In this essay we will discuss about Economics. After reading this essay you will learn about: 1. Subject Matter of Economics 2. Economics as a Science 3. Economics as an Art 4. Neo-Classical View of Marshall 5. The Classical View of Adam Smith 6. Basic Concepts of Economics 7. Types of Goods in Economics 8. Utility in Economics.
- Essay on Subject Matter of Economics
- Essay on Economics as a Science
- Essay on Economics as an Art
- Essay on Neo-Classical View of Marshall
- Essay on the Classical View of Adam Smith
- Essay on Basic Concepts of Economics
- Essay on Types of Goods in Economics
- Essay on Utility in Economics
Essay # Subject Matter of Economics:
Broadly speaking, the formulation of a definition is a precise procedure of explaining the subject matter. The majority of economic thinkers from Adam Smith to Pigou have defined the subject matter of economics as the study of the causes of material welfare or as the science of wealth.
Marshall, in particular, confined it to the consumption, production, exchange and distribution of wealth by men engaged in the ordinary business of life. Men who are rational beings and act under the existing social, legal and institutional set up. It excludes the behaviour and activities of socially undesirable and abnormal persons like drunkards, misers, thieves, etc.
Professor Robbins, however, finds this subject matter as too restricted in scope to embrace all the facts. He cites numerous examples to show that certain human activities possess a definite economic significance but have little or no connection with material welfare.
The same good or service may promote material welfare at one time and less than one set of circumstances and not at another time under different circumstances. Robbins is, therefore, of the view that for a good or service to have economic significance it must command a price.
And for a good or service to command a price, it is not essential that it must promote material welfare, rather it must be scarce and capable of being put to alternative uses. Thus economics is not concerned so much with the analysis of the consumption, production, exchange and distribution of wealth as with a special aspect of human behaviour-that of allocating scarce means among competing ends.
This fundamental problem is ever present in all times and places and in all sets of circumstances. Thus the subject matter of economics includes the daily activities of the household, of the competitive business world and the administration of public resources in order to solve the problem of scarcity of resources.
The subject matter of economics includes the study of the problems of consumption, production, exchange and distribution of wealth, as well as the determination of the values of goods and services, the volume of employment and the determinants of economic growth. Besides, it includes the study of the causes of poverty, unemployment, underdevelopment, inflation, etc. and steps for their removal.
Essay # Economics as a Science:
There is considerable disagreement among economists whether economics is a science and if it is so, is it a positive or a normative science? In order to answer these questions, it is essential to know what science is and to what extent the characteristics of science are applicable to economics.
A science is a systematized body of knowledge ascertainable by observation and experimentation. It is a body of generalisations, principles, theories or laws which traces out a causal relationship between cause and effect.
For any discipline to be a science:
(i) It must be a systematized body of knowledge;
(ii) Have its own laws or theories;
(iii) Which can be tested by observation and experimentation?
(iv) Can make predictions;
(v) Be self-corrective; and
(vi) Have universal validity. If these features of a science are applied to economics, it can be said that economics is a science.
Economics is a systematized body of knowledge in which economic facts are studied and analysed in a systematic manner. For instance, economics is divided into consumption, production, exchange, distribution and public finance which have their laws and theories on whose basis these departments are studied and analysed in a systematic manner.
Like any other science, the generalisations, theories or laws of economics trace out a causal relationship between two or more phenomena. A definite result is expected to follow from a particular cause in economics like all other sciences.
An example of a principle in chemistry is that, all other things being equal, a combination of hydrogen and oxygen in the proportion of 2: 1 will form water. In physics, the law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal.
Similarly, in economics, the law of demand tells us that other things remaining the same, a fall in price leads to extension in demand and a rise in price to contraction in demand. Here rise or fall in price is the cause and, contraction or extension is its effect. Hence economics is a science like any other science which has its own theories and laws which establish a relation between cause and effect.
Economics is also a science because its laws possess universal validity such as the law of diminishing returns, the law of diminishing marginal utility, the law of demand, Gresham’s law, etc. Again, economics is a science because of its self-corrective nature.
It goes on revising its conclusions in the light of new facts based on observations. Economic theories or principles are being revised in the fields of macroeconomics, monetary economics, international economics, public finance and economic development. But certain economists do not accord economics the status of a science because it does not possess the other features of a science.
Science is not merely a collection of facts by observation. It also involves testing of facts by experimentation. Unlike natural sciences, there is no scope for experimentation in economics because economics is related to man, his problems and activities.
Economic phenomena are very complex as they relate to man whose activities are bound by his tastes, habits, and social and legal institutions of the society in which he lives. Economics is thus concerned with human beings who act irrationally and there is no scope for experimentation in economics.
Even though economics possesses statistical, mathematical and econometric methods of testing its phenomena but these are not so accurate as to judge the true validity of economic laws and theories. As a result, exact quantitative prediction is not possible in economics. For instance, a rise in price may not lead to contraction in demand rather it may expand it if people fear a shortage in anticipation of war.
Even if demand contracts as a result of the rise in price, it is not possible to predict accurately how much the demand will contract. Thus, as opined by Marshall: “In sciences that relate to man exactness is less attainable.” But this does not mean that economics is not a science.
