Economics · Chapter 2
Study notes aligned to the official NEB syllabus.
The word economics came into the English language from the Greek word "Oeconomicus" by Xenophon in 431 B.C., which is a Socratic dialogue principally about household management. So, economics means managing a household with limited resources, i.e. income. The history of economics is as old as the history of mankind. The start of economics is traced back to Plato and Aristotle. Plato gave his economic ideas in his book "The Republic" and Aristotle in "Politics and Ethics". According to Aristotle, economics is the science of household management and an art of wealth-getting and wealth-spending.
Economics is a social science. It was treated as a part of political science, ethics and religion until the 18th century. The classical economists developed it as a separate social science in the 18th century. Thus, economics is a science in the sense that economists aim to develop theories of human behaviour and to test them against the facts.
According to Jacob Viner, "Economics is what economists do." The covered area of economics depends upon economists, so there is no universally acceptable definition of economics. As society is changeable, definitions of economics also change. According to Barbara Wootton, "Whenever six economists are gathered there are seven opinions."
The great economists Adam Smith, Alfred Marshall and Lionel Robbins have given the definitions of economics as follows.
Adam Smith (1723-1790), a citizen of Scotland, is popularly known as the father of economics as well as the leader of classical economics. He was the first economist to present a systematic analysis of economics, so he is regarded as the "Father of Economics." Adam Smith published his epoch-making book "An Inquiry into the Nature and Causes of the Wealth of Nations" in 1776 A.D. This book is popularly known as the Wealth of Nations and is considered the Bible of the science of economics. From 1776 to 1850, several great economists such as J.B. Say, David Ricardo, T.R. Malthus and J.S. Mill fully supported and followed the economic ideas of Adam Smith. They were of the view that economics is concerned with the production, consumption, exchange and distribution of wealth.
Hence, according to the classical economist Adam Smith, economics is the subject that studies wealth. Wealth is the base of human happiness.
Characteristics of the wealth definition:
1. Study of wealth: Economics is concerned only with the study of wealth. It deals with the production, consumption, exchange and distribution of wealth. It studies human beings who are engaged in the production and consumption of wealth, and does not study those who are not engaged in the production of material things.
2. Main goal of human beings is to earn wealth: The main goal of a human being is to earn money, because wealth or money is the only means that can satisfy human wants. Human wants are fulfilled by wealth.
3. Primary place to wealth: This definition gives primary focus to wealth and secondary emphasis to human beings. The classical economists regarded man as a means and wealth as an end. Therefore, this definition gives first priority to wealth and second priority to human beings.
4. Employed labour is the source of wealth: Adam Smith's definition assumed that wages earned by the active human resource are the one most important source of income of a country. He suggested that active labour can earn a high amount of wages only through the division of labour in the production and distribution of goods and services.
5. Study of economic man: The wealth definition imagines the study of a man who always thinks about earning more and more wealth throughout his life. A human being of such a nature is an "Economic Man". Such a man always thinks about earning wealth, involves himself in the production of wealth, and has no concern with human qualities like love, affection, honesty, beauty and co-operation.
Criticisms of Adam Smith's definition:
The wealth definition has been criticized on several grounds by different economists such as Carlyle, Ruskin, Mankiew and Morris. They characterized it as a Bastard Science, Dismal Science, Bread and Butter Science, and Gospel of Mammon. The neo-classical economist Alfred Marshall criticized it on the following grounds:
i. Too much emphasis on wealth: Adam Smith considered that economics deals only with wealth and material goods. But critics pointed out that economics studies not only material goods but also some non-material things, such as the services of a teacher, a lawyer or an engineer, which also fulfil human needs and wants.
ii. Incomplete definition: The wealth definition is incomplete and lacks an analytical approach. It does not shed any light on the nature of economic problems like unemployment, inequality, poverty, scarcity and corruption. It emphasizes the earning and spending of wealth but ignores the scarcity and choice involved in the production and distribution of wealth.
iii. Wrong assumption of a single source of wealth: According to the wealth definition, the only source of the wealth of a nation is employed labour. But critics viewed that human resources, capital resources, physical resources, rents, interest and profits are also sources of wealth.
iv. Wrong assumption of economic man: Adam Smith included only those persons who are involved in economic activities. But apart from wealth, there are other qualitative aspects in human life like friendship, love, cooperation, respect, self-esteem and sympathy, which enrich a human being more than wealth. Thus, the pure economic man as explained by Adam Smith cannot exist in the real world.
v. Wrong assumption of primary place to wealth: The wealth definition gives wealth the primary place and human beings the secondary place. But critics argue that man should be given first priority and wealth second priority, because all types of wealth are used by human beings according to their objectives.
