General Definition of Economics

The English word economics is derived from the ancient Greek word oikonomia—meaning the management of a family or a household.

It is thus clear that the subject economics was first studied in ancient Greece.

Economics, as a study of wealth, received great support from the Father of economics, Adam Smith, in the late eighteenth century.

Since then, the subject has travelled a long and this Greek or Smithian definition serves our purpose no longer. Over the passage of time, the focus of attention has been changed. As a result, different definitions have evolved.

These definitions can conveniently be grouped into three:

Adam Smith’s Wealth Definition:

The formal definition of economics can be traced back to the days of Adam Smith (1723-90) — the great Scottish economist. Following the mercantilist tradition, Adam Smith and his followers regarded economics as a science of wealth which studies the process of production, consumption and accumulation of wealth.

His emphasis on wealth as a subject-matter of economics is implicit in his great book— ‘An Inquiry into the Nature and Causes of the Wealth of Nations or, more popularly known as ‘Wealth of Nations’—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.” Like the mercantilists, he did not believe that the wealth of a nation lies in the accumulation of precious metals like gold and silver.

To him, wealth may be defined as those goods and services which command value-in- exchange. Economics is concerned with the generation of the wealth of nations. Economics is not to be concerned only with the production of wealth but also the distribution of wealth. The manner in which production and distribution of wealth will take place in a market economy is the Smithian ‘invisible hand’ mechanism or the ‘price system’. Anyway, economics is regarded by Smith as the ‘science of wealth.’

Criticisms:

Following are the main criticisms of the classical definition:

1. This definition is too narrow as it does not consider the major problems faced by a society or an individual. Smith’s definition is based primarily on the assumption of an ‘economic man’ who is concerned with wealth-hunting. That is why critics condemned economics as ‘the bread-and-butter science’.
2. Literary figures and social reformers branded economics as a ‘dismal science’, ‘the Gospel of Mammon’ since Smithian definition led us to emphasise on the material aspect of human life, i.e., generation of wealth. On the other hand, it ignored the non-material aspect of human life. Above all, as a science of wealth, it taught selfishness and love for money. John Ruskin (1819-1900) called economics a ‘bastard science.’ Smithian definition is bereft of changing reality.
3. The central focus of economics should be on scarcity and choice. Since scarcity is the fundamental economic problem of any society, choice is unavoidable. Adam Smith ignored this simple but essential aspect of any economic system.

Marshall’s Welfare Definition:

Alfred Marshall in his book ‘Principles of Economics published in 1890 placed emphasis on human activities or human welfare rather than on wealth. Marshall defines economics as “a study of men as they live and move and think in the ordinary business of life.” He argued that economics, on one side, is a study of wealth and, on the other, is a study of man.

Emphasis on human welfare is evident in Marshall’s own words: “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, “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.” According to Marshall, wealth is not an end in itself as was thought by classical authors; it is a means to an end—the end of human welfare.

This Marshallian definition has the following important features:

1. Economics is a social science since it studies the actions of human beings.
2. Economics studies the ‘ordinary business of life’ since it takes into account the money-earning and money-spending activities of man.
3. Economics studies only the ‘material’ part of human welfare which is measurable in terms of the measuring rod of money. It neglects other activities of human welfare not quantifiable in terms of money.
4. Economics is not concerned with “the nature and causes of the Wealth of Nations.” Welfare of mankind, rather than the acquisition of wealth, is the object of primary importance.

Criticisms:

Though Marshall’s definition of economics was hailed as a revolutionary one, it was criticised on several grounds. They are:

1. Marshall’s notion of ‘material welfare’ came in for sharp criticism at the hands of Lionel Robbins (later Lord) (1898- 1984) in 1932. Robbins argued that economics should encompass ‘non- material welfare’ also. In Teal life, it is difficult to segregate material welfare from non-material welfare. If only the ‘materialist’ definition is accepted, the scope and subject-matter of economics would be narrower, or a great part of economic life of man would remain outside the domain of economics.
2. Robbins argued that Marshall could not establish a link between economic activities of human beings and human welfare. There are various economic activities that are detrimental to human welfare. The production of war materials, wine, etc., are economic activities but do not promote welfare of any society. These economic activities are included in the subject-matter of economics.
3. Marshall’s definition aimed at measuring human welfare in terms of money. But ‘welfare’ is not amenable to measure­ment, since ‘welfare’ is an abstract, subjective concept. Truly speaking, money can never be a measure of welfare.
4. Marshall’s ‘welfare definition’ gives economics a normative character. A normative science must pass on value judgments. It must pronounce whether a particular economic activity is good or bad. But economics, according to Robbins, must be free from making value judgment. Ethics should make value judgments. Economics is a positive science and not a normative science.
5. Finally, Marshall’s definition ignores the fundamental problem of scarcity of any economy. It was Robbins who gave a scarcity definition of economics. Robbins defined economics in terms of allocation of scarce resources to satisfy unlimited human wants.

