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EconomicsAssignment

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DEFINITIONS AND SCOPE OF ECONOMICS

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Prepared By: Submitted to:

Ritwiz Rishabh Dr. Anuradha Jha

Sources: Modern Economic Theoryby K .K. Dewettand various Internetsites

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ECONOMICS

Economics is a subject matter that studies different economic activities as directed towards the

maximisation of satisfaction or maximization of profit at the level of an individual and

maximisation of social welfare at the level of the country as a whole.

One of the earliest and most famous definitions of economics was that of Thomas Carlyle, who

in the early 19th century termed it the "dismal science." According to a much-repeated

(but erroneous) story, what Carlyle had noticed was the anti-utopian implications of economics.

Many utopians, people who believe that a society of abundance without conflict is possible,

believe that good results come from good motives and good motives lead to good results.

Economists have always disputed this, and it was to the forceful statement of this disagreement

by early economists such as Thomas Malthus and David Ricardo that Carlyle supposedly

reacted.

Another early definition, one which is perhaps more useful, is that ofEnglish economist W.

Stanley Jevons who, in the late 19th century, wrote that economics was "the mechanics of

utility and self interest." One can think of economics as the social science that explores the

results of people acting on the basis of self-interest.

Main Definitions of economics can be classified into four groups.

i) Science of wealth,

ii) Science of welfare,

iii) Science of scarcity,

iv) Science of growth and development

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1. Science of Wealth

There are many Economists who gave the wealth related definition of the economics, like Adam

Smith, J.E Cairnes andF.A. Walker. But, the definition given by the father of economics, Adam Smith,

is the first important and comprehensive definition. His book WEALTH OF NATION is the first

systematic book on Economics.

Definitions

Adam Smith: Economics is science of wealth.

J.E Cairnes: Economics deals with phenomenon of Wealth.

F.A. Walker: Economics is that body ofknowledge which relates to Wealth.

Science of wealth definition has two dimensions:

i) Meaning of wealth, andii) Causes of wealth.

Meaning of Wealth

At time around the industrial revolution, merchants or traders were the most powerful class in

Western Europe, and for them wealth only meant money. As the form of money at that time

was in gold, merchants declared gold as the only wealth people had. This definition rendered

merchants as the only productive class, as they created wealth by trade.

This definition harmed the interests of newly emerging class of petty industrialists and their

hard working workers. Adam Smith as spokesman of the emerging class widened the definition

to include all material goods he said that activities which did not result in material goods

production were unproductive.

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Causes of Wealth

After the new definition two things came in to knowledge.

1) Traders are not the only cause of wealth in the nation.2) Freedom of trade and enterprise were the greatest causes of wealth because Human

beings are born selfish. They have self interest. It is this self interest which guides economic

activity. When they are left to themselves, each individual would maximise his self interest or

wealth. When all the adult citizens of a nation maximise their self interest, the wealth of nation

would grow at a faster rate.

Exceptions

There are certain exceptions to the theory. There are certain groups or part of the society

where the self interest does not work.

They are:

1. Defence2. Public utilities3. Law order and justice.

Criticism

According to this definition Economics is the study of wealth. On that point, It was criticized

that the primary importance was given to wealth and secondary to man. In this way the human

being was degraded and ignored.

Definition given by Adam Smith was criticised on the following grounds:

1) Adam Smith included only material goods in economics and excluded services i.e. doctor's,

teacher's and lawyer's services. We know that their services are also as important as goods.

2) Main focus was only to earn the wealth. They did not study about the means to earn

the wealth.

3) He ignores the human welfare as compared to wealth. According to them wealth is more

important than human welfare.4) The word wealth is controversial and the majority of the people dislike it. They thought that

wealth is an evil.

5) Economics was supposed to teach selfishness and came to be called a "dismal science"

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2. Science of Welfare

After the industrial revolution, Adam Smiths self interest theory didnt materialise. Criticism of

believe turned reformist and revolutionary.

At the turn of the century, Alfred Marshall's Principles of Economics was the most influential

textbook in economics.

