INTRODUCTION TO ECONOMICS

Economics is a social science that delves into the complex processes of how societies manage their limited resources to fulfill unlimited wants. The modern conception of economics as a distinct field of study dates back to the 18th century.

Historical Context:

• Ancient Times: Philosophers like Aristotle addressed economic problems primarily as issues of household management. Ethical considerations of economic behavior and the condemnation of excessive pursuit of money were prevalent.
• Early Modern Period: Mercantilist philosophers emphasized trade balances and currency regulation due to increasing trade and the rise of nation-states.
• 18th Century Shift: Physiocrats, David Hume, and notably Adam Smith, recognized the need for discoverable laws governing the production and distribution of goods, resources, and tools.
• Emergence as a Subject: Economics gained its independent identity in 1776 with Adam Smith's seminal work, "An Inquiry into the Nature and Causes of the Wealth of Nations."

Etymology and Early Names:

• The term "Economics" is derived from Greek words: "Oikos" (house) and "Nemein" (to manage). Thus, it means "the art of managing a household with limited resources to satisfy wants."
• Earlier names for economics include:
  • Catallactics or "science of exchange" (Whatley)
  • Plutology meaning "science of wealth" (Hearn)
  • Chrematistics or "science of money making" (Ingram)
• It was previously known as "Political Economy" and was often studied alongside political science.

WEALTH DEFINITION (ADAM SMITH – 1776)

Adam Smith, a Scottish economist (1723-1790 AD), is widely known as the "Father of Economics". His publication, "An Inquiry into the Nature and Causes of the Wealth of Nations" in 1776, established economics as an independent discipline.

• Core Definition: "Economics is the science which studies the production and consumption of wealth.

Key Proponents & Statements:

• Adam Smith: "Prosperity of the individuals constitutes the prosperity of the nation. Gain of wealth or after acquiring, the man can achieve his satisfaction."
• J.B. Say: "Economics is the science which treats Wealth."
• Walker: "Economics is the body of knowledge which relates to wealth."
• Senior: "The subject Treated by political economics is not happiness but wealth."
• J.S. Mill: "Economics is the practical science of production and distribution of wealth."

Focus:

• Adam Smith's focus was on understanding the factors that determine a country's wealth and its growth, emphasizing the proper utilization of resources.
• Initially, the subject matter was the production and expansion of wealth. David Ricardo later shifted emphasis to the distribution of wealth.

Critical Evaluation:

• Narrow Interpretation of Wealth: The term "wealth" was interpreted in a restrictive sense, primarily meaning "riches" or abundance, rather than a broader concept of well-being. This led to economists being perceived as solely suggesting ways to accumulate wealth.
• Religious Sentiments: In the 17th and 18th centuries, strong religious beliefs condemned the pursuit of wealth as "sordid and mean." Critics like Carlyle and Ruskin branded economics as "Gospel of Mammon" or a "dark and dismal science," and "bread-and-butter science," suggesting it ignored higher values of life.
• Narrowed Subject Matter: It confined the study of economics to goods and commodities required for physical subsistence and raising living standards.
• Ignored Immaterial Labour: It only considered the productive contribution of 'material' labor, overlooking the significant contribution of 'immaterial' labor (e.g., services of doctors, teachers).
• Secondary Place to Man: Classical economists prioritized wealth, placing man in a secondary position. It was unclear whether the ultimate objective was individual or societal welfare; wealth was considered the "be-all and end-all."
• Property Rights: The study of wealth raised questions about the acceptance and justification of various forms of property rights.
• Limited Scope: The wealth definition restricted the scope of economic study, eventually paving the way for the emergence of the Welfare Definition.

WELFARE DEFINITION (ALFRED MARSHALL – 1890)

Alfred Marshall (1842-1924), a British national and a pioneer of the neoclassical economic school, significantly reoriented economic thought. In his influential book "Principles of Economics," published in 1890, he offered a more comprehensive definition.

• Core Definition:"Political Economy or Economics is a study of mankind in the ordinary business of life. It examines that part of individual & social action which is most closely connected with the attainment & with the use of material requisites of well-being."
• Marshall's Stance: For Marshall, wealth is not an end in itself; human welfare should be the ultimate goal. 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'."
• Key Aspects of the Definition:
  • It is a study of human beings and their actions.
  • It focuses on the economic aspects of human life, specifically how individuals earn and spend money to achieve material welfare.
  • It primarily studies material welfare of human life.
• Supporting Views:
  • Edwin Cannon: "The aim of political economy is the explanation of the general causes on which the material welfare of human beings depend."
  • Prof. A.C. Pigou: The inquiry is restricted to "that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money." Pigou suggested money as a measure of economic welfare.
• Critical Evaluation (Mainly by Lionel Robbins):
  • Excludes Non-Material Welfare: The definition restricts economics to only "material things," ignoring non-material requisites (e.g., services of teachers, doctors, lawyers) which also contribute significantly to human welfare and have value. It's often hard to segregate material and non-material aspects in practice.
  • Inconsistency in Scope: While the definition rigidly excludes non-material objects, economists often include their contributions (e.g., services) as productive activities within economics, leading to a logical inconsistency.
  • No Link to Welfare for All Activities: Robbins argued that economics studies many activities (e.g., manufacturing alcohol, cigars) that are economic in nature (involving production and distribution of scarce goods to satisfy wants) but are not necessarily "conducive to welfare." This disconnect challenges the direct link between economics and welfare.
  • Illogical Concept of Welfare: Cannan argued that war is not conducive to material welfare, yet "Political Economy of War" is a valid economic study, showing how modern warfare can be financed successfully. This reveals contradictions in making material welfare the sole basis.
  • Difficulty in Measuring Welfare: Prof. Pigou's idea of money as a measuring rod for material welfare was questioned. Satisfaction derived from money can vary significantly between individuals (e.g., rich vs. poor), making money an imperfect measure of utility or happiness.
  • Pure Social Science Limitation: The definition makes economics a "pure social science," focusing only on individuals within society. This ignores individuals isolated from society, despite their being subject to fundamental economic laws. It was argued that economics should be treated as a "human science."
  • Classificatory, Not Analytical: Robbins criticized it as classificatory (dividing human activities into economic/non-economic) rather than analytical. He argued that economic activities can have non-economic aspects and vice-versa, making such a rigid division unscientific.

