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Top 4 Definitions of Economics

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The following points highlight the top four definitions of economics by eminent economists of all times. The definitions are: 1. Wealth Definition of Economics by Adam Smith 2. Alfred Marshall’s Definition of Economics 3. Robbins’ Definition of Economics 4. Modern Definition of Economics.

1. Wealth Definition of Economics by Adam Smith:

Economics is sometimes defined as the science of wealth.

The definition of Adam Smith, the father of economics, goes as follows:

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“Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsis­tence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the State or Commonwealth with a revenue sufficient for the public service.”

Adam Smith defined Economics, called Political Economy in those days as An Inquiry into the Nature and Causes of Wealth of Nations.

As Adam Smith commented:

“Every individual endeavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promot­ing it. He intends only his own security, only his own gain.”

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Smith declared that the wealth of a nation did not lie in gold and silver as the mercantilists believed. Instead, it was determined by the goods and services—whether produced at home and abroad—available to the people for consumption and accumulation.

Smith argued that a free exchange market economy would harness self-interest as a creative force. Since one moves ahead in a market economy by helping others in exchange for income, people seeking their own gain will provide valuable goods and services to others.

Furthermore, Smith argued, if legal restrictions that retard productive activity and exchange were removed, the invisible hand of the markets (and prices) would direct individuals and resources into areas where their productivity was the maximum.

Coordination, order and efficiency would result, despite the absence of a central authority that planned and directed the economy. Smith believed that this process provided the key to production and the wealth of nations.

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After the publication of Smith’s treatise, intellectuals became gradually interested in the study of the relationship between production, exchange and wealth. Political Economy— later divided into economics and Political Science — became a new and widely accepted field of study throughout the world.

Adam Smith directed his inquiries into the factors determining the growth, prosperity and wealth of a nation. In his book, Smith was mainly interested in analysing those factors that determine the wealth of a nation — i.e., the growth of the volume of production. In his own words – “The great object of political economy of every country is to increase the riches and power of that country”.

According to Smith, the wealth of a nation largely depends on two factors:

(1) The productivity of labour, and

(2) The propor­tion of productive labour in the total labour force.

The wealth and prosperity of a country cannot increase without an appropriate and effective utilisation of its human (and material) resources. This, according to Smith, is indeed the subject matter of Political Economy. In other words, Smith emphasised the creation and expansion of society’s wealth as the subject matter of economics.

2. Alfred Marshall’s Definition of Economics:

Alfred Marshall pointed out in 1890 that Adam Smith’s definition is much too materialistic. Smith has emphasised only two things: how a man acquires wealth and how he spends it. But, according to Marshall Wealth is not an end in itself. Instead it is a means to an end. The end is human welfare. In fact, Marshall shifted his attention from wealth to welfare and from individual to society.

Marshall, of course, assigned a secondary role to incomes and wealth. But, he shifted emphasis on man’s action in society.

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In his language, “Economics is, on the one hand, a science of wealth; and, on the other, that part of the social science of man’s action in society, that deals with his efforts to satisfy his wants, in so far as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e., money.”

So, Marshall shifted his emphasis from wealth to man. And so, he attached primary importance to men and secondary importance to wealth. Of course, the study of wealth is necessary because it is a means to an end, viz., 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.”

Marshall 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.

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Neglect of Man:

Another major drawback of the classical definition of economics is that by making economics ‘a science of wealth’ an undue emphasis on wealth was placed and man has been put in a secondary place in any economic study. Not much stress was given either on human behaviour in relation to wealth or on maximisation of social welfare (which is the sole and ultimate purpose of economics).

In truth, wealth is not desired for its own sake. It is not an end in itself. Instead, it is a means to an end — the end is individual and social welfare. By regarding wealth as the be-all and the end-all of economic science the classical economists wrongly identified the means as the end.

It was Alfred Marshall, the great neo-classical economist, who first shifted the emphasis not only from wealth to man but also from wealth to welfare. In his view, 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.”

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He adds that, “economics examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being.”

Marshall no doubt saw economics as concerned with those aspects of human behaviour which are open to monetary influences. While emphasis­ing the importance of maintaining some moral standards, he conceded that most human behaviour lay within the ambit of the measuring rod of money.

On the other hand, he emphasised that motivation was not merely a matter of pursuing self-interest or personal gains. He stressed the human desire for social recognition or distinction, as also the pleasures of skilful activity. He saw functions of artists and singers are driven more by the joys of creative activity than the desire for material acquisition.