It is definitely a science like any other science. Biology and Meteorology are those sciences in which the scope for predictability is less. The law of tides explains why the tide is strong at a new and full moon and weak at the moon’s first quarter.
At the same time, it is possible to predict the exact hour when the tide will rise. But it may not happen so. The tide may rise earlier or later than the predicted time due to some unforeseen circumstances. Marshall, therefore, compared the laws of economics with the laws of tides rather than with the simple and exact law of gravitation.
For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty.
Essay # Economics as an Art:
Art is the practical application of scientific principles. According to J. N.Keynes, “An art is a system of rules for the attainment of given ends.” Science lays down certain principles while art puts these principles into practical use.
To analyse the causes and effects of poverty falls within the purview of science and to lay down principles for the removal of poverty is art. Art facilitates the verification of economic theories. As pointed out by the Italian economist Cossa, “Art directs, art un-poses, predicts or proposes rules. It solves general economic problems.” Economics is thus both a science and an art in this sense.
However, certain economists do not consider it advisable to treat economics as both a science and an art. For the pressure of practical problems will hinder the development of economics as a science. This will, in turn, react on the effectiveness of the corresponding art.
Therefore, any attempt to solve a particular economic problem in full will so complicate the problem that the work may become hopeless. For this reason, Marshall regarded economics as “a science pure and applied, rather than a science and an art.”
Economists today are realising more and more the need for practical application of the conclusions reached on important economic problems. Therefore, “Economics should not be considered as a tyrannical oracle whose word is final. But when the preliminary work has been truly done, Applied Economics will at certain times on certain subjects speak with the authority to which it is entitled.”
Economics is thus regarded both a science and an art, though economists prefer to use the term applied economics in place of the latter. Samuelson opines, “Economics is the oldest of the arts, the newest of sciences indeed the queen of all the social sciences.”
Economics—Positive or Normative Science:
Before we discuss whether economics is a positive or normative science, let us understand their meanings which are best described by J.N. Keynes (father of Lord Keynes) in these words:
“A positive science may be defined as a body of systematized knowledge concerning what is, a normative science as a body of systematized knowledge relating to criteria of what ought to be, and concerned with the ideal as distinguished from the actual.” Thus positive economics is concerned with “what is” and normative economics with “what ought to be.”
Economics as a Positive Science:
It was Robbins who in his An Essay on the Nature and Significance of Economic Science brought into sharp focus the controversy as to whether economics is a positive or a normative science.
Robbins regards economics as a pure science of what is, which is not concerned with moral or ethical questions. Economics is neutral between ends. The economist has no right to pass judgment on the wisdom or folly of the ends itself.
He is simply concerned with the problem of scarce resources in relation to the ends desired. The manufacture and sale of cigarettes and wine may be injurious to health and therefore morally unjustifiable, but the economist has no right to pass judgment on this, since both satisfy human wants and involve economic activity.
Following the classical economists, Robbins regards the propositions involving the verb ought as different in kind from the proposition involving the verb is. He finds a ‘logical gulf’ between the positive and normative fields of enquiry as they “are not on the same plane of discourse.”
Since “Economics deals with ascertainable facts” and “ethics with valuations and obligations,” he finds no reason for “not keeping them separate, or failing to recognise their essential difference.” He, therefore, opines that “the function of economists consists in exploring and not advocating and condemning.”
Thus an economist should not select an end, but remain neutral, and simply point out the means by which the ends can be achieved.
Like Robbins, Friedman also considers economics as a positive science. According to him, “the ultimate goal of a positive science is the development of a ‘theory’ or ‘hypothesis’ that yields valid and meaningful (not truistic) predictions about phenomena not yet observed.” In this context, economics provides systematic generalisations which can be used for making correct predictions.
Since the predictions of economics can be tested, economics is a positive science like physics which should be free from value judgments. According to Friedman, the aim of an economist is like that of a true scientist who formulates new hypotheses.
Hypotheses permit us to predict about future events or to explain only what happened in the past. But predictions of such hypotheses may or may not be limited by events. Thus economics claims to be a positive science like any other natural science.
Thus economics is a positive science. It seeks to explain what actually happens and not what ought to happen. This view was held even by the nineteenth century economists. Almost all leading economists from Nassau Senior and J.S. Mill onwards had declared that the science of economics should be concerned with what is and not with what ought to be.
Economics as a Normative Science:
Economics is a normative science of “what ought to be.” As a normative science, economics is concerned with the evaluation of economic events from the ethical viewpoint. Marshall, Pigou, Hawtrey, Frazer and other economists do not agree that economics is only a positive science.
They argue that economics is a social science which involves value judgments’ and value judgments cannot be verified to be true or false. It is not an objective science like natural sciences. This is due to the following reasons.
First, the assumptions on which economic laws, theories or principles are based relate to man and his problems. When we try to test and predict economic events on their basis, the subjectivity element always enters.
Second, economics being a social science, economic theories are influenced by social and political factors. In testing them, economists are likely to use subjective value judgements.
Third, in natural sciences, experiments are conducted which lead to the formulation of laws. But in economics experimentation is not possible. Therefore, the laws of economics are at best tendencies.
Thus the view that economics is only a positive science is divorced from reality. The science of economics cannot be separated from the normative aspect. Economics as a science is concerned with human welfare and involves ethical considerations. Therefore, economics is also a normative science.
