WHAT IS THE DEFINITION OF ECONOMICS

DEFINITION OF ECONOMICS

1. WEALTH DEFINITION:–  Adam Smith (1723-90). The great Scottish economist.
2. WELFARE DEFINITION:- Alfred Marshall (1842-1924). The English economist.
3. SCARCITY DEFINITION:-  Lord Robbins (1898-1984). The British economist.
4. GROWTH DEFINITION:-Paul Anthony Samuelson (1915-2009). An American economist.

WEALTH DEFINITION:-

Adam Smith’s emphasis on wealth as a subject matter of economics in his great book- An inquiry into the nature and causes of the wealth of nations- The latter, usually abbreviated as the ‘the wealth of nations’ – was published in 1776.

According to Smith, – “the great object of the political economy of every country is to increase the riches and power of that country”. To him, wealth may be defined as those goods and services which command value in exchange. He emphasizes that economics is concerned with the generation of the wealth of nations. It is not be concerned only with the production of wealth but also the distribution of wealth. The production and distribution of wealth in the market are governed by the “invisible hand” mechanism of the ‘price system’.

CHARACTERISTICS

STUDY OF WEALTH:  According to wealth definition, economics is the study of wealth. Hence it deals with production, consumption, exchange, and distribution.

ECONOMIC MAN:  The man who is always ‘self-centered’ and ‘self-interested’ in nature is known as an economic man.

ONLY MATERIAL COMMODITIES:  The definition centered its study only on material commodities while it ignores non-material goods as sunlight, rainwater, air, etc.

HUGE STRESS ON WEALTH: The main aim of an economy is to become rich. Hence, it gives more stress on wealth, not anything else.

CRITICISM:

• MATERIALISTIC CONCEPT: According to wealth definition, wealth is the sole end of all human beings. However, in reality, wealth is not an end in itself. It is only a means and that too one of many means for man’s happiness and welfare.
• AMBIGUOUS: The wealth definition is ambiguous, i.e., meaning is not clear. In earlier days wealth means only material goods like money, gold, silver, land, cattle, etc. which are visible. However, it ignores non-material goods like the services of a doctor, washerman, barber, teacher, etc. All these immaterial goods are as good as wealth.
• NEGLECT OF WELFARE: This definition emphasis more on wealth, hence it ignores the most fundamental concept viz. welfare. The definition is, therefore, incomplete and narrow.
•  CONCEPT OF ECONOMIC MAN: Smith’s definition is based on the concept of economic man. Marshall and Pigou believed that an economic man who works for selfish ends alone is not found in real life.
• WELFARE DEFINITION:

Marshall shifted his attention from wealth to welfare and from individual to society. Marshall said that wealth is not and in itself. Instead, it is a means to an end. The end is human welfare. According to Marshall, 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.” He also suggests that “economics enquires how a man gets his income and how he uses (spends) it. Thus, it is on one side a study of wealth and on the other and more important side, a part of the study of man”. Thus, in Marshall’s definition, we find a link between wealth and welfare.

CHARACTERISTICS:

STUDY OF HUMAN LIFE: According to this definition of economics studies human life. So, there is a particular objective of this subject which is human life.

IMPORTANCE OF SOCIETY: According to this definition society has been given much importance and all those people who earn and consume wealth have been discussed.

AN ORDINARY MAN DISCUSSED: Economics is a social science that studies man’s social life. Those people who don’t perform social activities like saints and mad will not be studied in economics.

CRITICISM:

• NARROW AND INCOMPLETE: Prof. Robbins criticized Marshall’s definition of economics as narrow and incomplete. Because, this definition only includes material goods and excludes not material goods like the service of a teacher, doctor, lawyer, and others.
• THE CONCEPT OF WELFARE IS NOT CLEAR: Robbin’s pointed out the Marshall’s concept of welfare is unclear and vague. The concept of welfare relates to the state of mind of a person. This concept changes with time, place, and circumstances. For example, alcohol drinking in India is considered welfare reducing, whereas it is regarded as necessary or welfare promoting in some western countries.
• WELFARE IS SUBJECTIVE AND DIFFICULT TO MEASURE: Robbin is also criticized in the use of word welfare because it is a subjective phenomenon that cannot measure objectively. Marshall sought to measure welfare with the help of money. But money is not a satisfactory measuring rod of welfare.
• ONLY SOCIAL SCIENCE: Marshall states that economics studied the activities of persons who live in society. But what about the extraordinary persons who like a saint in the caves of the Himalayas or sailor in the sea. According to Robbins, economics studied about all man and is a human science.
• SCARCITY DEFINITION

The most accepted definition of economics was given by Lord Robbins in 1932 in his book “An essay on the nature and significance of economic science”. His definition runs in terms of scarcity. He defines “economics as the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.