In any study of economics, in Marshall’s view, wealth has to be treated not as an end in itself but only a means to an end; the end is the promotion of human (social) welfare.

Thus, in Marshall’s writing, wealth has been given secondary impor­tance. The primary importance has been assigned to man. The primary object of economic study is man and his ordinary business of life. This means that Marshall attempted to make the study of economics an engine of social improvement.

To Marshall the man was more important than wealth and to him the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind. For the majority of the population, struggling hard to make a living or working under adverse conditions, little progress in habits, aspirations and self-esteem could be expected without improving their economic conditions first.

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Such improvement was socially important for stimulating improvement in the quality and character of the population. He did not value improvement in the standard of living. What he really valued was the enhancement of the standard of life which this improvement made possible.

Economics, thus, was itself a noble activity of high importance for the future of mankind. With this end in view, Marshall suggested his own definition of the subject.

Three Points:

Three points emerge from the above definition. Firstly, economics is largely and primarily a study of man, and not of wealth (as thought by the classical economists). Economics is indirectly concerned with wealth in the sense that it seeks to study man’s actions — his wealth (money)-earning and wealth (money)-spending activities.

Anything connected with earning and spend­ing of money is known as economic activity. Thus, according to Marshall, the study of man occupies the central place in the study of economics.

Secondly, Marshall’s definition makes it clear that economics is con­cerned with’ only one aspect of man’s life. Human beings are engaged in various types of activities — social, religious, political, etc. Economics is not concerned with such non-economic activities.

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It is concerned only with economic activities. Thus, the implication of Marshall’s statement that economics is a study of mankind in the ordinary business of life. Economics studies how man earns money (wealth) and how he spends it.

Thirdly, according to Marshall’s definition, the sole end and ultimate purpose of economics is the promotion of social welfare. This, in its turn, depends on material wealth. However, wealth is not desired for its own sake but for consumption and accumulation. Even Adam Smith pointed out that ‘consumption is the sole end and purpose of all production’.

However, human welfare is a broad term. It has both economic and non-economic aspects. Economics is not at all concerned with the totality of human welfare. Instead, it is concerned with only that aspect of human behaviour which is directly connected with the use of the material wealth for the achievement of maximum economic welfare.

3. Robbins’ Definition of Economics.

The Scarcity Definition:

Lionel Robbins of London School of Economics not only criticised the welfare definition of Marshall, but sug­gested his own definition of the subject of Economics. His new definition of economics is perhaps the most celebrated of all.

He considered his own definition as more scientific and correct than Marshall’s definition. In his famous book: An Essay on the Nature and Significance of Economics Science (1932) he argues that economics studies the problems which have arisen due to the law Of scarcity, i.e., the scarcity of resources.

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People have to rank their wants in order of importance and urgency, i.e., people have to choose. Thus, a society seeks to overcome the problem of scarcity by exercising choice. In other words, people have to decide the ends or the wants for which the resources are to be utilised.

This means that, scarce resources are to be allocated among different (alternative) uses in the best possible manner (and in the larger interest of society). Thus, he has suggested the following definition of Economics: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

An analysis of his definition reveals the following funda­mental insights about our economic life:

1. Unlimited wants:

The starting point of economic analysis is the exist­ence of unlimited human wants. Obviously, definition of the term ‘ends’ implies wants. For satisfying wants we have to make the best possible utilisation of society’s limited resources. Since men’s wants are unlimited the problem of scarcity exists everywhere in the world — in all economic systems and societies.

2. Scarce means:

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On the one hand, human wants are unlimited. On the other hand, the resources to satisfy the wants are limited. This is why man is always faced with the battle with nature for survival. Human beings have usually had to struggle and toil merely to eke out a minimum living.

Therefore, the members of society have to decide which wants are to be satisfied first, by using society’s limited resources, and which needs are to be left unsatisfied. In economics, the means or resources refer to land and natural resources, manpower, capital goods like machines or man-made factors, consumer goods, money and time available with men and so on.

3. Alternative uses of means:

Robbins’ definition is also based on a third fact of our economic life: scarce resources or means have alternative uses. Since the scarcity of productive resources, time and income limit the alter­natives available to us, we must have choices.

Choice is the act of selecting among restricted alternatives. A major focus of economics is the choice problem faced by individuals and society at large. Economics is concerned with how people choose when the alternatives open to them are limited. If you choose to spend Rs.30 going to a movie, you will have Rs.30 less to spend on other things (i.e., you cannot spend the money on any other good or service).