Marshall attempted to give a new definition. According to him Economics is the study of mankind in

the ordinary business of life; it examines that part of an individual and social action which is

most closely connected to the attainment of and the use of the material requisites of well-

being."

According to another economist Pigou The range of our enquiry becomes restricted to thatpart of social welfare which can be brought directly or indirectly into relationship with

measuring rod of money.

Critics

There are some critics to the theory of welfare.

According to Critics Economics is not only restricted to material things it also include things like

medical services, education and entertainment. Welfare is a dynamic subject it varies according

to individual satisfaction, as well as it varies with time to time and place to place.

Not only this sometimes Marshalls definition has been attacked on specious grounds. It has

been alleged, for example, that sociologists, psychologists, and even anthropologists study

"exactly" the same phenomena.

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3. Science of Scarcity

Most contemporary definitions of economics involve the notions of choice and scarcity.

Perhaps the earliest of these is by Lionel Robbins in 1935: "Economics is a science which studies

human behaviour as a relationship between ends and scarce means which have alternative

uses." Though at all the places there are definitions that are derived from this definition. The

exact wording differs from author to author; the standard definition is something like this:

"Economics is the social science that examines how people choose to use limited or scarce

resources in attempting to satisfy their unlimited wants."

According to this definition all goods and services having a price fall under the scope of

economics. And all these goods and services help to satisfy human wants.

Human Wants can be classified into three parts;

1) Necessities

2) Comforts, and

3) Luxuries

Necessities can be further divided into three parts.

(a) Necessities of existence(b)Necessities of efficiency, and(c) Necessities of convention.

Comforts and luxuries

i) They are related time and place.

ii) There positions are interchangeable. A luxury may be a comfort or even necessity for

someone at different point of time. It also changes its position with person to person. At the

same time for a person a good can be a luxury and for another it can be just comfort or even

necessity.

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Criticism

There are some criticisms to this definition of economics. It fails to explain certain points, like:

1) Despite being scare why labours remains unemployed or underemployed.2) It ignores the welfare situation.3) Apart from this it is not able to explain the situation of abundance in market.

There are certain criticisms to the definition given by the Lionel Robbins. His definition is

criticised on the following grounds:

1) Ethical aspect ignored: Robbins does not consider economics as a normative science. He

overemphasised economics as a positive science. In his view, economics only says how manbehaves and not how he should behave.

2) Too much stress on scarcity: Robbins lays too much stress on the scarcity aspect. He forgets

that an economic problem may also out of abundance.

3) Imprecise scope: According to Robbins's definition, the scope of economics is either too wide

or too narrow. In the wider sense, economics embraces almost the whole of man's life and in

the narrow sense economics would be a science of price theory or market equilibrium.

4) Neglect of social aspects: Robbins's definition studies and deals with individual behaviour

only. In fact, economics is a social science which deals with man's behaviour as a member of

society as well.

5) No human touch: Robbin's definition lacks human touch. A satisfactory definition should be

concerned not only with the adjustments of scarce resources to unlimited wants, but also with

human welfare.

6) Static, not dynamic: Dynamic economics is concerned with growth or development.

Robbins's definition takes a static view of the economic problem and therefore does not help us

to solve the problem of development.

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4. Science of Growth and Development

Economics is a study of how people and society end up choosing with or without the use of

money, to employ scarce productive resources that could have alternate uses; it studies

production of various commodities over time and their distribution for consumption, now or in

future, among various groups in the society. It analyses costs and benefits of improving

patterns of resource allocation.

Paul Samuelson, Nobel laureate in Economics in 1970, defines economicson the basis of

modern concept of growth criteria.

Economics is a study of how men and society choose with or without the use of money,

to employ scare productive uses resource which could have alternative uses, to produce various

commodities over time and distribute theme for consumption, now and in future among the

various people and groups of society.

There are other definitions of economics. Here are some:

- Economics is a science that deals with the study of the production and distribution of a

country's resources.

-E

conomics is a social science that deals with the study of the utilization of a country's naturalresources.

