Nature of Economics | Class XI Notes, Management
Classical Economics (Adam Smith’s Definition of Economics)
Adam Smith was a first economist who presented a systematic analysis through his book ‘An Enquiry into the Nature and Causes of the Wealth of Nation’ published in 1776.
After, that publication of this book Economics become a separate discipline like others. There fore, Adam Smith is called the father of economics.
According to Adam Smith, “Economics is the science of wealth.” Adam Smith’s definition of economics is concerned with the meaning, nature, source, and use of wealth.
In this way, the definition of Adam Smith basically concerned with the wealth of the nation and his definition was supported by other different economists.
Features of Adam Smith definition:
a) Study of wealth: As per Adam Smith’s definition of economics is only concerned with the study of wealth. All human beings living in society are concerned to earn more money/ wealth.
b) The secondary place to the study of man: The wealth centered definition of economics has given first priority to wealth and second to mankind. Adam Smith assumed that mankind is for wealth but wealth cannot be for mankind.
c) Meaning of Wealth: According to this definition, Both goods are important to improve human welfare.
d) Study of economic man: Adam Smith claimed that economic studies the behavior of that person whose main objective is to earn more and more money. Humans of such nature in the world Adam Smith called economic man.
e) Investigation of the causes of wealth: Classical economists are of the opinion that economics is to investigate the causes of wealth i.e how wealth can be increased.
Criticisms of wealth:
a) The narrow meaning of wealth: According to this definition, Tangible goods are only included and completely ignored the non-material goods. But, Modern definition has included not only tangible but intangible goods as well.
b) Undue importance to wealth: According to this definition, the primary place has been given to wealth and secondary place to men. Whereas men are the central point of all activities. Wealth is simply meant to satisfy human needs.
c) Unrealistic concept of man: AS per the definition, economic man is one who is guided by self-interest alone whereas such men didn’t exist in the world.
d) The narrow subject matter of economics: This definition has confined the subject matter of economics only to the study of wealth, which is very narrow. The subject matter of economics should be the study of the economic welfare of society but not wealth.
e) Neglect of economic welfare: This definition has totally neglected the economic welfare of society. According to Marshall’s definition, the main aim of economic is to promote the welfare of human beings and not to obtain wealth.
Neo-classical (Alfred Marshall’s definition of economics)
Alfred Marshall was a popular neo-classical English economist. He criticized Adam Smith’s definition of economics. His definition of economics regarded that economics is material science. He defined economics in his book ‘Principle of Economics’ Published in 1819 AD.
According to Alfred Marshall, “Political economy of economics is a study of mankind in the ordinary business of life.” It demises that part of individual kind social action which is most closely connected with the attainment and with the use of material requisites of well being.
Features of Marshall’s definition:
a) Primary concerned: According to this definition, wealth is meant to fulfill the human desire. Economics is the study of wealth in relation to man and hence the primary importance is given to men, not to wealth.
b) Study of an ordinary man: According to this definition, Economics is related to the behavior of ordinary people. That means it studies the rational man and ignore man like ‘sadhu’.
c) Study of material welfare: This definition has highly focused on material welfare i.e satisfaction or utility obtained from physical goods or materials goods rather than human welfare. The satisfaction derived by a consumer by consumption of basic goods or luxury goods, etc.
d) Social science: AS per the definition, economics is a social science. It studies the economic problems of those individuals who live in an organized society.
e) Normative science: As per the definition, economics is a normative science since it studies what should be done to promote the material welfare of men.
Criticism of Welfare definition:
a) Material and non-material welfare: Marshall included only material things within the preview of economics and excludes all non-material things. However, it is quite difficult to separate the material and non-material things. For example, if a doctor services for free, it is material and if he services for free its non-material.
b) The connection between economic and welfare: This definition tried to establish the connection between economics and welfare. However, economic studies several activities not conducive to welfare such as the production of wine, etc. as their income is not included in national income.
c) Economic is a human science: The welfare definition doesn’t concern the man thing living outside the society. But even an isolated man like Robinson cruise is subject to the law of economics such as the law of diminishing marginal utility.
d) It involves value judgments: The world ‘welfare’ in the marshal definition involves value judgment and relates ‘Economics’ to the branch of ethics. But economics should be neutral regarding moral judgments and about what is good and what is bad.
e) The ordinary business of life: As per definition, economic is the study of human activities in the ordinary business of life. But the meaning of ordinary life is not clear in this definition.
