Economics is the branch of social sciences that deals with understanding how and why the economic choices behind managing resources are made in an economy, both individually and collectively. The individual part of economics is known as microeconomics, whereas the collective aspect is studied under macroeconomics.
To put it simply, any business or individual or the government of a nation wants to make the best choices in their functioning to maximize their welfare. They make certain choices regarding various aspects such as savings, investments, taxation, production methods, and costing methods. Economics aims to understand how these decisions are made at both micro and macro levels, and what effect these decisions have on the other factors of the economy such as national income, unemployment, inflation rates, and capital creation.
Economics as a study has existed for over a millennium, and as such has been developed by various economic philosophers. This has given rise to multiple theories and models over time. The most popularly accepted theories were the result of each economist trying to address the limitations of their predecessors’ definitions. The evolution of these definitions is discussed.
Adam Smith was a Scottish economist who gave the most fundamental definition of economics. He is considered to be the father of economics because he was the founder of many of the primary theories that are the basis of modern-day principles of economics. In his 1776 book, Wealth of Nations, he stated economics as-
His definition was primarily focused on the wealth aspect of activities that build a nation. He believed that the end goal of any nation to be prosperous should be to produce, accumulate, and distribute wealth. Wealth, here, is referred to goods that have monetary value and can be used to meet the needs of individuals. He stated that the individual decisions of a man are purely based on self-interest and practicality. This man was defined as an economic man.
The premise of this definition was that the need for wealth was a universal problem. Economics can be beneficial to every nation in its mission to solve this problem. Almost all individual problems could be solved to a large extent by the accumulation of wealth.
Criticisms of Wealth Definition
The more developed the field of economics became, the more prominent the problems with this definition were. The following criticisms were charged against this definition-
- Materialistic- Smith’s definition was only focused on activities that maximized wealth. These completely overlooked activities that aimed at the satisfaction or welfare of an individual. The primary goal of every individual under this definition was to collect wealth.
- Wealth Definition- Wealth only referred to goods with material value. This, once again, neglected resources such as the services provided by humans such as teaching or practicing law.
- Economic man- This was an unsophisticated and self-centered idea of what makes an individual make economic choices. It ignores the selfless and noble intentions behind some decisions made by a man. This is why critics called this idea the ‘bread-and-butter science’
Adam Smith gave the first organized definition of economics. This worked as a good foundation for almost a century of economic studies. Soon, this led to the need for a more refined definition that took into consideration the shortcomings of Smith’s ideas. This definition is still a major contributor to understanding the wealth production needs of a nation.
Economist Alfred Marshall published a book in 1890 known as Principles of Economics and defined economics as-
His definition modified what was proposed by Adam Smith. He focused on the wealth aspect of activities while also giving due importance to welfare. He theorized that wealth was not the end goal of a man, but a means to the end goal of welfare.
He also moved beyond the scope of a man only working in self-interest to include understanding the choices made by a typical individual. His definition wanted economics to analyze the activities performed by individuals to attain and use wealth in the normal routine of life.
Criticisms of Welfare Definition
The biggest critic of Marshall’s definition was a British economist, Lionel Robbins. He leveled the following criticisms-
- Material Welfare- While it was an improvement on Smith’s definition, it still focused on the material aspects of activities. Non-material welfare activities were still ignored.
- Wealth & Welfare Link- Robbins reasoned that no definite relationship can be explained between wealth-creating economic activities and welfare. Some activities create wealth but do not contribute to the welfare of society. For example, alcohol consumption is an economic activity that generates wealth but does not lead to welfare.
- Scarcity- Both Adams and Marshall ignore the problem of scarcity and unlimited resources. The basic purpose of an activity performed by any individual or a nation as a whole is to find a solution to the problem of scarcity.
- Normative- A normative science observes an activity and judges its value. Robbins believed that the job of economics was not to pass judgments but to witness.
This definition added the concept of welfare as the final aim for wealth creation. This gave a complex characteristic to economic decisions. The purview of economics now involved observing and analyzing regular persons in their everyday life. Despite that, it failed to focus on non-material activities. It also could not create a proper connection between economic activities and welfare.