CHARACTERISTICS:

UNLIMITED WANTS: Robbins suggested that human wants are endless as soon as one wants gets fulfilled, then automatically several wants grow up.

LIMITED MEANS: The resources or means to satisfy them are limited. The goods and services which satisfy human wants are scarce in relation to their wants. Here the term scarcity is used not in the absolute sense but the relative sense i.e., in relation to demand.

ALTERNATIVE USE OF RESOURCES: Resources are scarce as well as they have different uses i.e., they can be put to use for more than one purpose. For instance, electricity is limited but can be used to operate much equipment.

PROBLEM OF CHOICE: The emergence of limited resources in relation to unlimited wants arises the problem of choice in which economy or people have to choose the most urgent wants from unlimited wants according to his performance. Thus, scarcity of resources makes the choice necessary. Hence, economics is termed as a science of choice.

CRITICISM:

• STATIC: Prof. Samuelson pointed correctly that Robbins’ definition is not dynamic, as it focuses only on the problems of the present generation not anything about the future generation.
• ECONOMIC PROBLEMS ALSO ARISE FROM MORE SUPPLY: Some economists claimed that economic problem also arises from the plenty of goods as well. The great depression of the 1930s in the USA was due to an abundance of goods, but not due to the scarcity of resources.
• NOT FIT FOR RICH COUNTRY: The economic problem for a rich and sound economy is different from the underdeveloped or poor economy. Here the resources are plenty.
• NOT FIT FOR SOCIALISTIC ECONOMY: Robbin’s definition is not applicable for a socialistic economy, because, in this type of economy, the government takes all the initiatives for supplying all the necessities of life among the citizens.

The definition proposed by Lionel Robbins has emerged the concept of “scarcity”. Scarcity (also called paucity) is a situation where demand for goods and services exceeds its availability. It is a fundamental economic problem. Scarcity is at the core of economics because without this concept macroeconomics and microeconomics research would be rendered meaningless. However, scarcity is a relative concept as it can only be defined in relation to human wants. It means good and service may be scarce for someone but at the same time, it might be abundant for someone. For example, there are lots of oil resources in ‘gulf countries’ but it is scarce in India. So, we can say that scarcity cannot be used in the absolute sense.

For example, Mr. X wants 5 black T-shirts for him and his 4 younger brothers. He visited the site Snapdeal but he found only “3 left in stock” but at the same time, Mr. Y needs only 2 units of a black T-shirt. In this, sense scarcity may exist for someone and may not exist for someone.

Yet, the concept of scarcity also emerged as the concept of “economic problem”

• ECONOMIC PROBLEM: It is the problem of choice or problem of resource allocation. According to Milton Friedman, “An economic problem exists whenever source means are used to satisfy alternative ends. If means are not scarce, there is no problem at all”.

Reasons to arise Economic Problem

SCARCE RESOURCES: Resources are limited in relation to their demand and the economy cannot make available the resources for all the people. This is the basic cause of all economic problems. The concept of scarcity is ubiquitous and applies to all individuals, organizations, and countries.

ALTERNATIVE USES: Resources are not only scarce but can also be put to various uses. This involves making choices among the optimum use of resources. For example: if a “rikshaw puller” has 1000/- in his pocket, rather spend it on a mobile phone, laptop, etc. He will have spent it on necessary commodities like rice, wheat, etc.

UNLIMITED HUMAN WANTS: Human wants are endless, i.e., they can never be fully contented. As one want is satisfied many other wants emerge. In this way, wants to arise one after another. The second want arises after the satisfaction of the first want, the third after the second, and so on. This endless circle of wants continues throughout human life.

CENTRAL PROBLEMS THAT ARE FACED BY EVERY ECONOMY OF A COUNTRY: Production, distribution, and disposition of goods and services are the basic economic activities of life. Because of scarcity, every society has to decide how to allocate scarce resources.

 It leads to the following central problems that are faced by every economy:

• What to produce?
• How to produce?
• For whom to produce?

These problems are called central problems because these are the most basic problems of an economy and all the other problems revolve around them.

WHAT TO PRODUCE:

This problem involves the selection of goods and services to be produced and the quantity to be produced of each selected commodity.