As pointed out by Pigou, Marshall believed that “economic science is chiefly neither valuable neither as an intellectual gymnastics nor even as a means of winning truth for its own sake, but as a handmaid of ethics and a servant of practice.”
On these considerations, economics is not only “light-bearing,” but also “fruit- bearing.” Economists cannot afford to be mere spectators and arm-chair academicians. “An economist who is only an economist,” said Fraser “is a poor pretty fish.”
In this age of planning when all nations aspire to be welfare states, it is only the economist who is in a position to advocate, condemn and remedy the economic ills of the modern world. “When we elect to watch the play of human motives that are ordinary—that are something mean and dismal and ignoble,” wrote Prof. Pigou, “our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge but rather the physiologist’s knowledge for the healing that knowledge may help to bring.” It is not enough for the economist to explain and analyse the problems of unequal distribution of wealth, industrial peace, social security, etc. Rather his work is to offer suggestions for the solution of such problems.
Had he remained a mere theoretician, poverty and misery and class-conflicts would have been the lot of mankind. The fact that economists are called upon to pronounce judgements and tender advice on economic problems shows that the normative aspect of the economic science has been gaining ground ever since the laissez-faire spirit became dead.
Wootton is right when she says, “It is very difficult for economists to divest their discussions completely of all normative significance.” Myrdal is more forthright when he says that economics is necessarily value-loaded and “a ‘disinterested social science’ has never existed and, for logical reasons, cannot exist.”
About the relation between normative and positive economics, Friedman observes: “The conclusions of positive economics seem to be, and are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained.”
Normative economics cannot be independent of positive economics, though positive economics is free from value judgements. Economics is, therefore, not only a positive science of “what is” but also a normative science of “what ought to be.”
Essay # Robbins Scarcity Definition of Economics:
It was Lord Robbins who with the publication of his Nature and Significance of Economic Science in 1932 not only revealed the logical inconsistencies and inadequacies of the earlier definitions but also formulated his own definition of economics. According to Robbins, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
This definition is based on the following related postulates:
1. Economics is related to one aspect of human behaviour, of maximising satisfaction from scarce resources.
2. Ends or wants are scarce. When a particular want is satisfied others crop up to take its place. Multiplicity of wants makes it imperative for human beings to work ceaselessly for their satisfaction but they are usable to satisfy all.
3. The obvious reason for the non-satisfaction of unlimited wants is the scarcity of means at the disposal of mankind. The time and means available for satisfying these ends are scarce or limited.
4. The scarce means are capable of alternative uses. Land is capable of being used for growing rice, sugarcane, wheat, maize, etc. Likewise, coal can be made use of in factories, railways, for generation of electricity, etc. At a time, the use of a scarce resource for one end prevents its use for any other purpose.
5. The ends are of varying importance which necessarily leads to the problem of choice—of selecting the uses to which scarce resources can be put.
6. Economics is related to all kinds of behaviour that involve the problem of choice. This clearly distinguishes economics from technical, political, historical or other aspects. The problem of how to build a college building with given resources is technical.
But the problem of choosing the best combination of resources or the problem of allocating given building resources between an auditorium, library, laboratory, and lecture rooms, cycle-shed and canteen is economic. Thus economics is related to the valuation process which studies the production and distribution of goods and services for fulfilling the needs of mankind.
To conclude, economics is essentially a valuation process which is concerned with multiple ends and scarce means being put to alternative uses in order of their importance. In the ultimate analysis, the economic problem is one of economizing scarce means in relation to numerous ends.
Superiority of Robbins’ Definition:
Robbins’ definition is superior to the earlier definitions in more than one way.
Firstly, it does not contain such vague expressions as ‘material welfare’ and ‘material requisites of well are being’ which had made the neo-classical formulations classificatory. His definition, therefore, is analytical for it does not attempt to pick out certain kinds of behaviour, but focuses attention on a particular aspect of behaviour, the form imposed by the influence of scarcity.
Secondly, Robbins emphasizes that economics is a science. It is a systematized body of knowledge which gives its proud possessor a framework within which to analyse the problems associated with the study. Like other pure sciences, economics is neutral between ends.
The ends may be noble or ignoble, material or immaterial, economic or non-economic, economics is not concerned with them as such. Economics has thus nothing to do with Ethics. For, according to Robbins, “Economics deals with ascertainable facts. Ethics with valuation and obligations. The two Fields of inquiry are not on the same plane of discourse.”
Thirdly, Robbins has made economics a valuation process. Whenever the ends are unlimited and the means are scarce, they give rise to an economic problem. In such a situation, there is little need for defining economics as the study of the causes of material welfare. The problems of production and distribution of wealth are also of economizing scarce resources in relation to varied ends.
Lastly, there is universality in Robbin’s scarcity definition of economics. It is as much applicable to a Robinson Crusoe economy as to a communist economy and a capitalist economy. Its laws are like the laws of life and are independent of all legal and political frameworks. All this led economists to describe Robbins’ definition as the “dominant academic doctrine” of the times.
Criticisms of Robbins’ Definition:
Many economists have criticized Robbins’ definition on the following grounds:
1. Artificial Relation between Ends and Means:
Some critics characterize the relationship between ends and scarce means as presented by Robbins as “artificial schemaIn his definition, Robbins fails to explain fully the nature of ‘ends’ and the difficulties associated with it.”