The widely accepted theory of economics comes from Lionel Robbins himself. His definition was a direct result of criticisms Robbins had against Marshall’s definition. His definition focuses on the problem of scarcity. This means people have limited resources, and choices have to be made to gain maximum satisfaction.
In his 1932 book titled Essay on the Nature and Significance of Economic Science, he defines economics as follows-
This definition has arrived at the bare and basic truth of what economics aims to do, making it the dominant definition to this day. It states that human beings have endless wants but have limited resources to fulfill these. These limited resources also come with the scope for alternative ways of utilization. If there were limited wants or limited uses to a resource or unlimited resources, the need for economics would not exist.
This means that people have to first narrow down which desire to fulfill. Then they have to choose to use the limited resources in such a way that it gives them maximum satisfaction. They also need to make the sacrifice of not being able to use those resources for other options. The alternative that is being sacrificed is known as an opportunity cost. This concept can be better understood with some examples.
Examples of Scarcity Definition
Ben has a small plot of land. This land can be used to build a home or he can use it for farming. He also desires to build a park for his children. He has always wanted to start a shoe manufacturing business and this plot can be used to build a factory. In this example, Ben has unlimited desires that involve the use of a plot. Similarly, this plot has alternative uses. It is suitable to be used to do either of those activities. On top of it, Ben only has a limited piece of land that cannot fulfill all his desires.
This implies he has unlimited wants, limited resources, and unlimited potential ways to use the same resources. Economics is simply trying to understand why Ben will make the choices that he will.
This definition applies to the decisions of a nation as a whole too. The nation could focus more on mango production and less on guavas. They could produce more ammunition or more buildings with limited steel supplies.
Criticisms of Scarcity Definition
The scarcity definition of economics is subject to certain limitations that are as follows-
- Wide Scope- By simplifying the theory and purpose of economics, this definition has unnecessarily widened the area under which economic theories can be effectively used. If economics were simply the study of choices, it would also include irrelevant choices such as which channel a person decides to watch the news on. Decisions like these barely impact the economy.
- Satisfaction vs. Welfare- This theory believes that decisions are made according to what gives people more satisfaction. The ultimate goal of a choice is to provide maximum fulfillment. This completely ignores the effect that welfare has on decisions. Some decisions may not provide maximum satisfaction but may only be taken to optimize welfare.
- Microeconomic- This definition is more focused on individual choices. As such, it puts less emphasis on macroeconomic systems such as the banking system or international trade laws.
- Neutral- Robbins did not believe in the idea of economists passing value judgments. Economists must observe and only pronounce neutral or positive statements.
- Growth- The definition only focuses on immediate wants and immediately available resources. There is no clear link between economic activities concentrating on future growth.
The scarcity definition does a good job of explaining the primary purpose of economics. It has highlighted the most important characteristics of why economics is needed in a society. However, this definition is rigid and simplistic. It also fails to take into consideration the concept of human welfare in decision-making.
The American economist Paul Samuelson added the growth aspect of economic activities to the already existing definitions of economics. In 1948, he published Economics and wrote –
This is the most inclusive definition of economics which takes into account both the welfare and scarcity definitions of past economists. Then it improves upon the limitations of both to present a well-balanced combination by involving the time element in it.
Growth-oriented economics concerns itself with improving resource allocation and utilization systems by refining the costs and benefits analysis. It is also directed towards the distribution of said resources in the most justified and equitable manner.
Criticisms of Growth-oriented Definition
Since the growth-oriented definition is comprehensive, it has easily battled most criticisms. However, there are only a few valid limitations to the definition. For instance, the definition has distinctly explained what constitutes an economic activity and what factors affect it. This has led to some socio-economic factors being unnoticed that have a significant impact on economic decisions. Factors such as standard of living, political freedom, gender equality, ease of business, etc.
The growth-oriented definition has, so far, been accepted without many criticisms against it. It is modern and complex in its understanding of an economy. It incorporates the scarcity problem, the human aspect of welfare definition, and the prospect of future growth activities. It works as a good standard for defending what the study of economics is about.