1st year intermediate Economics study material

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Definitions of Economics

If we look around, we find people engaged in different activities like agriculture, trade, business and industry. The motive behind these activities is to earn money for the satisfaction of their wants. The activities performed for earning money are called economic activities. Economic activities form the subject matter of economics.

Meaning of Economics
Economics is a social science which studies individuals and organizations engaged in production, distribution and consumption of goods and service. Economics is the systematic study of the never ending efforts of man to satisfy his endless wants with limited resources.
The word ‘economics’ and ‘economy’ both come from two greek terms – oikos and neme in meaning “household management” – the management of the household being one of the most familiar fields for the practice of the economy. With the publication of Adam Smith’s famous book “An familiar fields for the practice of the economy. With the publication of Adam Smith’s famous book “An Enquiry into the Nature and Causes of Wealth of Nations” in 1776, Economics saw the light of the day.
Since it is not possible to satisfy all wants with the limited resources, every society must decide some way of selecting those wants which can be satisfied. Thus a society is faced with the problem of choice – choice among the vast array of wants that are to be satisfied. The scarcity of resources therefore compels us to choose among different channels of production to which resources are to be devoted. In other words, the problem of allocating scarce resources so as to achieve the greatest possible satisfaction of wants assume importance. This is known as the economic problem.
The nature and scope of economics are related to “What is economics? Is it a study of wealth or human behavior or of scarce resources? The scope of economics is very wide. It includes, the subject matter of economics, whether economics is a science or an art and whether it is a positive or a normative science. A study of definitions of economics throws light on the nature of economics.
Definitions of Economics
Various definitions of economics emerged during the course of history. It is not possible to study all these definitions individually. For simplicity purpose, all these definitions can be studied under the following categories:
1. Wealth definition of Adam Smith
2. Welfare definition of Marshall
3. Scarcity definition of Lionel Robbins
4. Growth definition of Prof. Samuelson

1. Wealth definition
The classical economists beginning with Adam Smith defined economics as the science of wealth. He defined it in his famous book on ‘wealth of nations’, as “an enquiry into the nature and causes of wealth of nations”. Besides Adam Smith, other classical economists have also regarded economics as the study of Wealth. In the words of J.B. Say, “the aim of political economy is to show the way in which wealth is produced, distributed and consumed”. J.S.Mill and others also have given similar definitions.

I. Important Features of Wealth Definition
1. The main objective of human activity is the acquisition of wealth.
2. Wealth refers to goods produced.
3. Man is treated as selfish whose objective is to accumulate more and more wealth.

II. Criticism
They view that ‘economics is a science of wealth’ was subjected to severe criticisms for its narrow View.
1. Many economists criticized this definition. Carlyle, Ruskin and others criticized that economics must discuss ordinary man’s activities and not those of the economic man. They termed it as a “dismal science”.
2. Marshall criticized that wealth is only a mean to an end, but not an end itself.
3. Adam Smith’s definition covers only materialistic human activities and not the non-materialist activities like the services of teachers and doctors. Due to this the scope of economics is limited.
4. This definition concentrated mainly on the production side and neglected the distribution side.

2. Welfare Definition
Alfred Marshall raised economics to a dignified status by advancing a new definition in 1890. He shifted emphasis from production of wealth to distribution of wealth (welfare). In the words of Marshall, “political economy or economics is a study of mankind in the ordinary business of life; it examines that part of 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 side, a study of wealth and on the other and more important side, a part of the study of man.”
Economists who followed the foot-prints of Marshall like A.C.pigou and Edwin Cannan have given the same type of definitions. In the words of Pigou “the range of enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”. Edwin Cannan, defined it as “the aim of political economy is the explanation of the general causes on which the material welfare of human beings depends”.