Robbin’s Definition of Economics:
Lionel Robbins an English professor of economics published a book ‘An essay on the nature and significance of economics science’ and has given a précis definition of economics since the definition is given by robbins has addressed the real economic problems, this definition is considered as a modern definition.
According to Robbins, “Economics is a science which studies human behavior as a relationship between end and scars means which have alternative use”. In this way definition of robins focuses on the major issue of people i.e. unlimited wants limited resources to fulfill these wants.
Features of Robbins definition:
a) Unlimited wants: Human wants are unlimited. The man said to be a bundle of wants.
b) Scarce means: Means refers to resources. Means to satisfy unlimited wants are limited or scars.
c) Alternative use of means: According to Robins, the means have alternative use i.e. they can use many times and in different ways.
d) Want differ in urgency: Human wants are not equally important. They are different in urgency. Some wants are more urgent than the other one.
e) The problem of choice: According to robins, the problem, the problem of choice is the economic problem which forms the subject matter of economics. “Economics is a science of choice.
a) Hidden concept of welfare: The definition has criticized Marshall’s definition but this definition itself includes the concept of welfare through the back door.
b) Even abundance may create a problem: According to robbins’ definition, economics is the study of choice under scarcity but may economic problems don’t take place due to the causes of scarcity.
c) Self-contradictory: On the other hand this definition regards economic is positive science and hence neutral between ends.
d) Economic is not only positive science: Critics are the view that economics is only a positive science but also normative science.
e) Incomplete definition: This definition has not covered the present-day economic problem like unemployment, inflation, economic growth, etc.
Similarities between Marshall’s definition and Robin’s definition:
a) Both definitions have given importance to man than to wealth.
b) Both have regarded economic is science.
c) The concept of welfare forms the subject matter of both these definitions directly or indirectly.
d) Both definitions are based on the assumption of the rational behavior of man.
The superiority of Robin’s definition:
a) Positive science: Robins tried to make economics a more exact science. It is neutral between ends.
b) An analytical definition: Robbin’s definition has made the study of economic analytical. It proves the reasons for the study of the economic problem, which is the problem of scarcity.
c) A clear conception of human behavior for economics: Robbins also gave a clearer view of what human behavior economists are interested in.
d) Clear on the scope of the economics: Wherever a problem at the choice of choice arises due to the resource being scarce and the want being much more, an economic study is called for.
e) A universal definition: Robbins’ definition is applicable everywhere. As it is concerned with unlimited wants and limited resources, one can relate it with the economic problem in every country.
Scope of economics:
The scope of economics refers to the area of the subject matter covered by economics. The subject matter of economic can be analyzed in the following ways:
The subject matter of economics:
a. On the basis of representative definition:
Classical school – Adam Smith – Wealth: Accumulation, Consumption, Distribution, Exchange
Neo-classical school – Alfred Marshal – Material welfare
Modern school – Robbins – Unlimited wants, limited means, Problem of choice
b) On the basis of economic activities:
i. Consumption: The process of satisfying human wants is called consumption. Its theory is Law of marginal utility, the law of substitution, consumers.
ii. Production: The production of transforming inputs or factors of production into the output is called product.
Production function: Law of variable proportion and law of returns to scale, etc.
iii. Exchange: The process of determining the price of goods and services is called exchange. We can study the determination of price of the product in the various types of market structures like perfect competition market monopoly, etc.
iv. Distribution: The process of determining the price of factors of production is called distribution. Land, labor, and organization, etc. are the factor of production.
v. Public finance: Public finance is the branch of economics that deals with revenue and expenditure of the government. We can study theories, revenue, government expenditure, public debt, taxation under the public figures.
c) On the basis of the Modern approach:
i. Microeconomics: Microeconomics studies are the study of small individual parts of the economy. Example: Study of the individual household, individual firm, individual market.
ii. Macroeconomics: Macroeconomics studies are the study of the small individual household, individual parts of the economy. Example: Aggregate demand and aggregate supply.
Nature of economics:
The nature of economics means whether it is a science or an art or both.