2. Difficult to Separate Ends from Means:
Robbins’ assumption of definite ends is also unacceptable because immediate ends may act as intermediaries to further ends. In fact, it is difficult to separate ends from means distinctly. Immediate ends may be the means to the achievement of further ends, and means by themselves may be the ends of earlier actions.
3. Economics not Neutral between Ends:
Economists have criticized Robbins’ definition for its ethical neutrality. Robbins’ contention that “Economics is neutral between ends” is unwarranted. Unlike physical sciences, economics is concerned not with matter but with human behaviour. It is, therefore, not possible for economists to dissociate economics from Ethics.
4. Neglects the Study of Welfare:
Robbins’ formulation of economizing scarce means in relation to ends for the solution of all economic problems is simply a valuation problem. This has tended to narrow the jurisdiction of economics. According to Boulding, “Prof. Robbins in defining economics as a valuation problem seems to deprive economics of the right to study welfare.” Economics will be an incomplete body of knowledge without the study of welfare which Robbins neglects.
5. Economics not Merely a Positive but also a Normative Science:
By concentrating exclusively on the valuation problem, Robbins has made economics a positive science. But economists like Souter, Parsons, Wootton, and Macfie regard it not only a positive science but also a normative science. According to Macfie, “Economics is fundamentally a normative science, not merely a positive science like chemistry.”
6. Robbins’ Definition too Narrow and too Wide:
Robertson regards Robbins’ definition “at once too narrow and too wide.” It is too narrow since it does not include organisational defects which lead to idle resources. On the other hand, the problem of allocating scarce means among given ends is such that it may arise even in fields which lie outside the jurisdiction of economics.
The captain of a team in a playground or an army commander in battlefield may be faced with the problem of scarce resources in the event of a member being injured. Thus, Robbins’ scarcity formulation is applicable even to non-economic problems thereby making the scope of economics too wide.
7. Economics Concerned with Social Behaviour rather than Individual Behaviour:
Robbins’ conception of economics is essentially a micro analysis. It is concerned with individual behaviour, of economizing ends with the limited means at his disposal. But economics is not concerned with individualistic ends and means alone.
It has nothing to do with a Robinson Crusoe economy. Our economic problems are related to social rather than individual behaviour. Robbins’ definition is, therefore, steeped in classical tradition and fails to emphasize the macro-economic character of economics.
8. Fails to Analyse the Problems of Unemployment of Resources:
Robbins’ scarcity formulation possesses little practical usefulness as it fails to analyse the causes of general unemployment of resources. Unemployment is caused not by scarcity of resources but by their abundance. It is, therefore, only in a fully employed economy that the problem of allocating scarce resources among alternative uses arises.
Thus the scarcity definition of Robbins, applicable as it is to a fully employed economy, is unrealistic for analysing the economic problems of the real world.
9. Does not Offer Solutions to the Problems of LDCs:
Robbins’ conception of economics offers no solution to the problems of underdeveloped countries. The problems of underdeveloped countries are concerned with the development of unused resources. Resources are in abundance in such economies but they are either unutilized, or underutilised or misutilised.
Robbins’ scarcity formulation, however, takes the resources as given and analyses their allocation among alternative uses.
10. Neglects the Problems of Growth and Stability:
Robbins’ scarcity definition neglects the problems of growth and stability which are the corner stone’s of the present day economics.
Of the two definitions of welfare and scarcity, it is not possible to say with precision which is better than the other.
As Boulding opines:
“To define it as a study of mankind in the ordinary business of life, is surely too broad. To define it as the study of material wealth is too narrow. To define it as the study of human valuation and choice is again probably too wide, and to define it as the study of that part of human activity subject to the measuring rod of money is again too narrow.” He, therefore, agrees with Jacob Viner that “Economics is what economists do.”
However, the truth is that keeping in view the present day trend of establishing welfare states in the world; the welfare definitions are more practicable whereas the scarcity definitions are more scientific.
A satisfactory definition must combine both these conceptions of economics. We may define economics as a social science concerned with the proper use and allocation of resources for the achievement and maintenance of growth and stability.
Essay # Neo-Classical View of Marshall:
It was, however, the neo-classical school led by Alfred Marshall which gave economics a respectable place among social sciences. Marshall laid emphasis on man and his welfare. Wealth was regarded as the source of human welfare, not an end in itself but a means to an end.
According to Marshall, “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 wellbeing. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.”
Certain logical inferences can be drawn from Marshall’s definition.
First, economics is concerned with man’s ordinary business of life. It is related to his wealth-getting and wealth-using activities. Or, as Marshall put it: It “deals with his [man’s] 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.”
Secondly, economics is a social science. It “is a study of men as they live and move and think in the ordinary business of life.” Thus, economics is concerned with the economic aspects of social life. It excludes the activities of socially undesirable and abnormal persons like thieves, misers, etc.
Thirdly, it is related to those economic activities which promote material welfare. Non-economic activities and activities having ignoble ends are excluded from the study of economics. Lastly, by using the broad term ‘Economics’ in place of the narrower term ‘Political Economy’, Marshall lifted economics to the realm of a science and divested it of all political influences.