These criticisms by Robbins led to the rejection of the material welfare definition and paved the way for the Scarcity Definition.

SCARCITY DEFINITION (LIONEL ROBBINS – 1932)

Lord Lionel Robbins, in his 1932 book "An Essay on the Nature and Significance of Economic Science," provided the widely accepted scarcity definition.

• Core Definition: "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."
• Three Basic Propositions (The Economic Problem):
  • Ends (Human Wants): Human wants are unlimited, insatiable, and recurring. Individuals must choose and prioritize wants based on need, necessity, and urgency.
  • Scarce Means (Resources): The resources (time, money, natural resources, capital) available to fulfill these wants are limited. Scarcity is the fundamental economic problem faced by all societies.
  • Alternative Applications/Uses: The scarce means have alternative uses, meaning they can be used for different purposes. This forces individuals and societies to make choices about how to allocate their limited resources to satisfy their most pressing wants.
• Significance:
  • Robbins' definition explicitly highlights the fundamental problem of scarcity and the universal need for choice. This problem applies to individuals, households, firms, and entire economic systems.
  • It significantly expanded the scope of economics by focusing on the logical problem of choice under scarcity, rather than specific types of activities (material vs. non- material).
• Critical Evaluation:
  • Implicit Welfare: Critics argued that even Robbins' definition implicitly aims for maximum satisfaction or material welfare by suggesting that scarce means should be adjusted to multiple ends.
  • Restricted Scope (Marshall's School): Some from Marshall's school felt the definition still restricted economics by focusing purely on choice under scarcity, potentially overlooking broader societal goals.
  • Pure Science vs. Applied Science: Critics argued that this definition converts economics into a "pure science" concerned only with formulating generalizations, whereas economics should also be a "tool user" (an applied science) addressing practical problems.
  • Abundance as a Problem: This criticism arose during the Great Depression (1930s) when the global economic problem was seen as an "abundance" of goods/resources (excess supply, lack of demand) rather than scarcity, leading to unemployment and underutilization of capacity.
  • Excludes 'Purpose': Some economists argued that the definition overlooked the concept of 'purpose', which is fundamental to human action and decision-making.
  • Ignores Macroeconomics: It was criticized for primarily dealing with micro-analysis and failing to address large-scale economic problems of a country (e.g., inflation, national income).
  • No Growth/Stability Focus: The definition does not explicitly cover crucial aspects like economic growth, stability, employment, and underemployment, which are vital branches of modern economics.
  • Positive vs. Normative Science: Critics argued it makes economics a purely "positive science" (describing "what is") while economics also has a "normative science" aspect (prescribing "what ought to be").
  • Static and Inadequate: It was seen as static and lacking clarity on the dynamic interplay between means and ends, thus offering an inadequate explanation of the scarcity problem in a changing world.

GROWTH-ORIENTED DEFINITION (PAUL SAMUELSON – MODERN)

Paul Samuelson (1915-2009), an American economist, was the first American to win the Nobel Memorial Prize in Economic Sciences in 1970 for his significant contributions to economic theory. His work spanned various fields, including welfare economics, Keynesian economics, and economic dynamics.

• Core Definition: "Economics is the study of how people and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various persons and groups of society.”
• Supporting Views:
  • F. Benham: "Economics is the study of the factors affecting the size, distribution and stability of a country’s national income."
  • J.M. Keynes: "Economics is defined as the study of scarce resources and the determinants of income and employment."
  • C.E. Ferguson: "Economics is the study of the economic allocation of scarce physical and human means (resources) among competing ends, an allocation that achieves a stipulated optimizing or maximizing objectives."
• Focus: This definition is highly comprehensive and dynamic, integrating scarcity, resource allocation, distribution, and particularly, the dimension of time and growth. It emphasizes effective allocation and use of resources to achieve economic growth.
• Implications and Strengths:
  • Acknowledges Scarcity and Choice: Like Robbins, Samuelson stresses the problem of scarce means relative to unlimited ends with alternative uses.
  • Comprehensive Resource Focus: It views economics as a study of all economic resources (natural, human, physical) that satisfy human wants, recognizing their scarcity and alternative uses.
  • Dynamic Element (Time): A key strength is the inclusion of the element of time with phrases like "to produce various commodities over time" and "distribute them for consumption now and in the future." This makes the definition relevant to issues of economic growth and development across generations.
  • Wider Scope (Universal Applicability): The definition is applicable to all economic systems, including barter economies, as the problem of choice under scarcity is universal. It transcends the limitations of monetary economies.
  • Choice in a Dynamic Setting: It links the problem of choice not only to the present but also to the future. It accounts for the changing nature of human wants (tastes, fashions, aptitudes) over time, necessitating economic systems to concentrate on increasing resources, income, output, and employment to meet evolving societal needs.
  • Integration of Macroeconomic Aspects: It inherently includes the study of determinants of income, output, employment, and economic growth, addressing the macroeconomic concerns that Robbins' definition was criticized for neglecting.

CONCLUSION

Samuelson's growth-oriented definition is widely appreciated for building upon Robbins' scarcity principle while adding a crucial dynamic element and broader applicability, making it the most comprehensive and universally accepted modern definition of economics.