Economic as science:
Science is a systematized body of knowledge that explains the cause and effect relationship. Economics is also a systematic body of knowledge because it studies consumption, production, exchange, and distribution systematically.
Like other scientific laws, most of the economic laws established causes and effect relationships between various economic variables.
[Question] Why economic is a science?
Ans: Economic is a science because:
i. It is a systematic study of health-related activities.
ii. Economics laws established a cause and effect relationship between different variables.
iii. Economic laws are universally accepted and verified by the experiments.
Economic as an art:
Art is a practical application of knowledge for achieving definite ends. It helps in the solution of practical problems. It provides a solution to the poverty problem. Unemployment, inequality, soaring prices, malnutrition, etc. in this way economics is an art.
Limitations of economics:
a) Study of activities related to wealth only: Economic studies activities related to wealth only, not the other activities of man such as religious, political, social, cultural activities, etc.
b) Study of social man: Economics studies only those people who live in society either they are businessmen or monks.
c) Study of normal man: Economics studies only normal man, but not an abnormal man like a drunkard, miser, mad man, etc.
d) Study of scarce commodities: Economics studies only scarce commodities but not free goods whose supply is higher than demand.
e) Another thing being equal: All economic laws are based on the assumption of other things being equal.
Concept of positive and normative economics:
A positive science is that which studies the thing as they happen in reality. It explains what is, what was, what will be. It means positive science only describes. Economic is a positive science since it studies the cause and effect relationship between economics phenomena. For example, the law of demand studies causes and affects the relationship between price and demand for a commodity. This law studies that the demand for a commodity falls when its price rises and vice-versa.
Economic as normative science:
A normative science is that which studies things as they should be. It is related to the criteria for what ought to be. Economics cannot be separated from the normative aspect. Economists offer valuable advice to curb the economic ills for the real world. Normative statements are those which involve value judgment and therefore cannot be verified for their truth. It is the duty of economists to make a careful study of the different economic problems, and suggest ways and means solve these problems.
Concept of Micro and macroeconomics:
The word ‘micro’ was derived from the Greek word ‘Mikros’. The meaning of Mikros is small. Thus, microeconomics is the study of the economic activities of individuals and small groups of individuals. It deals with how individual consumers choose between goods, How individual consumers choose a job. How the price of individual consumers choose job. How the price of individual commodities? How to supply the demand of individual commodity? How the industry formed by an individual?
Importance of microeconomics:
a) To understand the working of an economy: How a million decisions about the allocation of productive resources among millions of goods and services.
b) To provide tools for economic policies: It is useful for designing prices of public utilities and an economy.
c) Helpful in the distribution of goods and services: We know that the economy consists of many sectors like industry, trade, and government while making spectral decisions.
d) Helpful in the allocation of resources: The condition of efficiency in both consumption and production and ensure maximum social welfare to make production and pricing decision.
e) Helpful in the study of human behavior: Microeconomics studies many forms of human behavior with the help of the law of diminishing marginal utility, law of maximum satisfaction, indifference curve, etc.
‘Macro’ word was derived from the Greek word ‘Makros’. The meaning of ‘Makros’ is large or aggregate. Thus, macroeconomics studies about very large or aggregate economic activities such as National income, price level, level of employment, PCI, economic growth rate, etc. We can also be called Aggregate economic variables to those activities.
According to K.E. Boulding, “Macroeconomics deals not with individual quantities but with the aggregate of these quantities not with individual income but with National income, not with individual prices with price level, not with individual output but with national output. Macroeconomic is basically concerned with how national income and employment are determined. So, it is also called the theory of income and employment.
a) To understand the working of an economy: It helps in understanding how the macro variable behaves in the aggregate. The study of national income, aggregate output, gross saving, and investment is very essential to understand the working of the economy.
b) Helpful in the formulation of economic policies: The economic policies for the removal of poverty, unemployment and price stabilization must be based upon reliable statistics of an aggregate variable.
c) Helpful in controlling economic fluctuation: Macroeconomics helps to give finite direction to trade cycle, inflection, deflation inappropriate period.
d) Helpful in international comparison: Macroeconomics variables like national income, total output and aggregate demand, consumer behavior and investment pattern of different countries can be compared easily.
e) Indicator of economic performance: It analyses the overall performance of the economy within a given period of time.