Marshall, however, emphasised that economics is concerned with wealth simply by accident and its “true philosophic raison d’etre must be sought elsewhere.” Robbins, therefore, in his Essay on the Nature and Significance of Economic Science finds fault with Cannan’s enunciation of the welfare conception of economics on the following grounds.
1. Distinction between Material and Non-Material things Faulty:
Robbins criticizes the distinction between material and non-material things as established by the neo-classical economists. The latter include only those activities within the scope of economics which lead to the production and consumption of material goods and services.
Robbins, however, regards all goods and services which command a price and enter into the circle of exchange as economic whether they are material or non-material.
The services of teachers, lawyers, actors, etc. have each their economic aspect, because they are scarce and possess value. To say that services are non-material “is not only perverse, it is also misleading. For it is not the materiality of even material means of gratification,” says Robbins, “which gives them their status as economic goods; it is their relation to valuations. The ‘materialist’ definition of Economics, therefore, misrepresents the science as we know it.”
2. Economics not concerned with Material Welfare:
Robbins also objects to the use of the word welfare along with material. For the neo-classical economists, economics is concerned with the causes of material welfare. To Robbins, however, there are certain material activities but they do not promote welfare.
For example, the manufacture and sale of wine is an economic activity but it is not conducive to human welfare. Such goods are significant from the economic point of view because they are scarce and have value.
There is a contradiction in the “non-material definition of productivity”, used by Marshall. He regards the services of opera singers and dancers as productive so long as they are demanded by the people. But since they are non-material, they do not promote human welfare. As such, their services are not the subject matter of economics.
Robbins, however, points out that “the services of the opera dancer are wealth. Economics deals with the pricing of their services, equally with the pricing of the services of a cook. He, therefore, concludes: “Whatever Economics is concerned with, it is not concerned with the causes of material welfare as such.”
4. Concept of Economic Welfare Vague:
The idea of economic welfare is vague. Money cannot be regarded as an accurate measure of welfare, for the conception of welfare is subjective and relative. The idea of welfare varies with each individual. Wine may give pleasure to a drunkard, but it may be harmful for the novice.
Again, it may be useful for people living in Siberia and Iceland but injurious for those living in hot climates. This interpersonal comparison of utility implies value judgment, which transports economics to the realm of Ethics. But Robbins has nothing to do with Ethics. To him, Economics is entirely neutral between ends. The ends may be noble or base, the economist is not concerned with them as such.
5. Welfare Definition & Classificatory and Not Analytical:
Robbins criticizes the material welfare definitions as being classificatory rather than analytical. These definitions deal with certain kinds of human behaviour—those directed towards the procurement of material welfare.
But other kinds of activities concerned with a particular aspect of human behaviour lie outside the jurisdiction of economics. Whereas the neoclassical described certain activities being “economic” and “non-economic”, Robbins finds no valid reason for making this distinction as every human activity has an economic aspect when it is undertaken under the influence of scarcity.
6. Economics not a Social Science but a Human Science:
Robbins does not agree with Marshall that economics is a social science— “a study of men as they live and move and think in the ordinary business of life.” Rather he regards economics as a human science. Economics is as much concerned with an exchange economy as with a Robinson Crusoe economy. The central problem in economics, according to Robbins, is that of valuation which is one of allocation of scarce means among alternative ends.
Since the generalisations of the theory of value are as applicable to the behaviour of an isolated man or to the executive authority of a communist society, as to the behaviour of man in an exchange economy. Therefore, economics should be regarded as a human science.
Essay # The Classical View of Adam Smith:
The classical economists beginning with Adam Smith defined economics as the science of wealth. Adam Smith defined it as the “nature and causes of wealth of nations,” whereby it “proposes to enrich both the people and the sovereign.”
Among his followers, J.B. Say in France defined economics as “the study of the laws which govern wealth;” to Nassau Senior at Oxford, “the subject treated by political economists…is not happiness, but wealth;” whereas to F.A. Walker in America, “Economics is that body of knowledge which relates to wealth.”
According to J.S. Mill, “Writers on Political Economy profess to teach the nature of wealth and the laws which govern its production, distribution and exchange.” To J.E. Cairnes, “Political Economy is a science…it deals with the phenomena of wealth.” While B. Price declared in 1878 that “all are agreed that it is concerned with wealth.”
The classical view was misleading and had serious defects. This conception of economics as a science of wealth laid exclusive stress on material wealth. Following Smith and Say, the Earl of Lauderdale (1804) and McCulloch (1827) regarded economics as related to material wealth, wealth being “the object of man’s desires.”
In an age when religious sentiments ran high, this conception of economics was interpreted as concerning only the acquisition of riches or money. This led economics to be branded as the science of Mormonism, of bread and butter, a dismal science, the science of getting rich.
Bailey called it “a mean, degrading, sordid inquiry.” To Carlyle it was a “pig-science.” Ruskin lamented in the Preface to his Unto the Last that economists were in “an entirely damned state of soul.” Even economists like Jevons and Edge worth were despaired of this wealth-oriented conception of economics. Edge worth regarded it as “dealing with the lower elements of human nature.”
The main drawback in wealth definition of economics had been its undue emphasis on wealth-producing activities. Wealth was considered to be an end in itself. Moreover, as pointed out by Macfie the “fatal word ‘material’ is probably more responsible for the ignorant slanders on the ‘dismal science’ than any other description.”