The basic point here is that, resources can be put to alternative uses. For example, the amount of steel that is currently available in India can be used to set up factory sheds or to build stadiums. It may also be exported to other countries and other commodities imported in exchange. Similarly milk may be used for feeding babies, for preparing tea or coffee, for making butter, cheese and sweetmeats and for various other purposes.

Similarly, electricity may be used for cooking, heating, lighting and other purposes (such as running trains, service stations, trams, etc.) In a like manner monetary resources can be used for the production of consumption goods or capital goods. If we increase the production of consumption goods the production of capital goods will suffer.

Thus, individuals have to decide how scarce resources are to be allocated among different uses. However there are certain resources which have a single use only. It is quite obvious that, in case of such resources the problem of choice would not arise. For example, a scenic site in the highlands of Shillong may have only one use: either it is used for the enjoyment of tourists or it is not used at all.

An important point that emerges from Robbins’ definition is that, he does not draw a line either between material goods and non-material services or between welfare and non-welfare. In his opinion, economics studies human activities with regard to all categories of goods and services (whether material or non-material), provided they are capable of satisfying human wants.

Whether such goods are conducive to social welfare is a different question. Economics only suggests ways of satisfying given ends or wants with the minimum amount of resources: money, effort and time. Economics is not at all concerned with the normative aspects of human life, i.e., what ends or wants should be ranked in order of importance and urgency for want-satisfaction.

It is the task of economics to study the ends, and analyse and explain them. It is not the object of economic study to enquire whether the ‘ends’ chosen by man are good or bad, and pass value judgments on them (i.e., to praise or condemn them). Thus, it is beyond the scope of economic study to decide whether a certain thing is good or bad. Thus, in Robbins’ view economics is neutral between ends.

The most important point about Robbins’ definition is that, economics is a science of choice; it is not a science of welfare.

We all make hundreds of economic choices everyday — consciously or unconsciously. Choosing when to get up in the morning, what to eat for breakfast, how to go to the work place, what television programme to watch — these are all economic decisions, because they involve the utilisation of scarce resources (e.g., time and income).

We all are constantly involved in making choices that relate to economics. That economics is a science of choice is quite clear from the following remarks of Robbins: “When time and means for achieving ends are limited and capable of alternative applications and the ends are capable of being distinguished in order of importance, then behaviour necessarily assumes the form of choice”.

Comparison with earlier definitions:

Robbins’ definition is more scientific (than that of Smith and Marshall) inasmuch as it not only explains the law of scarcity and the problem it gives rise to, but also suggests a way of overcoming the problem by exercising choice.

While the material wealth definition of Smith and the welfare definition of Marshall considerably restricted the scope of economics, Rob­bins’ definition undoubtedly broadened the scope of economic study.

Criticisms of Robbins’ Definition:

If we accept Robbins’ definition of economics (scarcity definitions) we can no longer treat economics as a ‘dismal science’. Economics is not concerned with whether ends are good or bad. It does not assume any responsibility about the choice of ends.

In a world characterised by unlimited ends and limited means, it becomes absolutely essential for the science of economics to study economic problems. This is indeed the view of Robbins and his followers. However, Robbins’ definition is not free from defects.

The fol­lowing are the major criticisms of the scarcity definition:

1. Neglect of economic welfare:

Firstly, critics point out that Robbins was totally unjustified in ignoring the welfare aspects of economics. However, a close look reveals that the concept of welfare is very much present even in Robbins’ definition. Like Marshall’s definition, Robbins’ definition also lays stress on the concept of maximisation (or maximum possible satisfac­tion) of human wants.

It follows from the definition of Robbins that eco­nomics is concerned with how man or society achieves the best possible utilisation of scarce resources so as to satisfy the maximum number of wants. In fact, the concept of maximum satisfaction in Robbins’ definition is not fundamentally different from the concept of maximum welfare in Marshall’s.

Robbins’ definition lays stress on an efficient allocation of soci­ety’s resources. In his view, an individual’s means or a society’s scarce resources (factors of production) are to be so allocated as to achieve the maximum satisfaction. The question of optimal allocation of society’s scarce resources is not relevant unless we take into consideration the satisfaction of an individual or the welfare of society at large.

2. Naturality between ends (objectives):

The second major criticism of Robbins’ definition is that, he tried to make economics neutral between ends.

