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Definitions of Economics
We can have a good idea about the nature and scope of economics by studying some of the important definitions of economics. Some of the important definitions of economics are those of leading economists like Adam Smith, Alfred Marshall, Lionel Robbins and Samuelson.
Adam Smith (1723 -90) defined economics as follows : 'Economics is the science of wealth'. He is the author of the famous book 'Wealth of Nations' (1776). He is known as the Father of Political Economy because he was the first person who put all the economic ideas in a systematic way. It is only after Adam Smith, we study economics as a systematic science.
The term 'wealth' has a special meaning in Economics. In the ordinary language, by 'wealth', we mean money, but in economics, wealth refers to those goods which satisfy human wants. But we should remember all goods which satisfy human wants are not wealth. For example, air and sunlight are essential for us. We cannot live without them. But they are not regarded as wealth because they are available in abundance and unlimited in supply. We consider only those goods which are relatively scarce and have money value as wealth.
We study about consumption, production, exchange and distribution of wealth. J.S. Mill defined economics as 'the practical science of the production and distribution of wealth'. Adam smith was of the view that economics was concerned with the problems arising from wealth-getting and wealth-using activities of people. He was interested mainly in studying the ways by which the wealth of all nations could be increased.
There is a lot of criticism against Adam Smith's definition of economics. It has got a bad name for economics. Some social scientists like Ruskin and Carlyle called it 'a dismal science', 'a dark science'. But this criticism is unfair, because it is based on a misunderstanding about the nature and scope of economics. As this definition emphasized 'wealth', they thought it is all about money. They concluded that economics taught men and women how to make money. So they called it a selfish science as in their opinion it emphasized on 'the means to get rich'.
The above charge against economics is a false one. In economics, wealth does not refer to money. It refers to the scarce goods which satisfy our wants. Moreover, early economists used the term 'wealth' in the sense of welfare.
A great demerit of Adam Smith's definition is that there is over-emphasis on wealth. There is no doubt that we have to study about wealth in economics. But it can be only a part of the study. There is the other side. In fact, it is a more important side and that is the study of man. Economics is a social science. Hence the proper study of mankind should be man and not wealth alone.
When we discuss Adam Smith's definition of economics, we have to keep in mind the time in which he lived. He was writing his book at a time when England was on the eve of Industrial Revolution. The large investments of capital and use of largescale machinery enabled England to produce wealth on a large scale. So it is only natural that Adam Smith emphasized on wealth and considered economics as 'an enquiry into the nature and causes of the wealth of nations'.
Alfred Marshall (1842-1924) wrote a book Principles of Economics in 1890. In it, he defined economics as 'a study of mankind in the ordinary business of life'. An altered form of this definition is : 'Economics is a study of man's actions in the ordinary business of life'.
Marshall agrees that economics studies about wealth. But he does not accept the view that economics studies about wealth alone. In the words of Marshall, 'Economics is on the one side a study of wealth, and on the other and more important side, a part of the study of man. Man is the centre of his study. According to him, the study of man is more important than the study of wealth.
In economics, we do not study about all aspects of humankind. As Cairncross puts it, economics studies about man as 'buyer and seller, producer and consumer, saver and investor, employer and worker'. It studies about how people get their income, how they use it and how they make best use of their resources.
Economics studies how people try 'to increase the material means of well-being'.
According to this definition, we may say that economics is the study of the causes of material welfare.
Marshall's definition is known as material welfare definition of economics because of its emphasis on welfare.
There is no doubt that Marshall's definition is a great improvement over the definition of Adam Smith. For its emphasis is on social problems. And economics is a social science. Moreover, it tells us about the link between wealth and welfare. But the main idea of Marshall that economics is a science that deals with material welfare has been strongly criticized. Lionel Robbins is a great critic of this definition. He says that Marshall's definition misrepresents the science of economics.
First, if we go by the definition of Marshall, in economics we should consider only those activities which promote material welfare. But many activities do not promote welfare but are rightly considered as economic activity. For example, we know that alcoholic drinks and cigarettes are bad for our health. But these commodities are produced and sold. There is a market for them. And there are buyers and sellers. So the production and distribution of these goods is economic activity. Let us take another example. War does not promote material welfare. But we have 'economics of war'. And it is an important branch of economics. There are many economic problems with regard to war. Sometimes, the economic causes of war are more important than the political and social causes. So it is not right to say that economics studies material welfare.
Second, some activities promote welfare but not material welfare. For example, the activities of doctors, lawyers, actors, musicians promote our welfare. But their labour does not result in the production of material goods. If we follow the material welfare definition of economics, we cannot consider the activities of the above categories of labour as economic activity as they do not promote material welfare. But we make use of their services. We pay a price, sometimes very high price, for their services. Their services have economic value. It is misleading to describe economics as the study of the causes of material welfare. In the words of Lionel Robbins, 'whatever economics is concerned with, it is not concerned with the causes of material welfare as such'.