- Economics is a social science that deals with the study of how people can be influenced by

the economic system around them. For example, if the price of certain commodity goes up,

people will try to conserve that commodity or buy something that costs less.

- Economics is the fundamental argument in favour of free trade among countries and of

specialization among individuals - David Ricardo

- Jevons referred Economics as the calculus of pain and pleasure. Or it may be the effort of earnings

(disutility) and the amount of satisfaction (utility) we get from income earned by human effort.

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Conclusion

After analysing the above definitions we can say that no short definition of a growing science

like Economics would serve the purpose.

To define Economics as a science of wealth is too narrow or uncharitable. To define it as a study of mankind in the ordinary business of life is too broad and to

define it as the study of material welfare is too narrow.

To define it as a science of scarcity or choice or of human valuation is again too wideand to define it as that part of social welfare that can be brought directly or indirectlyinto relation with the measuring rod of money is too narrow.

Thus, every time we face a dilemma one may therefore agree with Prof. Viner that Economics

is what economists do.

Therefore, Economics can be defined as;

A social science concerned with the proper uses and allocation of resources for theachievement and maintenance of growth and stability.

Study of how in a civilised society one obtains the share of what other people haveproduced and of how the total product of society changes and is determine. - Prof.

Henry Smith.

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Scope

A branch of social science that deals with the study of production, distribution and the

consumption of the products and the services in an economy is known as economics. It has a

very broad scope.

The scope of economics is the area or boundary of the economics study. In scope of economics

we can analyze following three main points:

(1) Subject matter ofEconomics

(2) Nature ofEconomics.

(3) Limitations ofEconomics.

(1) Subject matter of Economics.

Economists on subject matter of economics.

There is a difference of opinion among economists regarding the subject-matter ofEconomics.

Adam Smith, the father of modern Economic Theory, defined Economics as a subject, which is

mainly concerned with the study of nature and causes of generation of wealth of nation.

Impressed by the condemnation of the 19th

century writers, like Carlyle and Ruskin, Alfred

Marshall introduced the concept of welfare in the study of economics. According to Marshall

Economics is a study of mankind in the ordinary business of life. It examines that part of

individual and social actions which is closely connected with the material requisites of well

being. In this definition, Marshall has shifted the emphasis from wealth to man. He givesprimary importance to man and secondary importance to wealth.

The Robinsons concept of the subject-matter of economics is that Economics is a science

which we studies about the human behaviour as relationship between ends and scarce means

which have alternative uses. According to Robbins

(i) human wants are unlimited(ii) means at disposal to satisfy these wants are not only limited,(iii) But have alternative uses.

Man is always busy in adjusting his limited resources for the satisfaction of unlimited ends. The

problems that centre round such activities constitute the subject-matters ofEconomics.

Paul A Samuelson, however, includes the dynamic aspects of economics in the subject matter.

According to him, Economics is the study of how man and society choose with or without

money, to employ productive uses to produce different types of commodities eventually and

distribute them for a utilization now and in future among various people and groups of

society.

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Subject matter of Economics has two parts:

(a) Microeconomics.(b)Macroeconomics

An economic system may be looked at as a whole or in terms of its innumerable decisionmaking units, producing units, individual factors of production and individual industries.

Microeconomics

Micro-economic theory studies the behaviour of individual decision making units such as

consumers, resource owners and business firms.

Importance: Microeconomics has both theoretical and practical importance.

Theoretical:

y It tells us how millions of consumers and producers in an economy takedecisions about the allocation of productive resources among millions ofgoods and services.

y It explains how through market mechanism goods and services produced inthe community are distributed.

Practical:

y Microeconomics helps in the formulation of economic policies calculated topromote efficiency in production and the welfare of the masses.

Limitation: Microeconomics analysis suffers from certain limitations.

y It cannot give an idea of the functioning of the economy as a whole.y It assumes full employment which is rare phenomenon, at any rate in the

capitalist world.

Macroeconomics

Macroeconomics is concerned with aggregates and averages of the entire economy, such as

national income, aggregate output, total employment general level of prices etc.