There is a feeling among contemporary economists that, if economics is to play an important role in accelerating the rate of economic growth (which implies a sustained or continuous increase in per capita real income) and in promoting social welfare, it is not enough for economics to describe, explain and analyse economic behaviour.

It is equally important to pre­scribe policies or pass judgments as to what is good for society and what is bad. In other words, economics has to make not only positive statements (as to what is going on in the economy) but also normative statements (as to what should be done to increase social welfare).

To be able to do this, the science of economics must not be neutral between ends or objectives. Then only it will be able to serve as an engine of economic welfare and social improvement.

It is vitally important for economists to state clearly what is good for human society and social welfare and what is not. It is an equally important task of economists to state whether human efforts should be directed towards attaining certain given ends or fulfilling certain stated (well-defined) goals.

Thus, it is the function of the economists not only to describe explain and explore economic behaviour, but also to condemn certain aspects of behaviour (which are injurious to social welfare). It is also the task of economists to educate people and prescribe what is good for the members of a society or the community at large.

3. Neglect of macroeconomics:

The third major criticism of Robbins’ definition is that by laying stress on resource allocation, he has reduced economics to mere price theory or microeconomics. In microeconom­ics we study mainly two things: (1) commodity pricing and output determination, and (2) factor pricing and income distribution.

But, the Great Depression of 1929-33 proved that the scope of economics is wider than mere allocation of resources and pricing of commodities.

Immediately after the publication of J. M. Keynes’ General Theory in 1936, macroeconomics has been established as a separate branch of study — no less important than microeconomics. Nowadays the study of macroeconomics has assumed significance in almost all the countries of the world. Macroeconomics stud­ies how certain broad aggregates such as national income and the level of employment are determined.

But, the determination of society’s output or GNP and the level of employment does not fall within the purview of Robbins’ definition of economics, in which the focus of attention is the allocation of scarce resources. In other words, the scope of economics is much wider than the simple allocation of resources and pricing of commodi­ties and factors of production.

A study of economic history reveals that most Western capitalist countries have been characterised by periodic fluctua­tions in business (economic) activities — or business (trade) cycles. These are an inherent part of capitalist economic development.

And, it is important to discover and explain the causes of economic fluctuations and suggest measures to ensure full employment and high growth (of per capita income) in the absence of inflation or deflation.

In fact, one major defect of Robbins’ theory is that it has totally ignored the problem of unemployment which is now being faced by both developed and developing countries. Although full employment and stable prices are the twin goals of economic policy, no country has been able to achieve both the goals at the same time.

Robbins’ definition essentially deals with the problem of scarcity. But, the problem of unemployment is not one of scarcity. Unemployment im­plies excess supply of labour. In most developing countries of the world like India, Pakistan, Bangladesh etc. capital is scarce but labour is abundant.

Unemployment implies that labour service or manpower is an abundant factor, not a scarce one. Robbins’ definition leaves this aspect (essentially) of economics completely untouched. In other words, macroeconomics, which has assumed significance in recent years, has been totally ignored by Robbins. It does not fall under the subject matter of study of economics as Robbins has defined it.

4. Neglect of growth and development:

Another major defect of Rob­bins’ definition is that, it is static in nature. It focuses on the allocation of resources at a fixed point of time. But, an economic system has also to allocate resources over time. It has to choose between the production of consumption goods (to meet current needs and wants) and capital goods (to meet future needs for consumption and capital goods).

This is basically the problem of growth. Growth is an aspect of economic dynamics. It refers to the growth of real output of an economy over time. The theory of economic growth is concerned with the physical ability of an economy to produce more goods and services. This, in its turn, depends on a number of factors. In growth theory we study how a country’s national and per capita income increase over time.

We also study what are the sources of growth, i.e., what factors cause an increase in a country’s level of income. Economic growth implies an expansion of society’s production capacity and is reflected in the annual rate of increase of per capita income. Economic growth has job-creating and income-creating effects. It increases the level of employment and raises the levels of national and per capita incomes.

Growth is defined in strictly positive terms — the rate of change of GNP or of per capita income over time. By assuming fixity of resources and by focusing on their allocation at a fixed point of time, Robbins has unnecessarily restricted the area of economic enquiry. However, we live in a dynamic world characterised by population growth, change in the tastes and prefer­ences of buyers, technological progress and so on.

So, we cannot ignore economic dynamics, one major branch of which is economic growth. The theory of economic growth is concerned with overcoming or at least mini­mising the scarcity of resources by raising the level of national income and making it possible to accumulate more capital.

