Definition and Concepts of Economics PDF

# DEFINITION AND CONCEPTS OF ECONOMICS ## INTRODUCTION What is Economics? It is a simple question to which no simple answer can be given. Modern economics originated in 1776 when Adam Smith published his classic, *An Enquiry into the Nature and Causes of the Wealth of Nations*. So he is rightly c...

# DEFINITION AND CONCEPTS OF ECONOMICS ## INTRODUCTION What is Economics? It is a simple question to which no simple answer can be given. Modern economics originated in 1776 when Adam Smith published his classic, *An Enquiry into the Nature and Causes of the Wealth of Nations*. So he is rightly called the founder - the father of modern economics. From this point of view, economics is only about two-and-a-quarter centuries old. During this period, our notion about economics has undergone many stages of development. ## ECONOMICS: A SCIENCE OF WEALTH The classical economists, beginning with Adam Smith in his book *An Inquiry into the Nature and Causes of the Wealth of Nations*, published in 1776, defined economics as "a science of wealth." Some other economists followed Smith and defined economics in a similar way. Famous French economist, J.B. Say, stated, "Economics is the science which treats of wealth". To American economist, F. A. Walker, "Economics is that body of knowledge which relates to wealth." By wealth was meant not only gold and silver but also all kinds of other goods - houses and public buildings, furniture, ships, workshops, tools and machines in use at the time of the production of goods. Economics, which is described as the "queen of social sciences", cannot be so narrowly defined. Economics, as social science, cannot be confined to wealth-earning and wealth-consuming activities only. Wealth has its importance, but it cannot be the end of all human activities. The purpose of a definition is not to limit the scope of a subject, but to delimit - that is, to determine its boundaries or limits. In this sense all definitions of economics relating it to wealth are narrow, they put a limit or limits to scope of economics. For this reason later economists criticized them. They accused Economics of selfishness and meanness. It was described as the gospel of Mammon, the god of wealth (Kuber, according to Hindu mythology). It was called bread and butter science. Such a subject can have no lofty ideal, must be a "dismal" science and so cannot be acceptable. Social reformers, like Carlyle, Ruskin, Maurice, etc. condemned it. ## SCIENCE OF MATERIAL WELFARE: MARSHAL'S DEFINITION Later economists tried to rescue economics from this condemnation. They brought a man to the forefront and wealth was made subsidiary to him, only a means to an end. The end became the welfare of human being. Thus there was a basic shift in emphasis, from the study of wealth to that of human welfare. The best representative of this line of thinking was Alfred Marshall, the renowned British neo-classical economist. He defined economics thus: "Economics is a 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. "Thus it is on the one hand it is a study of wealth and on the other, and more important side, it is a study of man. In this definition, the terms on which emphasis is laid are "ordinary business", "social action" and "material requisites of well-being". They are important because man's character, according to Marshall, is moulded by his every day work and material resources at his command. He says further that a science which deals with issues vital for the well-being of mankind will attract the noblest thinkers of every age. But this did not happen because the influence of economics on the higher well-being of man had been overlooked. Instead, wealth became its subject-matter and so it was repugnant to many. Marshall says that it is true that money or command over material wealth is the centre around which economic science clusters, but it is not so because money or material wealth is the chief objective of human activities. It is not even the main subject-matter of economics. The importance of money lies in that it is a convenient means of measuring human motive. The older economists could not make this point clear. Had this been done so, there would have been no bitter attack on economics by the social reformers; economics would not have been taken as a science having no concern except the selfish desire for wealth. Another important aspect of Marshall's definition is that economists study the actions of individuals as they behave in society. They do not study isolated individuals like Robinson Crusoe living alone on a lonely island. Economists' individuals live in society, influencing the other persons and being influenced by them. Further, economists deal with man as he is, not with an abstract or "economic" man, but a man of flesh and blood. Thus Marshall, like Pigou later, regarded the accumulation of wealth only as a means towards raising a people's standard of living. A.C. Pigou, in his famous book *The Economics of Welfare*, defined economics in terms of welfare in which he stressed the human as well as the material aspect of the subject. He regarded economics as a means of studying how total production could be increased so that the standard of living of the people might be improved. ## Definition of economics as a science of material welfare remained acceptable for about four decades before being successfully challenged in the 1930s. Main points of criticism of this definition are as given under: 1. **It is classificatory.