By stressing on the word ‘material wealth’ the classical economists narrowed the scope of economics by excluding all economic activities which are related to the production of non-material goods and services, such as of doctors, teachers, etc.
Essay # Basic Concepts of Economics:
Ordinarily, the concept of value is related to the concept of utility. Utility is the want satisfying quality of a thing when we use or consume it. Thus utility is the value-in-use of a commodity. For instance, water quenches our thirst. When we use water to quench our thirst, it is the value-in-use of water.
In economics, value means the power that goods and services have to exchange other goods and services, i.e. value-in-exchange. If one pen can be exchanged for two pencils, then the value of one pen is equal to two pencils. For a commodity to have value, it must possess the following three characteristics.
It should have utility. A rotten egg has no utility because it cannot be exchanged for anything. It possesses no value-in-exchange.
Mere utility does not create value unless it is scarce. A good or service is scarce (limited) in relation to its demand. All economic goods like pen, book, etc. are scarce and have value. But free goods like air do not possess value. Thus goods possessing the quality of scarcity have value.
Besides the above two characteristics, a good should be transferable from one place to another or from one person to another. Thus a commodity to have value-in-exchange must possess the qualities of utility, scarcity and transferability.
2. Value and Price:
In common language, the terms ‘value’ and ‘price’ are used as synonyms (i.e. the same). But in economics, the meaning of price is different from that of value. Price is value expressed in terms of money. Value is expressed in terms of other goods. If one pen is equal to two pencils and one pen can be had for Rs.10. Then the price of one pen is Rs.10 and the price of one pencil is Rs.5.
Value is a relative concept in comparison to the concept of price. It means that there cannot be a general rise or fall in values, but there can be a general rise or fall in prices. Suppose 1 pen = 2 pencils. If the value of pen increases it means that one pen can buy more pencils in exchange.
Let it be 1 pen= 4 pencils. It means that the value of pencils has fallen. So when the value of one commodity raises that of the other good in exchange falls. Thus there cannot be a general rise or fall in values. On the other hand, when prices of goods start rising or falling, they rise or fall together.
It is another thing that prices of some goods may rise or fall slowly or swiftly than others. Thus there can be a general rise or fall in prices.
In common use, the term ‘wealth’ means money, property, gold, etc. But in economics it is used to describe all things that have value. For a commodity to be called wealth, it must prossess utility, scarcity and transferability. If it lacks even one quality, it cannot be termed as wealth.
Forms of Wealth:
Wealth may be of the following types:
1. Individual Wealth:
Wealth owned by an individual is called private or individual wealth such as a car, house, company, etc.
2. Social Wealth:
Goods which are owned by the society are called social or collective wealth, such as schools, colleges, roads, canals, mines, forests, etc.
3. National or Real Wealth:
National wealth includes all individual and social wealth. It consists of material assets possessed by the society. National wealth is real wealth.
4. International Wealth:
The United Nations Organisation and its various agencies like the World Bank, IMF, WHO, etc. are international wealth because all countries contribute towards their operations.
5. Financial Wealth:
Financial wealth is the holding of money, stocks, bonds, etc. by individuals in the society. Financial wealth is excluded from national wealth. This is because money, stocks, bonds, etc. which individuals hold as wealth are claims against one another.
Wealth is different from capital, income and money.
Wealth and Capital:
Goods which have value are termed as wealth. But capital is that part of wealth which is used for further production of wealth. Furniture used in the home is wealth but given on rent is capital. Thus all capital is wealth but all wealth is not capital.
Wealth and Income:
Wealth is a stock and income is a flow. Income is the earning from wealth. The shares of a company are wealth but the dividend received on them is income.
Wealth and Money:
Money consists of coins and currency notes. Money is the liquid form of wealth. All money is wealth but all wealth is not money.
4. Stocks and Flows:
Distinction may be made here between a stock variable and a flow variable. A stock variable has no time dimension. Its value is ascertained at some point in time. A stock variable does not involve the specification of any particular length of time. On the other hand, a flow variable has a time dimension. It is related to a specified period of time.
So national income is a flow and national wealth is a stock. Change in any variable which can be measured over a period of time relates to a flow. In this sense, in ventories are stocks but change in inventories in a flow.
A number of other examples of stocks and flows can also be given. Money is a stock but the spending of money is flow. Government debt is stock. Saving and investment and operating surplus during a year are flows but if they relate to the past year, they are stocks.
But certain variables are only in the form of flows such as NNP, NDP, value added, dividends, tax payments, imports, exports, net foreign investment, social security benefits, wages and salaries, etc.
Optimisation means the most efficient use of resources subject to certain constraints it is the choice from all possible uses of resources which gives the best results, it is the task of maximisation or minimisation of an objective function it is a technique which is used by a consumer and a producer as decision-maker.
A consumer wants to buy the best combination of a consumer good when his objective function is to maximise his utility, given his fixed income as the constraints. Similarly, a producer wants to produce the most suitable level of output to maximise his profit, given the raw materials, capital, etc. as constraints.
As against this, a firm cans hence the objective of minimisation of its cost of production by choosing the best combination of factors of production, given the manpower resources, capital, etc. as constraints. Thus optimisation is the determination of the maximisation or minimisation of an objective function.