In fact, the rate of capital formation (or the volume of investment) and how effectively it is used are the two most important determinants of economic growth.

The question of growth has assumed more importance in developing countries, like India, due to the existence of massive unemployment and widespread poverty. It is felt that, the only way to remove poverty is to accelerate the rate of economic growth. A faster rate of economic growth will enable a country to improve its living standards by distributing the fruits of progress among all sections of people.

5. Scarcity and poverty:

Another defect of Robbins’ definition is that, it fails to distinguish between scarcity and poverty. Like unemployment, poverty is also a major problem of the world today. Not only developing countries like India but highly developed countries like the USA also face the problem.

It may apparently seem from Robbins’ definition that, the root cause of the poverty problem of both developed and developing countries is scarcity of resources.

But, scarcity and poverty are not the same thing. Poverty implies some basic level of need, either in absolute or relative terms. Absence of poverty means that the basic need has been fulfilled. In contrast, the absence of scarcity means that, we have not merely attained some basic level but have acquired as much of all goods as we desire.

In other words even though the battle against poverty may ultimately be won, the battle against scarcity is always there.

6. Human science vs. social science:

Finally, Robbins’ definition has been criticised on the ground that, it has made economics a human science. It has failed to recognise that economics is a social science. The fields of Political Science, Sociology, Psychology, and Economics often overlap.

Because of the abundance of economic data and ample opportunity for scientific re­search in the real world, economics has been called by Paul Samuelson the Queen of the social sciences.

4. Modern Definition of Economics.

For quite some-time Robbins’ definition of economics was accepted by economists all over the world. But, over the years it gradually became clear that, his definition does not adequately indicate the nature and scope of economic science. His definition is relevant in explaining the nature of price theory or microeconomics, in which the focus is on resource allocation and pricing of commodities and resources.

But, Robbins’ definition has failed to consider the entire field of macroeconomics, in which the stress is on determination of income, employment and the rate of the growth of a nation over time. This is why Charles L. Schultz of the University of Maryland (USA) considers Robbins’ definition as misleading.

In his opin­ion, in particular, Robbins’ definition does not fully reflect two of the major concerns of modern economics, viz., growth and instability (business cy­cles). Therefore, some modern economists have suggested broader defini­tions of economics, embracing the theory of income and unemployment as also the theory of growth and income distribution.

According to Henry Smith, economics is “the study of how in a civilised society one obtains the share of what other people have produced and of how the total product of society is determined and changes over time.” Thus Smith suggests a more correct and broad definition of economics than Robbins.

An analysis of Smith’s definition reveals that it has touched three main subjects or problems of economics.

Firstly, by incorporating “the study of how a person obtains his/her share of what other people have produced” he highlights the problem of income distribution among the various social groups or factor-owners.

Secondly, he focuses on the method of determination of the level of employment and income. It may be noted in this context that, aggregate (total) employment in an economy depends on the volume of output or gross national product.

If the volume of output is large, a large quantity of resources or factors of production (especially labour) will be required to produce it. Thus, the larger the volume of output, the higher the level of employment. If output or GNP increases, more people will be required to produce it. Thus, output expansion will be job-creating and income-creat­ing.

Finally, Smith’s definition contains in it the seeds of modern growth theory because, in his view, economics enquires into “how the total product of society changes”. This means that, economics explain the sources of growth, i.e., the factors which determine the growth of a nation.

Economic growth is measured by the annual rate of growth of national and per capita incomes. In other words, economic growth refers to a sustained or continu­ous increase in per capita income over an extended period of time. Thus, Smith’s definition is more adequate than that of Robbins.

It incorporates three important aspects of an economic system in his definition, viz.:

(1) The sharing of national income or output (or the distribu­tion of national income),

(2) Determination of the level of national income and employment at a fixed point of time, and

(3) The theory of economic growth (which implies an expansion of society’s production capacity).

But, even this definition is not completely satisfactory, because it ignores those aspects of economics with which Robbins and his followers were concerned, viz., the problem of allocation of resources and pricing of products.

These two subjects have been of considerable concern of economists since the publication of Adam Smith’s Wealth of Nations in 1776.

Samuelson’s Final and Compromise Definition:

Perhaps the most acceptable definition comes from Paul Samuelson.

Ac­cording to him, “Economics is the study of how men and society end up choosing with or without the use of money to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various people and groups in the society. It analyses the costs and benefits of improving pattern of resource allocation”.

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