** It divides welfare into material and non-material. It is a false division. Take for example, the theory of wages. If wages are spent on things, such as bread, butter, etc., it comes under the study of economics because it increases material welfare. If the same wages are spent on spiritual attainment, it cannot come under the scope of economics as it does not add to any material welfare. Robbins says that such a dichotomy in the theory of wages is untenable. 2. **Neo-classical definition of economics is narrow.** If it confines the study of economics to material welfare only, then it is not possible to limit economics to the study of material welfare only on the basis of a false division. 3. **Neoclassical definition of economics concerns itself chiefly with those motives which affect, most powerfully and most steadily, man's conduct in the ordinary business part of his life**. Now the distinction between ordinary business and non-ordinary business is not clear. 4. **It ignores economic problems**. According to Marshall, economics deals, with persons living in society. It ignores all others, who also may have an economic problem - ie., of using scarce means for the satisfaction of unlimited ends. 5. **Objection is raised against the term 'welfare' as well.** If economics is a study of material welfare, it means that only those activities will be considered which add to welfare. Production and consumption of wine cannot form a part of the study of economics as they are destructive of welfare. But they are studied in economics because they add to national income. Further, welfare implies value judgment. Activities which are conducive to welfare will be studied, but those not conducive will be left out. It means that we have to apply our judgment and declare which activities are welfare-increasing and which are not. But Robbins says that economics is neutral between ends. So Robbins stated that "Whatever Economics is concerned with, it is not concerned with the causes of material welfare as such". His contention was that Economics actually dealt with both material goods and non-materials services. Therefore, any correct definition of Economics must cover the entire ambit of the subject. ## SCIENCE OF SCARCITY Robbins was of the view that the definition of Economics that he has provided is free from the above defects. Before we come to his definition, we must have a close look at the economy surrounding us. Robbins says that men feel innumerable wants which he calls ends. But the resources available to them to satisfy these ends are limited. These resources are termed as means. Let us analyse them a little closely. ### Unlimited Ends Our ends or wants are unlimited. When one want is satisfied, another crop up. Man, like an animal, is not satisfied by merely filling the stomach. We always hanker for what we do not have. Our hankering is insatiable. There is no end to what we may want. Limited wants would give rise to no economic problems. Another important fact about ends is that all of them are not equally important. ### Limited or Scarce Means Economics was once described as a dismal science. It may still be regarded as dismal in the sense that we cannot have everything we want; economics deals with scarcity. Resources at our disposal to satisfy wants are limited in relation to the ends we want to satisfy. Had resources been unlimited like endless wants, there would have been no economic problem. Scarcity is a relative term. Economic resources are limited in relation to our wants. In other words, scarcity is a condition where there is less of something that people would like to have if it cost nothing to buy. ### Alternative Uses of Means Mere scarcity does not give rise to economic problems. If resources are capable of one use only they are specific, their utilisation is an engineering problem, not an economic problem. Economic problem arises when resources are not only scarce but also capable of alternative uses. It means that a resource can be put to many uses. A piece of land can be used for growing corn or building a residential house or a commercial complex. The importance of the existence of scarcity is that it gives rise to a need to allocate the available resources among alternative uses. Given unlimited wants, it is important that an economy makes the best use of its limited resources. So Robbins defined economics thus: "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." ## LOGIC OF CHOICE Time and means for achieving ends are limited and are capable of alternative application. Ends are unlimited and are capable of being distinguished in order of importance. These factors cause human behaviour to assume the form of choice. He has to choose between competing ends. Choices are necessary because there are insufficient resources to satisfy all human wants. A country cannot produce everything its citizens would like to consume. So it has to decide – that is, it has to make a choice about – which goods to be produced and which left unproduced; what quantity of each to be