Robbins’ 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. According to Robbins, neither wealth nor human welfare should be considered as the subject-matter of economics. His definition runs in terms of scarcity: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

From this definition, one can build up the following propositions:

1. Human wants are unlimited; wants multiply—luxuries become necessities. There is no end of wants. If food were plentiful, if there were enough capital in business, if there were abundant money and time—there would not have been any scope for studying economics. Had there been no wants there would not have been any human activity. Prehistoric people had wants. Modern people also have wants. Only wants change—and they are limitless.
2. The means or the resources to satisfy wants are scarce in relation to their demands. Had resources been plentiful, there would not have been any economic problems. Thus, scarcity of resources is the fundamental economic problem to any society. Even an affluent society experiences resource scarcity. Scarcity of resources gives rise to many ‘choice’ problems.
3. Since the prehistoric days one notices constant effort of satisfying human wants through the scarcest resources which have alternative uses. Land is scarce in relation to demand. However, this land may be put to different alternative uses.

A particular plot of land can be either used for jute cultivation or steel production. If it is used for steel production, the country will have to sacrifice the production of jute. So, resources are to be allocated in such a manner that the immediate wants are fulfilled. Thus, the problem of scarcity of resources gives rise to the problem of choice.

Society will have to decide which wants are to be satisfied immediately and which wants are to be postponed for the time being. This is the choice problem of an economy. Scarcity and choice go hand in hand in each and every economy: “It exists in one-man community of Robinson Crusoe, in the patriarchal tribe of Central Africa, in medieval and feudalist Europe, in modern capitalist America and in Communist Russia.”

In view of this, it is said that economics is fundamentally a study of scarcity and of the problems to which scarcity gives rise. Thus, the central focus of economics is on opportunity cost and optimisation. This scarcity definition of economics has widened the scope of the subject. Putting aside the question of value judgement, Robbins made economics a positive science. By locating the basic problems of economics — the problems of scarcity and choice — Robbins brought economics nearer to science. No wonder, this definition has attracted a large number of people into Robbins’ camp.

Division of Economics

Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
Though these two branches of economics appear different, they are actually interdependent and complement one another. Many overlapping issues exist between the two fields.

Microeconomics

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. It considers taxes, regulations, and government legislation.
Microeconomics focuses on supply and demand and other forces that determine price levels in the economy. It takes a bottom-up approach to analyzing the economy. In other words, microeconomics tries to understand human choices, decisions, and the allocation of resources.

Having said that, microeconomics does not try to answer or explain what forces should take place in a market. Rather, it tries to explain what happens when there are changes in certain conditions.

For example, microeconomics examines how a company could maximize its production and capacity so that it could lower prices and better compete. A lot of microeconomic information can be gleaned from company financial statements.
Microeconomics involves several key principles, including (but not limited to):

Demand, Supply and Equilibrium: Prices are determined by the law of supply and demand. In a perfectly competitive market, suppliers offer the same price demanded by consumers. This creates economic equilibrium.

Production Theory: This principle is the study of how goods and services are created or manufactured.

Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.

Labor Economics: This principle looks at workers and employers, and tries to understand patterns of wages, employment, and income.

The rules in microeconomics flow from a set of compatible laws and theorems, rather than beginning with empirical study.

Macroeconomics

Macroeconomics, on the other hand, studies the behavior of a country and how its policies impact the economy as a whole. It analyzes entire industries and economies, rather than individuals or specific companies, which is why it’s a top-down approach. It tries to answer questions such as “What should the rate of inflation be?” or “What stimulates economic growth?”

Macroeconomics analyzes how an increase or decrease in net exports impacts a nation’s capital account, or how gross domestic product (GDP) is impacted by the unemployment rate.

Macroeconomics focuses on aggregates and econometric correlations, which is why governments and their agencies rely on macroeconomics to formulate economic and fiscal policy. Investors who buy interest-rate-sensitive securities should keep a close eye on monetary and fiscal policy.

John Maynard Keynes is often credited as the founder of macroeconomics, as he initiated the use of monetary aggregates to study broad phenomena. Some economists dispute his theories, while many Keynesians disagree on how to interpret his work.