Alfred Marshall, a popular neo-classical British economist, developed the new definition of economics known as the welfare definition. Marshall was the founder and leader of the neo-classical school of economics. He published his well-known book "Principles of Economics" in 1890 A.D. According to him, "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." Marshall gave more emphasis on man than wealth. Many economists such as A.C. Pigou, Edwin Cannan and W.H. Beveridge supported Marshall's view.
Characteristics of the welfare definition:
1. Study of material welfare: Economics studies only those activities of a common man that are concerned with the promotion of economic welfare. Marshall claimed that any form of goods or services of economic value that fulfils human desires and needs comes within the subject matter of economics. He put emphasis on the enhancement of material welfare through the consumption of material goods.
2. Study of ordinary human beings: The welfare definition gives the main priority to the study of the ordinary human being rather than the economic man of the wealth definition. According to Marshall, ordinary human beings get involved not only in the accumulation of wealth but also try to experience love, sympathy, goodwill, respect and honour to make their social life more meaningful. It means economics studies the rational man and ignores the activities of the irrational man like a Sadhu or Sanyasi (an isolated person).
3. Primary concern to man: According to Marshall, economics is the study of mankind in relation to wealth. He explains how a man in the ordinary business of life earns wealth and utilizes his income to achieve maximum satisfaction. Wealth is made for the benefit of human beings, but human beings are not for wealth. Primary importance should be given to human beings and secondary importance to wealth.
4. Economics as a social science: Economics is a social science. It studies the economic problems of individuals who live in an organized society. A man like Robinson Crusoe, an individual living outside human society, does not fall under the study of economics. Therefore, economics does not study isolated persons like monks, saints and beggars, because they are unaware of social problems and are not rational human beings.
5. Normative science: According to the welfare definition, economics is a normative science, since it studies what ought to be done to promote the material welfare of man and what should not be done. It must be the job of an economist to provide value judgment over economic phenomena rather than to express facts only.
Criticisms of the welfare definition:
The welfare definition was accepted as a correct definition until the arrival of the modern economist Lionel Robbins. It focused only on material things and did not explain the services that give maximum satisfaction and welfare to human beings. Its criticisms are:
i. Classificatory definition: Marshall classified human activities into material and non-material welfare, and economic and non-economic goods, but he could not distinguish clearly between these terms.
ii. Narrow definition of economics: Marshall included only material things within the study of economics and excluded all non-material things. But there are many non-material activities that fulfil human wants and needs, for example the services of teachers, doctors, engineers and lawyers, which are non-material in nature. Therefore, this definition narrowed the scope of economics.
iii. Welfare cannot be quantitatively measured: Money has been taken as an instrument for the measurement of welfare. Though money may be a rough measure of welfare, it cannot be a satisfactory measure, because poor and rich persons derive different levels of satisfaction from equal amounts of money. Welfare is a psychological phenomenon that varies from individual to individual. Therefore, it is unscientific to define economics in terms of welfare.
iv. Connection between satisfaction and welfare is wrong: According to the welfare definition, every material thing provides satisfaction and then welfare. But according to critics, every material thing may give satisfaction but not welfare, and may be harmful to human beings, such as wines, cigarettes, drugs and alcohol.
v. Pure social science: The welfare definition treats economics as a pure social science that does not study men living outside society. But this is not true, because even an isolated man such as Robinson Crusoe is subject to the laws of economics, such as the law of diminishing marginal utility and the law of equi-marginal utility. Hence, economics should be taken more as a human science than a social science.