Importance:

y It is helpful in understanding the functioning of a complicated economic system.y For the formulation of useful economic policies for the nation, macro-analysis is of the

utmost significance.Limitations:

y It ignores individual altogether, whose welfare is the main aim of economics.y The macro-analysis overlooks individual differences. For Instance, the general price

level may be stable, but the price of food grains may have gone spelling ruin to the poor.

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(2) Nature of economics.

The economists are also divided regarding the nature of economics. The two types of questions

are generally covered in the nature of economics;

(i) Is economics a science or an art?Economics is both a science and arts. Economics is considered as a science because it is a

systematic knowledge derived from observation, study and experimentation. However, the

degree of perfection of economics laws less compared with the laws of pure sciences.

An art is the practical application of knowledge for achieving definite ends. A science teaches

us to know a phenomenon and an art teaches us to do a thing. For example, there is inflation in

a country. This information is derived from positive science. The government takes certain fiscal

and monetary measures to bring down the general levelprices in the country. The study of

these fiscal and monetary measures tobring down inflation makes the subject of economics as

an art.

After arriving at a conclusion that economics is both a science as well as an art, here arises

another controversy. Is economics a positive science or a normative science?

(ii) Is it a positive science or a normative science?

Economics as a positive or normative science. There is again difference of opinions among

economists whether economics is a positive or normative science. Lionel Robbins, Senior and

Friedman have described economics as a positive science. They opined that economics is based

on logic. It is a value theory only. It is, therefore, neutral between ends.

Marshall, Pigou, Hawtrey, Keynes and many other economists regard economics as a normativescience. According to them, the real function of the science to increase the well-being of man.

They have given suggestions in their works for promotion of human welfare.

For example, Malthus has given suggestions of checking the rising population. J.M. Keynes has

suggested measures to remove unemployment.

At this point we can agree with Mr. Frazer, that an economist who is only an economist is a

poor pretty fish. An economist must come forward to give advice to the problems facing the

human being like depression, unemployment, high prices, etc., for increasing his welfare.

Economics, to conclude, has both theoretical as well as practical side. In other words, it is

both positive and a normative science.

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(3)Limitation of Economics.

It is important to know the limitation ofEconomics in order to understand the limitation of this

science. Apart from the fact that Economics cannot predict the course of future events since its

laws lack definiteness, it must be recognised that economics analysis by itself cannot provide

answers to questions that arise in individual or social conduct. It does not have any formula by

which schemes of social development can be tested neither it has a sovereign remedy to

economic problems.

Apart from above points scope of economics includes the following matters:

y Study of human affair: The aim of economics is to study human activities which areconductive to human affair. Study of economics helps to search for the ways to fulfil

human needs by limited products.

y Deals with economic activities: Economics is concern with such activities as relate toacquiring wealth & spending wealth. These twos are twos corner-stones of economics.

y Deals with production, consumption distribution & exchange: Economics focus ondifferent activities like as production, consumption & distribution. Economic

instruments like as money, tax, interest rate are necessary for production, consumption,

exchange & distribution.

y Meet unlimited wants with limited resources: Human want is unlimited. But theresources are limited. Economics helps to meet unlimited wants by using alternative

resources. Economics is the study of how people can distribute their limited resources

to produce & consume goods to satisfy their wants & maximize their utilities.

y Deals with domestic & international trade.y To solve economic problems: The basic 3 problems of economics are what to produce,

how to produce & for whom to produce. In order to use the limited resources efficiently

& provide opportunities & systematic ways economics studies. Thats why economics

has to tackle these fundamental problems.

y Market economy: Economics deals with demand, supply & balance of market. Itdetermines price of & quantities of commodities.

y Science of welfare: It deals with mankind & individual society & even state. This fact isclear from the definition of Alfred Marshall.

y Positive science: What is happening in an economy that are discussed by positiveeconomics & based on the current events & positive economist can calculate about the

future.

y Normative science: All the concurrent events arent beneficial for the society.Normative economists discuss about the facts that are beneficial for the society.