompass the character of above three definitions. Professor Henry Smith defined economics as “the study of how in a civilised society one obtains the share of what other people have produced and of how the total product of society changes and is determined.”

In modern economics, the study of economic science is divided into two main parts:

  1. Micro-economics
  2. Macro-economics

Definition of Positive Economics and Normative Economics

Positive economics is defined as a systematised study concerned with explaining ‘what it is’ that is it describes theories and laws to explain the economic phenomenon. Normative economics is defined as a regulative study concerned with the criteria of ‘what should be’ or ‘what ought to be’.

Positive economics formulates laws and propositions to explain the cause and effect relationship between economic variables. Thus positive microeconomics is concerned with explaining the determination of relative prices and allocation of resources. Positive macroeconomics is concerned with the determination of aggregate consumption and investment levels as well as general level of prices and saving rate, total national income and employment. It looks into the distribution of national income between various individuals but not how it should be distributed. Questions such as what price should be fixed, how income should be distributed, what wage rate should be paid; all fall in the purview of normative economics. That is why it is also known as prescriptive economics.

Value Judgements

Normative economics involves value judgement, i.e. the conception of people about what is good or bad. Value judgements of various individuals differ and therefore cannot be decided on the basis of scientific laws. However, value judgements do not render normative economics as any less useful. It plays an important role in terms of economics of welfare. Welfare economics evaluates the social desirability of alternative economic policies. While the laws of positive economics are derived from a set of assumptions and can be verified, tested and measured, the laws of welfare economics cannot be observed or measured. Thus to judge the validity of any welfare propositions, value judgements are required as yardsticks to judge its validity.