Every economy has scarce resources and thus cannot produce all the goods more of one good or service usually means less of others. For example: In a piece of land more production of wheat implies less production of mustard. Similarly, the production of war goods is possible only by reducing the production of civil goods.

So, the economy has to decide which goods should be produced and in what quantities. This is a problem of allocation of resources among different goods.

This problem has two aspects:

1. WHICH COMMODITIES ARE TO BE PRODUCE: Every economy has to decide, which consumer goods (bread, clothes, etc.) and which of the capital goods (machinery, equipment, etc.) are to be produced. In the same manner, the economy has to choose between and goods (bread, butter, etc.) and war goods (guns, tanks, etc.)
2. IN WHAT QUANTITY: After deciding the goods to be produced, the economy has to decide the quantity of each commodity that is selected. It means if this involves a decision regarding the quantity to be produced, of consumer and capital goods, civil and war goods, and so on.

GUIDING PRINCIPLES: Allocate the resources in a manner that gives maximum aggregate satisfaction.

HOW TO PRODUCE:

 It involves the choice of technique to be used for the production of goods and services. There are different techniques of production. The term technique here is used in the sense that in which particular combination inputs are used.

 Techniques are classified as:

• LABOUR INTENSIVE TECHNIQUES: This means more labor and fewer machines used for production.
• CAPITAL INTENSIVE TECHNIQUE: This means more capital and less labor used for production.  For example: To dig a well a zamindar can hire either more labor and a little capital or with less labor and more capital (mud rotary, air rotary, etc.)

Selection of technique is made to achieve the objective of raising the standard of living of people and to provide employment to everyone.

For example: In India, LIT is used to the abundance of labor, whereas countries like the USA, England, etc. prefer CIT due to shortage of labor and abundance of capital.

GUIDING PRINCIPLE: Combine factors of production in such a manner so that maximum output is produced at minimum cost, use the least possible scarce resources.

FOR WHOM TO PRODUCE:

Owing to the paucity of resources, an economy cannot produce goods for all sections of society to the desired extent. So ultimately it has to decide whether to produce goods for poorer and less rich or richer and less poor.

Goods are produced for these people who have the paying capacity. The capacity of people to pay for goods depends upon their level of income. It means, this problem is concerned with the distribution of income among the factors of production (land, labor, capital, and enterprise) who contribute to the production process.

The problem can be categorized under two main heads:

1. PERSONAL DISTRIBUTION: It means how the national income of an economy is distributed among different groups of people. Under personal distribution, we study the pattern of distribution of NY.

For example: why is the share of the wage-earning class in the national income lower than the other classes?

Why is the rent of one piece of land or how higher (or lower) than the other?

• FUNCTIONAL DISTRIBUTION: It explains the share of total national income received by each factor of production. In other words, it is related to the distribution of rewards for the services of the factors of production. For example rent for the land, wages for labor, interest for capital, etc.

GUIDING PRINCIPLE: It ensures that the urgent wants of each productive factor are fulfilled to the maximum possible extent.

SOME MORE ECONOMIC PROBLEMS RELATED TO UNDERDEVELOPED ECONOMY:

1. HOW EFFICIENTLY ARE THE RESOURCES BEING UTILISED?

Society has to see whether the resources it owns are being utilized fully or not. In case, the resources of the economy are lying idle, it has to find out ways and means to utilize them fully. In an economy where the available resources are being fully utilized, it is characterized by technical efficiency or full employment.

• IS THE ECONOMY GROWING?

The last and the most important problem is to find out whether the economy is growing through time or is it stagnant. If the economy is stagnant at any point inside the production possibility curve; economic growth takes place through a higher rate of capital formation which consists of replacing existing capital goods with new and more productive ones by adopting more efficient production techniques or through innovations

• GROWTH DEFINITION:

In the year 1948, Prof. Paul A Samuelson. “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”.

MAIN FEATURES OF SAMUELSON’S DEFINITION:

• Efficient Allocation of Resources: There is a great deal of similarity between the approaches of Samuelson and Robbins. Both have stressed the problem of scarcity of means in relation to unlimited ends.
• Dynamism: Samuelson has included dynamism in the definition of Economics by incorporating the time element. The problem of growth has been included in the purview of the definition.
• The problem of Choice: The greatest feature of Samuelson definition is that it takes into account the problem of choice in the dynamic framework of economics

• Improvement in Resource Allocation: Economics analysis of the costs and benefits of improving the pattern of resources allocation. Improvement of resource allocation and better distributive justice is synonymous with economic.
• Distribution: The modern definition also concerns itself with the distribution for the consumption among various persons and groups in a society.