lecture 1 definitions and scope

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  • Lecture 1Nature of Economics Definitions
  • Difficult to Define Economists like Pareto, Myrdal and Hutchinson think that any search for a precise definition of Economics is a barren enterprise Many economists thought it is needless to waste words in defining Economics However, it is essential for a student to have some definition in mind as working basis
  • Early Definitions According to Adam Smith Economics is concerned with an enquiry into nature and causes of wealth Craines in his book said Economics deal with the phenomenon of wealth According to a French economist J.B. Say Economics is science which treats of wealth The American Economist, F.A Walker is of the view that Economics is that body of knowledge which relates to wealth In all these definitions, key position is assigned to WEALTH
  • Problem with Early Definitions Too much emphasis on wealth This led to development of view that Economics teaches selfishness and came to be called a dismal science S.Baliey in 1835 discussed the popular view of Economics as: The unworthiness of political economy in public opinion stemmed directly from its explicit preoccupation with so degrading a subject-matter as wealth Thus, all the vices attributed to wealth became attached to the science of wealth (i.e Economics)
  • Change in Definition In the last quarter of the 19th Century humanistic character of Economics had come to be well recognized Schaffle in Germany and Droz in France placed the role of man in Economics higher than that of wealth It is now fully recognized that wealth is only a means to an end, the end being human welfare
  • Marshallian Definition Marshal said 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
  • Study of Marshalls Definition Marshalls definition puts emphasizes on four points: Economics does not regard wealth as the be-all and end- all of economic activities Economics is not concerned with economic man but is concerned with an ordinary man Economics is a social science and not one which studies isolated individuals Economics studies only material requisites of well- being or causes of material welfare
  • Criticism on Marshallian View Lionel Robbins criticized Marshalls definition on following grounds: It is not right that an economists confine their attention to the study of material welfare because in the actual study of economic principles, both the material and non-material things Marshalls definition is classificatory because it makes a distinction between material welfare and non- material welfare It unduly restricted the scope of Economics All those sums which are paid for immaterial services e.g. services of doctors or lawyers etc. Contd
  • Criticism on Marshallian View Welfare is too vague and indefinite an idea to provide a sound foundation for building up a respectable science e.g intoxicants are regarded as wealth but cannot be regarded as good for human welfare Idea of welfare vary from age to age, country to country and from individual to individual In assessing welfare, a verdict is needed that what is conductive to human welfare and what is not This would led us to world of ethics where as Economics is neutral According to Marshall, Economics deals with persons living in society. It ignores all others who also may have an economic problem i.e. of using scarce means for the satisfaction of unlimited ends
  • Robbins, Definition Robbins defined Economics as Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
  • Study of Robbins Definition Robbins definition lays down the following three fundamental propositions which constitute basis of the structure of economic science Ends refer to wants. Human beings have wants which are unlimited in number Wants are unlimited but the means to satisfy them are strictly limited Scarce means are capable of alternative uses Thus, in Robbins sense, economic activity lies in mans utilization of scarce means having alternative uses, for the satisfaction of multiple ends
  • Superiority of Robbins Definition Robbins claimed that his definition is superior to earlier definition because Independent of classification of material and non- material wants Takes into account all kinds of wants Elevation of economics to a science No longer function of economics to judge right or wrong economic activity It transcends the narrow boundaries within which the materialist definition confined Economics Economics to be no longer called dismal science Thus, the Robbins definition is superior both to the early definition (science of wealth) and Marshalls definition (science of material welfare)
  • Criticism on Robbins Definition Robbins definition attracted following criticism Robbins reduced economics to only valuation theory. Other aspects of the study of economics have been relegated to the background e.g aggregates Individual choices having no social implications cannot form the basis of subject-matter of Economics Economic growth and economic development has not been covered by Robbins definition This definition does not explain problem of unemployment Human touch is entirely missing Robbins has made Economics more abstract and complex and hence difficult and fruitful
  • Modern Definitions The credit of bringing about a revolution in economic thinking goes to Lord J.M. Keynes. According to him Economics studies how the levels of income and employment in a community are determined Thus, in Keynesian terms, Economics is defined as The study of the administration of scarce resources and of the determinants of income and employment In Benhams words Economics is a study of factors affecting the size, distribution and stability of a countrys national income
  • Conclusion Regarding Definition There is no short definition of growing science like Economics would serve the purpose One may agree with Prof. Viner that Economics is what economists do Economists do resource allocation or resource utilisation. They study size, distribution and stability of national income and economic growth In short, Economics may be defined as A social science concerned with the proper uses and allocation of resources for the achievement and maintenance of growth with stability Prof. Henry Smith defined Economics as Study of how in a civilized society one obtains the share of what other people have produced and of how the total product of society changes and is determined
  • Major Economic Problems What is an economic problem? In view of the scarcity of means at our disposal and the multiplicity of ends we seek to achieve The economic problem lies in making the best possible use of our resources so as to get maximum satisfaction in case of a consumer and maximum output or profit for a producer
  • Fundamental Problems What to produce? Quantity and range of goods to produce Resources are limited, we must choose between different alternative collection of goods and services that may be produced How to produce? Techniques of production e.g labor intensive, capital intensive For whom to produce? It means that how the national product is distributed i.e. who should get how much Are the resources economically used? No wastage ro misutilization of resources since they are limited Problem to full employment? Economy must endeavor to achieve full employment not only of labor but of all its resources Problem of growth? Economy must expand or develop to maintain conditions of stability
  • Nature of Economics Scope and Method
  • Two Main Streams The study of Economics is divided into two parts on the basis of looking the system as whole or in terms of its innumerable decision- making units Micro Economics It is also called Price Theory Macro Economics It is also called Income Theory
  • Micro Economics The word micro means a millionth part In micro economics we analyze small part or component of the whole economy e.g. individual consumers behaviour or firm, price of particular product or factor of production, employment in firm or industry In simple, micro-economic theory studies the behaiour of individual decision making units such as consumers, resource owners and business firms The basic assumption in micro economic analysis is full employment in the economy as whole
  • Importance of Micro-economics It tells us how millions of consumers and producers take decisions about the allocation of productive resources among millions of goods and services It explains how through market mechanism goods and services produced in the community are distributed It also explains the determination of the relative prices of the various products and productive services It explains the conditions of efficiency both in consumption and production and departure from the optimum Micro-economics helps in the foumulation of economic policies calculated to promote efficiency in production and the welfare of the masses
  • Limitation of Micro-economics It cannot give an idea of functioning of economy as a whole An individual industry may be flourishing but economy as a whole may be languishing It assumes full employment which is a rare phenomenon in the capitalist world T

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