Essay # Types of Goods in Economics:
1. Material and Non-Material Goods:
Goods may be material and non-material. Material goods are those which are tangible. They can be seen, touched and transferred from one place to another. For example, cars, shoes, cloth, machines, buildings, wheat, etc., are all material goods.
On the other hand, non-material goods are intangible for they do not possess any shape or weight and cannot be seen, touched or transferred. Services of all types are non-material goods such as those of doctors, engineers, actors, lawyers, teachers, etc. The characteristics common to both material and non-material goods are that they have value and satisfy human wants.
Economic and Non-economic Goods:
Material goods are further divided into economic and non-economic goods. Economic goods are those which have a price and their supply is less in relation to their demand or is scarce. The production of such goods requires scarce resources having alternative uses. For example, land is scarce and is capable of producing rice or sugarcane.
If the farmer wants to produce rice he will have to forgo the production of sugarcane. The price of rice equals the production of sugarcane forgone by the farmer. Thus economic goods relate to the problem of economizing scarce resources for the satisfaction of human wants. In this sense, all material goods are economic goods.
Non-economic goods are called free goods because they are free gifts of nature. They do not have any price and are unlimited in supply. Examples of non-economic goods are air, water, sunshine, etc. The concept of non-economic goods is relative to place and time. Sand lying near the river is a free good but when it is collected in a truck and carried to the town for house construction, it becomes an economic good.
It is now scarce in relation to its demand and fetches a price. There was a time when water could be had free from the wells and rivers. Now when it is stored and pumped through pipes to houses it is sold at a price to consumers.
Thus what is a free good today may become an economic good with technological advancement. For example, air which is a free good becomes an economic good when we install air conditioners, room coolers and fans.
Consumers’ Goods and Producers’ goods:
Economics goods are further divided into consumers’ goods and producers’ goods.
1. Consumers’ Goods:
Consumers’ goods are those final goods which directly satisfy the wants of consumers. Such goods are bread, milk, pen, clothes, furniture, etc. Consumers’ goods are further sub-divided into single-use consumers’ goods and durable use consumers’ goods.
(a) Single-use Consumers’ Goods:
These are goods which are used up in a single act of consumption. Such goods are foodstuffs, cigarettes, matches, fuel, etc. They are the articles of direct consumption because they satisfy human want directly. Similarly, the services of all types such as those of doctors, actors, lawyers, waiters, etc. are included under single use goods.
(b) Durable-use Consumers’ Goods:
These goods can be used for a considerable period of time. It is immaterial whether the period is short or long. Such goods are pens, tooth brushes, clothes, scooters, TV sets, etc.
2. Capital or Producers’ Goods:
Capital goods are those goods which help in the production of other goods that satisfy the wants of the consumers directly or indirectly, such as machines, plants, agricultural and industrial raw materials, etc. Producers’ goods are also classified into single-use producers’ goods and durable- use producers’ goods.
(a) Single-use Producers’ Goods:
Theses goods are used up in a single act of production. Such goods are raw cotton, coal used in factories, paper used for printing books, etc. When once used, these goods lose their original shape.
(b) Durable-use Producers’ Goods:
These goods can be used time and again. They do not lose their usability through a single use but are used over a long period of time. Capital goods of all types such as machines, plants, factory buildings, tools, implements, tractors, etc. are examples of durable-use producers’ goods.
The distinction between consumers’ goods and capital goods is based on the uses to which these goods are put. There are many goods such as electricity, coal, etc. which are used both as consumers’ goods and capital goods.
The distinction between single-use goods and durable-use goods has great significance from the point of the economy. The demand for single-use goods is more regular and steady over time and can be predicted in advance.
On the other hand, the demand for durable-use goods is irregular and uncertain. It takes much longer time to adjust supply to changes in demand in the case of such goods. This is partly the cause for trade cycles in an economy which produces durable-use goods in large quantities.
2. Intermediate Goods:
Goods sold by one firm to another for resale or for further production are called intermediate goods. They are single-use producers’ goods that are transformed to manufacture final goods. Intermediate goods are also termed as inputs.
Cotton from the fields is sold to the spinning mill where it is transformed into yarn. In turn, the yarn leaves the spinning mill by way of sale to the textile mill where it disappears into a new product, cloth. Again, cloth is sold by the mill to the trader to be sold as final goods.
3. Final Goods:
On the other hand, goods sold not for resale or for further production but for personal consumption or for investment are called final goods. On the basis of this definition, a particular good or service may be classified intermediate good or final good.
For instance, the water sold by the municipal corporation to commercial and industrial undertaking is an intermediate good because it is used by them for further production.
On the other hand, the water sold to individual households is final good because it is used for personal consumption. Similarly, the postal services sold to business houses are intermediate goods and those to households are final goods.
Thus the services of government enterprises and of non-profit institutions should be classified as intermediate or final goods according to the definition given above. What these enterprises and institutions purchase from firms are intermediate goods because they are used in the services they render to final consumers.
When the government buys cement, steel and other raw materials to build roads and bridges, consumers use the services of the roads and bridges which are final goods. The distinction between intermediate and final goods is of much importance in the computation of national income. It is especially so while computing national income by the product method or value added method.