produced and whose wants to be sacrificed and whose left unsatisfied. Thus the fact of scarcity means that we must always be making choices. We cannot escape the fact of scarcity and the necessity of choice. Households, the smallest economic units, must choose how best to employ their limited incomes between competing ends, such as food and housing, necessities and entertainment, consumption and saving, and so on. In all these choices, household decisions are guided by market prices. Business firms too must constantly choose in the face of scarcity. All public economic policy decisions are also subject to choice, though less explicitly. Every society, rich or poor, makes choices because its production limited by its resources and technological knowledge. If the society chooses to have more of one thing, then it must have less of something else. Such a choice is called an efficient choice. Scarcity and efficiency are, according to Samuelson and Nordhaus, the twin themes of economics. In their words, "the essence of economics is to acknowledge the reality of scarcity and then figure out how to set-up society in a way which produces the most efficient use of resources." ## SUPERIORITY OF ROBBIN'S DEFINITION Robbins' definition of economics gained wide acceptance and holds till today. It is superior all other definitions for the following reasons: 1. **It is a scientific definition.** It is not classificatory. It does not divide wants and goods into material and non-material. 2. **Robbinsonian definition has widened the scope of economics.** Material as well as non-material goods and wants come under the purview of Economics if they arise in the context of scarcity. 3. **Robbinsonian definition of economics makes it a science only**. Other definitions regard Economics as being both a science and an art. 4. **Robbins considers Economics as a positive science only**. It steers clear of value judgment as is the case in a normative science, so economics is neutral between ends. ## Criticism of Robbins' Definition In spite of the above merits, Robbinsonian definition suffers from a number of weaknesses: 1. **Economics is not only light-giving; it is also fruit-bearing.** Robbins' definition ignores this normative aspect of economic life. In order to be fruit-bearing, the study of what it is is not enough; what ought to be cannot be ignored. 2. **Some critics characterize the relationship between ends and scarce means as presented by Robbins as, "artificial schema."** In his definition, Robbins fails to explain fully the nature of 'ends' and the difficulties associated with it. 3. **In the definition of Robbins, it is difficult to separate ends from means.** Robbins' assumption of definite ends is unacceptable, because immediate ends may act as intermediaries to further ends. In fact, it is difficult to separate ends from means distinctly. Immediate ends may be the means to the achievement of further ends, and means by themselves may be the ends of earlier actions. 4. **Economists have criticized Robbins' definition for its ethical neutrality.** Robbins' contention that 'Economics is neutral between ends" is unwarranted. Unlike physical sciences, economics is concerned not with the matter, but with human behaviour. It is therefore, not possible for economists to dissociate economics from ethics. Like ethics, economics to examines the virtues and vices of the ends. 5. **Robbins, it is said, has reduced economics merely to valuation theory.** Other aspects of the study of economics have been neglected. Robbins's definition does not circumscribe an aggregate already in existence, but it leaves outside the city wall a part of the city already existing. As 'Fraser says, "Economics is more than a value theory or equilibrium analysis or resource allocation." According to Boulding, "Prof. Robbins in defining economics as a valuation problem seems to deprive economics of the right to study welfare." Economics will be an incomplete body of knowledge without the study of welfare which Robbins neglects. 6. **Robbins' definition which assigns only an allocative role to economics does not cover macro-economics.** But, then, macro-economics was in the womb of the future when Robbins wrote. 7. **Similarly, the theory of economic growth remains outside the purview of Robbinsonian definition.** He takes resources as given and discusses only their allocation. Though the theory of growth explains how an economy grows where resources are not given, but increasing. 8. **The problem of unemployment, where there is not scarcity but the abundance of manpower, cannot come under this definition.** Thus, scarcity definition is impractical. It has reduced economics to simply a theory of value determination or science of choice making. It has nothing to do with the welfare of man. Robbins has made economics more abstract and complex and hence difficult and unfruitful. This detracts from its utility of the common man. ## Some Other Definitions 1. **Baxter and Rees offered the following definition:** "Economics is a science concerned with those aspects of social behaviour, and those institutions, which are involved in the use of scarce resources to produce and distribute goods and services in the satisfaction of human wants." 