Third, Marshall's definition is classificatory. It is not analytical. It considers the production of material goods (e.g. chairs, tables, cycles and cars, bread) alone as economic activity. As the services of a teacher or a judge do not produce material goods, they are not considered as economic activity. This is a wrong view. As Lionel Robbins says, 'we do not say the production of potatoes is economic activity and the production of philosophy is not'.
Lastly, by introducing ethical concepts like welfare, economics will become an inexact science. For it is rather difficult to measure welfare. And some economic policies which promote the welfare of some people may affect the welfare of others.
In spite of the above criticism against Marshall's definition, we should not forget that Marshall has widened the scope of economics by establishing a link between wealth and man and his welfare.
Modern definitions of economics are based on a theory of scarcity and choice.
Lionel Robbins has defined economics as follows : 'Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses'.
Robbins has given the above definition in his book 'An Essay on the Nature and significance of Economic Science'.
The definition of Robbins is based on the following basic assumptions
i Ends are various. The term 'ends' mean wants. Human wants are unlimited.
ii Means are limited. Means like time, money and resources are limited.
iii We can put time and money to alternative uses. For example, though time is limited, we can use it for different purposes. We can use time for earning money or we may enjoy it as leisure, and
iv All wants are not of equal importance.
We have to note certain things here. The fact that we have many wants is not of interest to an economist by itself. For example if you want to do two things and you have enough time and means with which to do them, and you do not want the time or means for anything else, then you need not economize anything. Though your means are limited, if they do not have alternative uses, you cannot economize anything. Further, if all wants are of equal importance, you cannot economize anything. We know time is limited. There are only 24 hours in a day. If a worker wants only money he has to work for long hours and forgo leisure. If he wants leisure, he has to forgo his income. He cannot have both at the same time.
We may, however, note that all means which satisfy human wants are not limited. For example, air and sunshine are available in abundance. They are free goods. But many things we want are scarce in relation to our wants. So economics studies human behaviour as a relationship between unlimited wants and scarce means. As means are limited, we have to pay a price for them. We study in economics how the prices of scarce goods are determined. We have to choose among different wants. That is why we say that scarcity and choice are central problems in economics. Economics is the science of choice.
Choice between alternatives is the basic principle underlying all economic activity. This is applicable to all economic systems - capitalism, socialism and mixed economy.
The capitalist economy is also known as market economy. There, the consumer will have a wider choice than in a socialist economy which is also known as command economy. A socialist economy is a planned economy. As all basic decisions are taken by the government, the consumer will have limited choice. And we have mixed economy. India is a good example of mixed economy where public sector and private sector play important roles in different economic fields. In some fields, the consumer has more choice and in other areas where the State has greater control, he has limited choice. But under all these systems, there is some kind of planning, it is a question of degree. And all economic life involves planning. As Robbins puts it. 'To plan is to act with a purpose, to choose, and choice is the essence of economic activity'. Lionel Robbins' definition is also known as scarcity definition of economics.
The definition of Marshall classified human behaviour into economic activity and non-economic activity. It considered only those activities which promoted material welfare as economic activity. But Robbins' definition covers the whole field. If there is scarcity of a thing in relation to the demand for it, it becomes the subject - matter of economics. That way, even the labour of those who provide services (eg. lawyers, doctors, actors) are taken for study in economics.
Another merit of Robbins' definition is it makes economics a scientific study. Ethical aspects of economic problems are not taken into account in discussions. In other words, the moral aspects are not considered. And it does not try to establish a link between economics and welfare. But some economists criticize this view. They say that as economics is a social science, its aim should be promotion of human welfare. That is why some economists say Robbins' definition has no human touch about it. It looks at economics only as the science of pricing process. But economics is more than a theory of value or resource allocation.
According to Robbins, an economic problem will arise only when there is scarcity, but it may arise during times of abundance as well. For example, the great depression of 1930s was caused not so much by scarcity but by plenty. That is why the world depression was described as poverty in the midst of plenty.
In spite of the above criticisms, we have to note that most of the economists have accepted the definition of Robbins because it emphasizes scarcity and choice which are two important facts of life under all economic, political and legal systems.
It is true that there have been improvements in the methods of production because of technological advancements. But scarcities are always with us. That is why we say economics is the science of scarcity.
Samuelson's definition is known as a modern definition of economics.
According to Samuelson, 'Economics is a social science concerned chiefly with the way society chooses to employ its resources, which have alternative uses, to produce goods and services for present and future consumption'.
The above definition is general in nature. There are many common points in the definitions of Robbins and Samuelson.
Samuelson's definition tells us that economics is a social science and it is mainly concerned with the way how society employs its limited resources for alternative uses. All this we find in the definition of Robbins. But Samuelson goes a step further and discusses how a society uses limited resources for producing goods and services for present and future consumption of various people or groups.
An interesting point that Samuelson tells is that the society may or may not make use of money.
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