Essay # Utility in Economics:
Meaning of Utility:
The want satisfying power of a commodity is called utility. It is a quality possessed by a commodity or service to satisfy human wants. Utility can also be defined as value-in-use of a commodity because the satisfaction which we get from the consumption of a commodity is its value-in-use.
Types of Utility:
Utility may take any of the following forms:
(1) Form Utility:
When utility is created and or added by changing the shape or form of goods, it is form utility. When a carpenter makes a table out of wood, he adds to the utility of wood by converting it into a more useful commodity like furniture. He has created form utility.
(2) Place Utility:
When the furniture is taken from the factory to the shop for sale, it leads to place utility. This is because it is transported from a place where it has no buyers to a place where it fetches a price.
(3) Time Utility:
When a farmer stores his wheat after harvesting for a few months and sells it when its price rises, he has created time utility and added to the value of wheat.
(4) Service Utility:
When doctors, teachers, lawyers, engineers, etc. satisfy human wants through their services, they create service utility. It is acquired through specialised knowledge and skills.
(5) Possession Utility:
Utility is also added by changing the possession of a commodity. A book on economic theory has little utility for a layman. But if it is owned by a student of economics, possession utility is created.
(6) Knowledge Utility:
When the utility of a commodity increases with the increase in knowledge about its use, it is the creation of knowledge utility through propaganda, advertisement, etc.
(7) Natural Utility:
All free goods such as water, air, sunshine, etc., possess natural utility. They have the capacity to satisfy our wants.
Characteristics of Utility:
The following are the characteristics of utility:
1. Utility and Usefulness:
Anything having utility does not mean that it is also useful. If a good possesses want satisfying power, it has utility. But the consumption of that good may be ‘useful’ or ‘harmful’. For example, the consumption of wine possesses utility for a man habitual to drinking because it satisfies his want to drink. But the use of wine is harmful for health, but it has utility. Thus utility is not usefulness.
2. Utility and Satisfaction:
Utility is the quality or power of a commodity to satisfy human wants, whereas satisfaction is the result of utility. Apples lying in the shop of a fruit seller have utility for us, but we get satisfaction only when we purchase and consume them. It means utility is present even before the actual consumption of a commodity and satisfaction is obtained only after its consumption. Utility is the cause and satisfaction is the effect or result.
3. Utility and Pleasure:
It is not necessary that a commodity processing utility also gives pleasure when we consume it. Utility is free from pain or pleasure. An injection possesses utility for a patient, because it can relieve him of his illness. But injection gives him no pleasure; instead it gives him some pain. Quinine is bitter in taste but it has the utility to treat the patient from malaria. So, there is no relationship between utility and pleasure.
4. Utility is Subjective:
Utility is a subjective and psychological concept. It means utility of a commodity differs from person to person. Opium is of great utility for a man accustomed to opium, but it has no utility for a man who is not accustomed to opium. In the same manner, utility of different commodities differs from person to person. Therefore, utility is subjective.
5. Utility is Relative:
Utility is a relative concept. A commodity may possess different utility at different times or at different places or for different persons. In olden days, a Tonga had greater utility. But now with the invention of bus, its utility has become less. A rain coat has greater utility in hilly areas during rainy season than in plain areas. A fan has greater utility in summer than in winter.
6. Utility is Abstract:
Utility is abstract which cannot be seen with eyes, or touched or felt with hands. For example, the argumentative power of an advocate is abstract. Similarly, utility is abstract. Utility of a commodity can neither be seen not touched or felt with hands.
Measurement of Utility:
According to Marshall, the utility of a commodity can be measured in terms of money. If a consumer is willing to pay Rs.2 for an orange and Re 1 for a banana, then the utility of an orange is equal to Rs.2 and that of a banana is Re. 1 to him.
It means that the utility of one orange is equal to 2 bananas. In other words, the utility of an orange to the consumer is twice that of the banana. But this analysis does not hold when there are two different consumers offering two different prices for the same commodity.
Suppose Bhanu offers Rs.2 for a banana for which Gautam is prepared to pay Re. 1.The higher price paid by Bhanu does not mean that he gets more utility and Gautam less utility. Thus money does not measure the utility from a commodity. It simply measures the intensity of our desire for a commodity. Despite this weakness, money is used as a measure of utility.
Cardinal and Ordinal Utility:
The terms ‘cardinal’ and ‘ordinal’ have been borrowed from mathematics. The numbers 1, 2, 3, 4, etc. are cardinal numbers. According to the cardinal system, the utility of a commodity is measured in units and that utility can be added, subtracted and compared.
For example, if the utility of one apple is 10 units, of banana 20 units and of orange 40 units, the utility of banana are double that of apple and of orange four times the apple and twice the banana.
The ordinal numbers are 1st, 2nd, 3rd, 4th, etc. which may stand for 1, 2, 4, 6 or 30, 40, 60, 80, etc. They tell us that the consumer prefers the first to the second and the third to the second and first, and so on. But they cannot tell by how much he prefers one to the other.
The entire Marshallian utility analysis is based on the cardinal measurement of utility. According to Hicks, utility cannot be measured cardinally because utility which a commodity possesses is subjective and psychological. He, therefore, rejects the quantitative measurement of utility and measures utility ordinally in terms of the indifference curve technique.