2. **Benham:** In Benham's words, "Economics is a study of the factors affecting the size, distribution and stability of a country's national income." 3. **J.M. Keynes**: In Keynesian terms, Economics is defined as the study of the administration of scarce resources and of the determinants of income and employment. In other words, it studies the causes of economic fluctuations to see how economic stability could be promoted. 4. **Milton H. Spencer**: "Economics is a social science concerned chiefly with the way the society chooses to employ its limited resources, which have alternative uses, to produce goods and services for present and future consumption." It describes and analyses the nature and the behaviour of the economy. 5. **Henry Smith**: Henry Smith defines 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." This definition covers important aspects of the study of Economics, viz., production and distribution of wealth and the determination of the level and changes in the total product of the nation which implies the theory of economic growth. ## GROWTH-ORIENTED DEFINITION More recently, the theory of Economic growth has come to occupy an important place in the study of Economics. Thus, a study of economic growth and development and of economic stability forms an integral part of the study of Economics. A good and adequate definition of economics must cover them. Prof. Paul Samuelson has given a definition of economics on the basis of the modern concept of growth criteria. According to Paul A. Samuelson, "Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities overtime and distribute them for consumption, now and in the future amongst various people and groups of society. Economics analyses the costs and the benefits of improving patterns of resources use." The above definition is very comprehensive because it does not restrict to material well-being or money measure as a limiting factor. But it considers economic growth overtime. **Main Features of Samuelson's Definition** Salient features of the growth-oriented definition as given by P.A. Samuelson are as follows: 1. **Like Robbins, Samuelson has given importance to the problem of scarcity of resources in relation to unlimited wants.** He has also accepted the alternative uses of resources. 2. **Samuelson regards economics as social science, unlike Robbins who regards it as a science of individual behaviour;** 3. **Samuelson has linked the growth aspects with the scarcity of productive resources.** 4. **The definition of Samuelson is also applicable in a barter economy where money measurement is not possible.** A barter economy has also to face the problem of scarcity of means in relation to ends. 5. **Prof. Samuelson includes a time element in his definition when he refers to 'overtime' which makes us study of economics dynamic.** Herein lies the superiority of Samuelson's definition over that of Robbins. 6. **Samuelson has given importance to the problem of consumption and distribution along with that of production.** 7. **By studying the problem of growth, Samuelson also highlights the study of macro-economics.** 8. **Samuelson lays stress on the use of the modern technique of "cost benefit analysis" to evaluate the development programme for the use of limited resources.** In this way, this definition is an improvement over the earlier definitions and is also more comprehensive and realistic than the earlier definitions. ## Limitations Though Samuelson's definition takes into account men, money, scarce resources and production aspect, but economics is not only the concern of material welfare, it has to be taken into account certain other socio-economic, politico-economic environment, which may give the human being maximum welfare. In modern-day economics Physical Quality of Living Index (PQLI) and Human Development Index (HDI) has been taken as the criteria of judging economic development of an economy. Hence, as economics is a broader concept, we should try to evolve a wider definition of economics. ## QUESTIONS 1. Is Economics a science of wealth? Is it also a study of material welfare? 2. Economics is "the logic of choice." Explain. 3. Discuss Robbinsonian definition of economics. Does it correctly explain the nature of economics? 4. "The fundamental economic problem is the problem of choice.” Discuss. 5. Define Economics as a science of wealth. Is it a dismal science? 6. Define Economics as a study of human welfare. 7. Explain the definition of economics as given by Robbins. Is it a satisfactory definition? 8. Explain Samuelson's definition of economics. Discuss its main characteristics. 9. Explain Adam Smith's definition of Economics. How did Marshall improve upon it? 10. How is Marshall's definition of Economics different from Adam Smith's definition? 11. Discuss the definitions of Economics. 12. "Economics is the Science of Choice." In light of this statement, discuss its implication and importance in modern economics. 13. Critically analyse the definitions of Economics. 14. Give a comparative analysis of the definition of economics. ## Objective Type Questions (A) Fill in the blanks: 1. __________ is the founder of Modern Economics. 2. French economist ________ stated, "Economics is the study of mankind in the ordinary business of life." 3. ________ deals with scarcity.