I. Important Features of Welfare Definition
1. Marshall used the term “economics” for “political economy” to make it similar to physics. He assumed that economics must be a science even though it deals with the ever changing forces of human nature.
2. Economics studies only economic aspects of human life and it has no concern with the political, social and religious aspects of life. It examines that part of individual and social action which is closely connected with acquisition and use of material wealth which promote human welfare.
3. Marshall’s definition considered those human activities which increased welfare.
4. This definition has given importance to man and his welfare and recognised wealth as a mean for the promotion of human welfare.
II. Criticism
Marshall’s definition is not free from critics. Robbins in his “Essay on the Nature and Significance of Economic Science” finds fault with the welfare definition of economics.
1. Economics is a human science rather than a social science. The fundamental laws of economics apply to all human beings and, therefore, economics should be treated as a human science and not as a social science.
2. Lionel Robbins criticized it as classificatory. It distinguishes between materialistic and non materialistic goods and not given any importance to non-materialistic goods which are also very important. Therefore, it is incomplete.
3. Another serious objection is about the quantitative measurement of welfare. Welfare is a subjective concept and changes according to time, place and persons.
4. Marshall includes only those activities which promote human welfare. But the production of alcohol and drugs do not promote human welfare. Yet economics deals with the production and  consumption of those goods.
5. Robbins has taken serious objection for not considering ‘scarcity of resources‘. According to Robbins’ economic problem arises due to limited resources which are to be used to satisfy unlimited wants.

3. Scarcity Definition
Marshall’s welfare definition until the publication of Lionel Robbins’ book "An Essay on the Nature and Significance of Economic Science ” in 1932. Robbins’ definition brought out the logical  inconsistencies and inadequacies of the earlier definitions and formulated his own definition of economics. He has given a more scientific definition of economies. In the Words of Robbins, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

I. Main Features
1. Human Wants are Unlimited: The fulfillment of one want gives rise to a number of new wants.
2. Means are Scarce: The means of a person by which his wants may be satisfied are limited. It leads to economic problems as all wants cannot be satisfied by these limited means.
3. Alternative Uses of Scarce Means: Resources are not only scarce but also have multiple uses. For example electricity can be used in homes and also in industries. A piece of land Can be used to  produce rice or wheat. If a scarce factor is used for the satisfaction of one want, less of it will be available for other wants. Hence, man has to make a decision regarding the alternative uses of resources.
4. Man has therefore to choose between wants. Problem of choice arises.

II. Superiority of Robbins’ Definition
Robbins’ definition is superior to the earlier definitions in more than one way. The reasons are given below :
1 . It is non-classificatory, as it includes all human activities whether they promote human welfare or not.
2. This is a universally accepted definition. It is applicable to all types of societies, because the scarcity of resources is felt by individuals as well as societies.
3. Rubbins’ definition of economics is neutral between ends. Being a positive science it does not pass any value judgments regarding ends.

III. Criticism
Some followers of Marshall like Durbin, Fraser, Beveridge and Wooton have critised Robbins’ definition by saying that it lacks human touch and that it is personal, neutral and devoid of any normative or ethical element. He does not seek to make economics a study of human welfare. Some of them criticized as “barren scholasticism”, while others accused him of “behaviourism”.
1 . Even though Robbins criticized Marshall ’s welfare definition, he has introduced the welfare concept indirectly in his definition. Therefore the criticism of welfare definition is equally applicable to it.
2. Another criticism of Robbins’ definition is that this definition does not distinguish between ‘ends’ and ‘means’.
3. Scarcity definition has been criticized by economists as to say “economics is neutral between ends”. But economics cannot be neutral between ends.
4. Robbins made economics a positive science. As per Macfie, “economics is fundamentally a normative science, not merely positive science like chemistry".
5. Robbins’ definition is not applicable to a dynamic society where changes take place and the problem of scarcity of resources can be overcome with the passage of time.
6. Mrs. Joan Robinson took serious objection to scarcity of resources. How best you utilize them is more important than the idle resources.

4. Growth Definition
Growth definition of economics is given by Prof. Paul A Samuelson, an American Economist and Economics Nobel Prize winner in 1970. Samuelson’s definition includes the time element and is dynamic in nature. Hence it is called a growth oriented definition of economics. In the words of Samuelson,” economics is the study how people and society choose, with or without the use of money, to employ scarce and productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption, now or in the future among various people and groups in the society. It analyses the benefits of improving patterns of resource allocation”.

Important Points
Some of the important points in Samuelsons’ definition are:
1. His definition like Robbins’ agreed that resources are not only limited but also have several uses.
2. Prof Samuelson‘s definition is dynamic in nature as it considers both the present and future consumption, production and distribution.
3. Growth definition deals with the problem of choice in a dynamic society. Hence his definition broadened the scope of economics.
4. Samuelson’s definition is superior to that of Robbins’ because he shifted the emphasis from the scarcity of resources to income, output and employment and later to the problems of economic growth.